LAGGARDS: The broad Bloomberg commodity index is up 23% the past year. Along with cash it’s the only positive asset class. The post-covid demand rebound and a decade of supply under investment drove big gains for most. But not all. China demand-focused base metals lost out. As did US dollar and interest rate sensitive precious metals (see chart). There are opportunities here, under the right circumstances, even as the commodity cycle cools. The energy crisis could tighten industrial metals supply more than it hits demand. Real-economy precious metals, silver and PGM’s, would benefit from a stabler dollar and less recession risk, with valuations very low.
ALUMINUM: Known as ‘congealed energy’ for its huge 14,000Kwh/t of needs to produce. It has demand across transportation, packaging, construction, with significant ‘green transition’ usage. 60% of both demand and supply is from China. Demand is hurt by its stop-start macro recovery and property crisis. But supply risk has risen as drought hits low-cost production. Soaring power prices are also driving shutdowns in high cost US and EU. Prolonged disruption will eat into the pre-emptive stockpiling seen. Major listed producers include Alcoa (AA), Norsk Hydro (NHY.OL).
SILVER: Has been a perennial and volatile commodity laggard. Hit by the stronger dollar, higher US interest rates, and recession concerns. Similar to PGM’s, most demand is from industrial uses. This is led by electronics (30%). Whilst jewellery (20%) and investment (25%) are the rest. The selloff has improved its valuation, with the gold/silver price ratio at levels only seen twice before. Major listed producers include Fresnillo (FRES.L) and Pan American Silver (PAAS).
All data, figures & charts are valid as of 07/09/2022