The Aussie Commodity Super Cycle- Autralian Investment Education. As one of the largest mining centric countries in the world. It comes at no surprise that we have seen record commodity prices. And colossal profits from our resource companies. The questions arise – is this something of a commodity super cycle? And how long will it last? Here are your answers below:
Where it all began
A good place to start would be to dial back the clock somewhat 9-10 months ago. The market was in anarchy as cases of the Coronavirus were wreaking havoc. And the economy essentially shutting down. When the pandemic first hit, no one really knew what to expect and so we saw somewhat of a log jam in commodity prices. As host, Andrew Baxter describes. The best example of this was oil when prices went negative. Yes, you read that correctly – negative oil prices.
When a commodity is bought to be used and stored. Yet no one is using it – people were actually being paid to hold oil, creating ‘negative’ prices. This had never been seen before in history and is a true representation of just how much of an impact the pandemic had on financial markets; not to mention the impact it had on other commodities like copper and iron ore.
More on oil – a bell ringer
Since returning to travel (domestically) and everyone now back driving to work. The need for oil has undoubtedly increased. With the price relying on a tight balance between supply and demand, oil prices (as per OPEC) now sit. At somewhat $40 / barrel and as we venture into further economic recovery and normality. We expect to see this increasing trend continue.
Taking an example in the form of an oil specific ETF, “OOO”. We have seen gains of nearly 25% over just the last year given the rise in oil prices – a bell ringer. Aussie stocks like Oil Search (ASX: OSH) for example are up more than 43% over just the last 6 months. As a great barometer to measure the rate of our economic recovery, oil prices are certainly hinting at a fast. And rapid improvement to our economic situation thus far.
Copper prices are at nine-year highs
As probably the single best barometer to measure to overall strength of the global economy. Here we have Copper prices at nine-year highs. As host Andrew Baxter mentions, there appears to be a shortage of copper at the moment which no doubt would be driving prices higher. Nonetheless what we are seeing is incredibly strong demand. With uses in plumbing and electrical wiring just to name a few. As the manufacturing industry has been pumping so too has the price of copper.
It, therefore, comes as no surprise when we see Aussie mining companies like BHP (who have a hefty exposure to copper). For example increase rapidly in share price to the order of 28% in the last half year. Realistically what we are seeing is an insatiable demand for commodities which Aussie companies like BHP are capitalising on with record prices.
Iron Ore at record prices
As the talk of the town when it comes to commodities. It’s only fair we give iron ore a mention. Iron ore is now at record prices as demand for steel in China continues to go through the roof. Rising in value by nearly 100% in the last year. Wow. This is why we have seen our Aussie iron ore producing companies like Fortescue Metals (ASX: FMG) nearly 2.5x their value in the last year. Operating in somewhat of an oligopoly.
As a three-horse race between FMG, BHP and RIO (which all happen to be Aussie companies). The iron ore market is controlled by us and is certainly reflecting positively for our producers with massive jumps in share price. Despite increasing tensions with China as the biggest buyer of our raw materials. There really is no competition and thus no external threat – leaving our iron ore miners to clean up massive profits.
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Is gold losing its lustre?
To flip this discussion on its head – the only commodity that really hasn’t followed suit like the others is gold. Typically, gold is an instrument used to act as an inflation hedge or during times of market uncertainty. Early on in the piece we did see gold prices at record highs. To which in the last 6 months or so has come down significantly to mediocre prices. So where are the new age gold investors now playing, if not in gold? You’d be surprised that the answer is in fact Bitcoin.
As the only natural hedge (given bitcoin is a commodity) outside of financial markets. Investors have piled into the infamous cryptocurrency. And out of gold to take shelter from the anarchy of the stock market. We’re even seeing Super Funds pile into crypto for exposure outside of the stock market. And is hence why instruments like Bitcoin are again at record highs.
Are the central banks driving up prices?
Putting on our true economists’ hats for a minute now we must beg the question. How in the world are these commodity prices so damn high? In the midst of a pandemic that really is still raging in most parts of the world and largely damaged GDP figures. The only really answer is the central bank. We have seen so much money being pumped into our global economy by various central banks around the world. In order to keep us afloat.
At this point on a month-to-month basis, around 0.7% of global GDP is being funnelled. Into markets as new money – 0.7%! As the world is washed with cash right now it has provided a natural level of support where global expansion has become a real reality. The beneficiary – commodities. The world can’t expand or develop without raw materials. And is hence why we are seeing something of a super cycle in prices. These are the kinds of tail winds that you can learn to exploit through Australian Investment Education.