Not every commodity is equal

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Since the start of the corona crisis, commodities have not behaved as one investment category. Metals rose sharply from the start, but oil prices fell hard at first and have only just recovered from the historical drop in prices.  This is mainly due to the demand for certain products and services. Due to the lockdowns, there were far fewer transport movements and the demand for energy, especially energy in the form of fossil fuels, fell sharply. Now that a large part of the population has been vaccinated, everyone feels like going out again. Instead of buying things during the lockdown, people now mainly buy services. The holidays will start soon, and the driving season has already begun in the United States. This has a major impact on the demand for energy. During the lockdown, a lot of consumer electronics were sold, as well as all kinds of equipment for working, learning, and shopping at home. Many people also started renovating their homes. This created a strong demand for metals in particular. Many wood suppliers were misled by the corona crisis. They had assumed that the corona crisis would lead to less demand for timber/lumber, only to be surprised by the strong demand last year. Timber prices seemed to have drifted off course for a while, when an average house became 10 percent more expensive, just because of the rise in lumber prices. Meanwhile, they have more than halved. Now that everyone is out and about again, demand for building materials and electronic equipment is falling back somewhat, although stocks remain extremely low and delivery times longer. Producers are now reacting to the sharp rise in prices.  

In the third quarter, oil demand is likely to be back at pre-Corona levels. There is nothing as good for the oil price as a low oil price. The oil price was even negative for a while in April 2020. That has not only caused part of the supply to disappear. It is also not coming back so soon. It seems that there is more capital discipline among oil producers. That also has to do with sustainability trends. Even central bankers are warning banks and investors to stop investing in fossil fuels, because of the business risks associated with the energy transition. Producers, therefore, react less than before to the increased oil price. On top of that, Shell has been challenged by the courts on its CO2 emissions, and oil companies also see that cash flows generated by alternative fuels are valued much higher by the stock market than cash flows from fossil fuels. If they want to raise their own share price, they have to change course. Here too, capital discipline ensures higher oil prices. Good for the energy transition. 

Agricultural commodities are highly dependent on weather conditions. At the moment, there is an extreme heatwave in Western Canada and the United States. As a result, spring wheat prices have risen to their highest level since 2013. The heat is affecting both quality and quantity. In Canada, there is already talk of the worst harvest ever. This also applies to rapeseed oil, for example. Rapeseed has a poor tolerance for warm weather, let alone the current heat. The prices for rapeseed oil have therefore risen to the highest level since 1982. In addition to a shortage of water and heat, the weather is also causing many more pests. In some cases, the crops are so badly affected that it is no longer worthwhile to harvest them. Corn and soy can withstand the heat better and the rising prices at the end of last year have increased the area under cultivation, almost as much as in the record year 2017. At the same time, stocks are low and that means that nothing can go wrong with the harvest. Too much or too little water can also cause problems here. 

Demand for metals will decline as the economy opens up, but there are some exceptions. Especially metals that benefit from the energy transition remain in strong demand. Copper is crucial for electrification, not only in electric cars but also in the expansion of infrastructure, something that has already been boosted by the support plans of various governments. Then there are investors who are affected by commodities. A year ago, many investors abandoned their commodity investments, but this year it is back as the ultimate inflation hedge. Fortunately, inflation expectations are moderating somewhat, but count on further rising prices, especially in energy and agricultural commodities. This will also generate new demand from investors. Perhaps commodities will then start behaving more like a single asset class again.

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