Why Commodity Prices Will Be Stronger For Longer
Richard Hemming
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Why the Outlook for Commodities Prices Remains Positive
A commodity’s price directly relates to supply and demand. In a recent lecture (before his apology) RBA Governor Philip Lowe did a good job in discussing Australia’s terms of trade and why the outlook for commodities prices remains positive, despite the ructions in China.
The terms of trade is the relationship between export and import prices. Our terms of trade relies heavily on the price of commodities like iron ore and coal, which have been trading at escalated levels. Low and behold, so is our terms of trade. What’s interesting is that this is juxtaposed by low resources investment, in contrast to the last time this happened.
The last time Australia had a big terms of trade was about a decade ago, which triggered a big supply response, meaning the big mining companies invested big in exploration and development.
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Why Mining Companies are more focused on Shareholders
This time the response to high commodities prices has been muted. Why is that? One reason is that the big miners like BHP Group (BHP) and Rio Tinto (RIO) got burned spending too much in previous cycles, which hit hard when commodity prices reversed. These days, as we have been saying, they are much more focused on shareholder returns, distributing profits via dividends.
What about BHP’s recent $9bn plus purchase of Oz Minerals (OZL)? This was a bargain in our view, helping secure the company’s future in copper assets. Notably this is not a greenfields asset, but one that increases its focus towards what it calls “future facing commodities” related to end products such as battery production.
The other reason for a lack of mining investment relates to government efforts to get to zero carbon emissions, which has stymied new mines in coal as well as new petroleum projects.
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What should I invest in?
China’s economic cycle is far from irrelevant. But even in the face of weakness of the fastest growing, soon to be biggest, economy, the lack of investment in mining means that you should consider investment in miners, both in the Blue Chips and in the Small Caps in Under the Radar Report.
There is a sting in the tail, however. While existing commodities production is more valuable than previously, these are not futures contracts. A lack of investment supports current prices, but in the long-run volume is going to be undermined. Even Blue Chips like BHP and RIO aren’t set and forget.
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Related Article: ASX Lithium Stocks
This is the ultimate guide to get you started investing in Australia's ASX Lithium stocks. We make it super easy for you to make informed decisions and to start investing successfully in ASX Lithium stocks. - Richard Hemming
