Commodities remain a popular bet despite recent declines

Many commodities, from copper to lumber, have fallen from their pandemic price peak, easing more acute concerns about an inflationary spiral. But investors remain bullish on many of them, arguing that they still look cheap.

Copper is down 10% from the record set in March. First-month corn and soybean futures are 13% and 19%, respectively, below their May highs. Pigs have lost 17% this month.

Federal Reserve Chairman Jerome Powell recently said the lumber drama shows how the very high material costs that characterized the reopening of the economy were the result of bottlenecks in the economy. supply and other factors that are unlikely to last as global economies move away from foreclosure. Lumber futures fell 54% after hitting more than four times the average price in the most recent springs before the pandemic.

“A few months ago, the consensus was that commodity prices can only go up,” said Richard Dunbar, head of multi-asset research at Aberdeen Standard Investments. “More recently, however, we have received a few reminders that prices are not going up in a straight line.”

Despite the recent decline, the price of lumber remains double the usual price for this time of year. Copper, row crops and pork are still around their highest prices in years. Oil and natural gas, late in reopening, rose sharply to their highest levels since 2018.

Commodity prices have presented mixed signals to investors. On the one hand, rising prices are seen as a threat to the recovery as it contributes to rising costs of goods. On the other hand, investors tend to bet on commodities to take advantage of rapid growth and protect the rest of their portfolio against inflation.

Over the coming week, investors will be watching the June jobs report for the latest indicator of the economic recovery. General Mills, Inc Food Company Profits.

, alcoholic beverage vendor Constellation Brands, Inc.

, and housewares retailer Bed Bath & Beyond Inc.

will provide insight into consumer spending habits and how businesses are dealing with higher material costs.

ConocoPhillips has scheduled a call with investors who could provide insight into the reaction of US energy producers to the price hike. Meanwhile, the Organization of the Petroleum Exporting Countries and its oil market allies like Russia are meeting on Thursday to consider increasing production.

“I think we’re just in the early stages,” said Ed Egilinsky, head of alternative investments at Direxion, which manages exchange-traded funds that bet on commodity futures prices. “I don’t think it’s as transient as the Fed says it is.”

Consumers flushed out, government spending like China’s post-pandemic restocking and the trillion-dollar infrastructure bill being negotiated in Washington, and years of underinvestment in capacity are reasons why some investors are bullish on commodities. Others see these factors as a signal that they could be a source of good business.

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What future for the commodities market?

Commodities tend to perform well relative to other asset classes during times of inflation and are historically cheap relative to stocks, Deutsche Bank researchers say.

Major stock indexes have hit record highs over the past decade thanks to the outsized influence of tech companies that have become the most valuable companies in the world.

“Commodities as an asset class have been out of fashion for over 10 years,” said Jim Reid, research strategist at Deutsche. “Just a small spin in favor could have a big impact on prices.”

Matt Fine, portfolio manager at Third Avenue Management LLC, loaded the company’s $ 663 million value fund with shares of copper miners and companies that provide services and equipment for offshore drilling , as the owner of the supply vessel Tidewater Inc..

and PGS ASA,

which sells seismic data for seabed exploration.

Offshore drilling declined sharply during the long price war between OPEC and US shale producers, leaving few service companies solvent and in a profitable position should activity pick up at higher oil prices. high.

First month corn futures prices are down 13% from their May highs.


Photo:

Daniel Acker / Bloomberg News

“I am not optimistic about commodities per se, with the exception of copper,” Mr. Fine said. “I am optimistic about significantly mispriced stocks and the natural resources space continues to be a place where we can be opportunistic and can still find deeply mispriced stocks.”

One of the main holdings of his fund is Interfor Corp..

, a Canadian sawmill operator who has made a record profit since last summer cutting historically cheap pine logs from the southern United States into high-priced lumber. Interfor shares rose 174% from a year ago, compared to a 39% rise in the S&P 500. This week, Interfor will distribute some of its timber boom windfall with a special dividend of 1.65 $ per share.

Lumber’s downfall isn’t that bad for Interfor and its rivals, Mr Fine said. They can still rake in profits by selling lumber at prices north of the pre-pandemic record with less risk that the sky-high cost of lumber will doom the housing boom and dry up demand by two by four.

Analysts are offering ideas for investors to take advantage of high commodity prices.

BofA Securities suggests the Toronto Stock Exchange index. Drillers, miners, sawyers and other players in the commodities sector account for more than a quarter of the Canadian equity basket, compared to less than 6% of the S&P 500, and the Toronto index has traded at a steep discount versus US equities during this period. the current boom in tech stocks.

Goldman Sachs on Friday recommended shares of five major companies along the natural gas supply chain, including producer EQT Corp., pipeline operator Targa Resources Corp. and liquefied natural gas exporter Cheniere Energy Inc.

U.S. natural gas futures have gained a third since March to become more than twice as expensive as a year ago, and European gas prices have hit multi-year highs as stocks around the world run out faster than new supplies hit the market.

China, a buyer of some 60% of the world’s resources, poses a risk for these bullish bets. Demand from China has helped push soybeans, corn, natural gas, coal, copper and zinc to recent highs, but lately the country has taken steps to contain prices.

These include efforts to curb speculation in the country, and earlier this month Beijing said it would release copper, zinc and aluminum from its stocks to cool prices. The move helped push copper prices to record highs and analysts say there is reason to believe China will take similar steps to control costs.

“Sometimes supplies can come from unexpected places,” said Dunbar of Aberdeen. “People thought it would take up to five years to see a lot of new supplies, but it turned out to take five minutes.”

Demand for lumber has skyrocketed during the pandemic, pushing prices to all-time highs. This video explains what is driving the timber boom, who is benefiting from it, and why those who grow trees are not reaping the benefits. Illustration: Liz Ornitz / WSJ

Write to Ryan Dezember at [email protected] and Georgi Kantchev at [email protected]

Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8


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