Name the Commodity, Expect a Boom

Name the Commodity, Expect a Boom
  1. Put your head back and look up. More than that. Go right back. That’s how far you have to stretch to see the arc of the global LNG price currently.

Reuters reports that Bangladesh just paid $30 mmBtu (metric million British thermal units) for a cargo of the stuff.

These were going for $2 mmBtu in the middle of the COVID panic.

What gives?

The Economist tells us that there’s just too thin a safety buffer when the global energy system hits a glitch or two.

And now the looming winter in the Northern Hemisphere is causing emergency buying. Asia is sucking in cargoes of the stuff.

Why do we care about this? Earnings for gas producers that can benefit from this will be rising, of course.

But you can take the above scenario and reasonably predict it happening in any commodity you care to name in the next five years.

The general underinvestment in mining over the last 10 years almost guarantees it.

We saw iron ore go over US$200 a tonne recently after Brazil lost supply and demand roared. Now we’re seeing a similar dynamic playing out in natural gas.

Which goes next? Copper, nickel, or something else?

This is going to keep happening because there’s just so much demand now across the world.

I noticed something going through my watchlists this morning. Take a look at the following chart of a stock index…

Stock Index Chart

Source: Optuma

[Click to open in a new window]

Care to guess the country? No, it’s not the US.

It’s the BSE 30 — India!

Fancy that. Last time I checked in, the mainstream news was telling me that COVID was ravaging the place. And yet, the stock market is booming.

Clearly, the ongoing expansion and rise of the Indian market is going to be commodity-intensive. There are 1.4 billion people there!

My colleagues over in the US tell me that the Chinese car market began to explode when per capita income reached $2,500 in purchasing parity terms.

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For China, that happened in 1999 — and the start of a decade-long bull run in commodities.

Today, per capita income in India is already $6,920. India only has 34 vehicles per 1,000 people. China today has 207.

Granted, India’s infrastructure is not China’s.

But they have every chance of copying the Chinese playbook of using their cheap labour to attract foreign investment and invest in infrastructure around it.

China is losing 40,000 factories a year, as high wage costs push companies to places like Vietnam and India.

I literally just bought a jumper off Amazon and it was on my doorstep this morning. Made in Bangladesh!

The global supply chain is becoming stretched as so many countries reach for the same supplies at the same time.

It’s not as if a lot of the commodity-producing countries are known for their good governance and rule of law, either.

Take Brazil, for example. Some of the iron ore bears point to African supply pressing down on the market in about five years (we’ll see about that).

They might like to take a look at Brazil first (the next big exporter after Australia).

The country has multiple, massive problems. A huge drought has sent energy prices skyrocketing because two-thirds of their power base is hydroelectric.

Inflation is at the highest level in two decades. 600,000 people have died of COVID.

And to top it off, the cost to ship to China is at its highest level — ever, as far as I know.

Now, the Brazilian iron ore industry might be able to work through all this.

But it doesn’t exactly scream a stable situation to me. Any sort of disruption could rattle the iron ore market again somewhere down the line.

And even if you don’t invest in resource stocks, you have to pay attention here.

Higher commodities equal higher input costs for manufacturers — and therefore lower margins or higher prices.

The good news is that the ASX is a resource investor’s paradise. I think huge amounts of money will be made across commodities in the next five years. And Australia is full of them — with more discoveries coming.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia

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