Commodities are spiking higher and there are a number of reasons for this and it’s not just speculation. As industry breaks out of the inertia caused by covid there is demand for all manner of “capex” commodities that are involved in construction.
By Ben Robson
Copper, steel, aluminium and lumber being the ones that are better known. Oil has also been on a tear, due mainly to supply side restrictions. And most recently coffee has had its own supply shock; a spate of severe frosts in the state of Minas Gerais and its surrounding regions in Brazil has sent Arabica coffee futures spiralling higher, up 35% in two weeks.
Inflation is with us, and whether that is temporary or more permanent depends on your perspective. With all sorts of bubbles in products from houses to handbags, “mass luxury” cars and artwork or more simply in a basket of goods that makes up an inflation gauge, the numbers speak for themselves. US Fed chair Powell errs on the temporary narrative. I don’t see it that way. Commodities are seen as both a leading indicator of inflation and also a hedge against it. Commodities have played second fiddle to equities for the best part of 10 years and so commodities may be seen as a value trade as well as one diversifying risk away from bonds and stocks.
There is talk of the next commodities super-cycle. The last one was driven by China’s insatiable demand for all things commodities from coal to copper and sugar to soyabeans. The China growth story and her influence and reach is as compelling to some as it is disturbing to others. The predominant aspect of Chinese President Li Jinping’s vision is to revive and enhance the ancient “silk road” of trade routes and economic, cultural and political interactions between nations in what is now called the “Belt and Road Initiative,” a massive global infrastructure development strategy to invest in nearly 70 countries and create a logistical framework covering land and sea and connecting east to west.
Chinese land infrastructure projects have helped provide transport arteries in several ex-war conflict African countries such as Somalia, Mozambique, Angola and the Democratic Republic of Congo. In addition, Nigeria’s coastal railway, the Addis Ababa-Djibouti railway connecting Ethiopia and Djibouti and Tanzania’s Bagamoyo seaport have all be made possible through Chinese funding and partnerships. China’s infrastructure footprint currently involves projects in 35 African countries.
Chinese companies have also invested heavily in international seaports. The strategic creep of China Ocean Shipping Company (COSCO) is evident in its investments in European shipping terminals. In recent years COSCO has acquired majority stakes in ports in Piraeus, Greece (100%), Zeebrugge, Belgium (85%), Valencia, Spain (51%), and also owns large minority stakes in Vado Ligure, Genoa, (Italy), Bilbao (Spain), Rotterdam, (The Netherlands), Ambarli, (Turkey), Antwerp, (Belgium), and Port Said, (Egypt). China Merchants Port, part of China Merchants Group also partially owns several European ports as well as Sri Lanka’s Hambantota International port.
I think commodities are ready to surge. Copper prices are considered the bellwether or leading indicator of accelerated demand in potential commodity super-cycles. Nearly half of all copper supplies are used in building and construction. Other uses are in electric and electronic products, transportation equipment, consumer and general products and industrial machinery and equipment.
Obvious uses of copper are in pipes for plumbing and electrical wiring. The average car contains 20-40kg of copper. Copper also combines with zinc, tin and nickel to form alloys such as brass and bronze. In the last super-cycle China eclipsed the US as the world’s largest consumer and by a large margin, using about 40% of total world refined copper. At the time of writing, copper is trading around $9,600 per ton, mirroring prices not seen for a decade.
By contrast Crypto’s are well off their peak, are under threat from regulators, authorities and regimes and in the case of Bitcoin cost a fortune to mine. They offer an alternative payment solution for sure which is backed by blockchain technology. But what is this nonsense that they are a store of value? Give me a choice between 25oz of gold or 4 tonnes of copper or a Bitcoin and I’ll take the gold or copper any day.
There are several strong arguments to invest in commodities; the inflation hedge, the value trade, the China growth story re-igniting and spreading. Copper to me will be well supported in this decade. I have no clue what will happen to cryptos. But I will sleep a lot better knowing that I am an owner of a shiny metal that has many uses and that I’ll still be able to buy a coffee with my Great British Pounds!
Good luck and good trading!
LinkedIn BioBen Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Currencies and How You Can Too.
