In today’s Exponential Investor:
- How an Argentinian frost can drive up the cost of beef
- No one could agree, but everyone was right
- Hoarding is the commodities market’s biggest threat
Today, we get back on to that well-worn path of all things commodities.
Delicately woven webs with loose tethering points which come apart at the slightest breeze.
A copper mine coming offline in Chile restricts supply, for example. Or the seventh annual “above average” hurricane season in Atlanta may reduce US grain exports, putting more pressure on stressed global grain supplies.
As long as we have a global commodities market, there will be interruptions that are hard to predict.
A fall in soy bean crop yields in say, Argentina, will directly impact available livestock feed in the UK.
A lower crop could be caused by a wet or dry planting season…
… too many frosty mornings means soy beans won’t grow….
… a workers’ strike at the grains processing centre…
… truck drivers striking for higher pay to cover rising diesel costs…
… too many ships at port at both ends slowing down loading and unloading…
All of these will affect the price you pay for beef at Tesco.
That, my friend, is why we are still talking about commodities.
Five people on a panel. Five different opinions. All were right.
Believe it or not, all the events described above have occurred in the past two years. To just one country and one commodity. The market would be in chaos if all commodities were hit at the same time.
And, to be fair, the panic we saw in the markets in March and April of 2020 could be considered a sneak peak of the turmoil if disruptions were prolonged.
The fragility of commodity markets is easily shaken, with one small, unpredictable event rippling downstream stream into swell.
I was reminded of this watching a Davos Forum on commodities last night.
The panel was diverse. Two foreign ministers, one from Peru and another – who wasn’t afraid to speak his mind – from Indonesia. A couple of C-Suite types from major resources firms, plus the dean of a French political science thinktank.
All had different points of view, and there was very little agreement among them. Look, it wasn’t the sort of fiery clash you’d get from a reality show, but all five were clear on what mattered most from their seat.
And yet, even though no one could agree on a single point, all of them were right. Every answer to the host, or follow-up from another panellist, was countered by another, opposing point.
One panellist was adamant that resources nationalism was the only way to ensure economic growth and avoid the middle-income trap that ensnares most developing countries.
Another panellist countered this, claiming it could lead to the hoarding of minerals which would reduce available stockpiles, meaning soaring prices and volatility, making long-term resource planning and mine financing very difficult.
The dean of the thinktank countered that stockpiling isn’t catastrophic when it’s copper, though it is when it involves grains. She then went on to argue for less fragmentation in the market and some sort of global framework on sustainability rules…
Of course, that somewhat clunkily lead into sustainability being a local issue, with multipolarity really only benefitting the West. And that leaders of developing yet resource-rich countries owe it to their growing, social media-savvy population to use those mineral rents wisely.
So, you get the point. There was no “let’s shake hands and agree to disagree”. The hour-long panel discussion highlighted that global trade is more at risk now than in the last 50 years.
Resource nationalism threatens markets
The whole forum was as dry as toast.
That said, it really did reaffirm for me what matters most to commodity markets in the short term.
It’s not that we don’t have sufficient resources to meet the wave of demand coming for minerals.
Higher prices lead to demand destruction. People are clever. We’ll work out how to extract more from every tonne, how to farm smarter and how to reuse what’s above ground.
And commodity-hungry, developed economies such as the UK and Australia will be keen to secure resources from allies. We can debate the drawbacks of government intervention another day, but I have no doubt wealthy countries will strike deals with like-minded friends. No doubt our governments will finance local, unprofitable projects to ensure there’s a stream of what’s needed.
The most immediate threat for the commodity market and investors is not easily reduced with a junket and a few handshakes in front the cameras.
The key takeaway from this forum is that the ‘have nots’ will ensure they exploit their country’s commodity riches to solely benefit their people. The mining extraction business doesn’t really bring much value for its country of origin. The “value add”, so to speak, is having those things made in one place.
It’ll be the same with grains and other food products. Smart leaders would never risk a starving population to honour trade contracts with countries they barely tolerate.
Whether it be pulling the supply of a commodity from the market, or simply stopping farmers from sending crops to export, we are likely to witness a shift from commodity market to commodity markets.
Indonesia banned nickel exports in 2019. International companies had just four months’ notice and were forced to use Indonesia’s manufacturing facilities if they wanted the archipelago nickel resources.
Similarly, several food-export bans have been put in place since the Russian-Ukraine war began. It hasn’t taken long for the impact to be felt by consumers.
We’ve had a taste of what these disruptions feel like.
Commodities may remain traded in central locations, but their easy availability and accessibility could soon be a thing of the past.
Resource nationalism can be destabilising to prices and increase sovereign risk to investors’ portfolios.
And it might be more of an immediate threat to commodity markets than underinvestment in the resources themselves.
Until next time,
Co-editor, Exponential Investor