GIULIETTA TALEVI: As red flags mount, commodity traders are still dancing
While we love the good times, and the effect this has on profits for JSE-listed companies like Kumba, Anglo American and BHP, the fear that this will all end in tears is hard to shake
There’s nothing quite like a bit of “supercycle” talk to get the commodity bulls all steamed up. And, as it turns out, there’s a lot to get frisky about in the markets right now — be it iron ore, copper, the rare metals used to produce batteries, lumber, or corn.
This week, the FM’s Lisa Steyn did some digging on what is happening to the iron ore price — which has in the past few days breached $190 a ton — in direct contrast the views of sceptics who’ve been saying for the past year the metal is overdue a dramatic correction.
While we love the good times, and the effect this has on profits for JSE-listed companies like Kumba, Anglo American and BHP, the fear that this will all end in tears is hard to shake. Especially when we remember what happened to those same mining houses back in 2016, when the bottom fell out of the rally and you could have picked up Kumba, say, for R26 apiece (it’s now at R683).
But what will cause the iron ore price to correct? And how will you see it coming? Read this piece in the FM, here, to find out.
Meanwhile, the FT has a great read on the “supercycle” chatter.
The interesting thing is that the rally has swept up a number of agricultural commodities in its path, most especially timber and corn, where prices topped $7 a bushel this month for the first time in eight years.
“I don’t know if we have seen anything like this before,” Ulf Larsson, CEO of Swedish pulp and timber company SCA, told the FT, after announcing a 66% rise in first-quarter net profit last week. “We are in some kind of perfect storm.”
At the same time, reports the FT, “copper, the world’s most important industrial metal, traded above $10,000 for the first time since 2011, while soya beans hit an eight-year high”.
The index which tracks the price of raw materials — the S&P GSCI spot index — has already risen 24% this year.
In a six-page note this week, SmallTalkDaily analyst Anthony Clark writes: “If your portfolio had corn as an asset play, you’d be 147% richer than you were in mid-August 2020, some nine months ago. Think of that, the most ubiquitous food staple rising 147% in less than a year.”
What is driving this rally taking corn back to 50-year records is as fascinating as the market itself, writes Clark. Some is speculation, of course, and a fall from grace is bound to occur, as it has in the past.
“But some factors are extraneous and their long-term trends and demand requirements simply won’t change … they may even exacerbate,” he says.
If you’re keen on dabbling in maize futures on the futures exchange, Safex, try to get your hands on the note. In short, Clark argues that for now “higher global prices are with us”.
The big question is, for how long?
This Bloomberg opinion piece argues that the premise of a supercycle in soft commodities is flawed.
“Unlike metals or fuels, spikes in crop prices tend to be short-lived. Shortages induced by weather such as droughts or floods are usually brief and isolated in their impact. And while bringing a new mine or oilfield into production can take years, farmers respond to price signals on a seasonal schedule.”
Bloomberg says that such a signal — a red flag — has already been given.
“Time spreads — the difference between the first and sixth futures prices — have widened sharply. The discount on the sixth-month contract is the deepest since 2013 and one of only three such periods of steep backwardation since 1990.”
That would suggest a correction is inevitable.
But until that happens, in the immortal words of former Citigroup CEO Chuck Prince, “as long as the music is playing, you’ve got to get up and dance”.
*Talevi is the FM's Money & Investing editor.
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