I had the opportunity to chat with Andrew Geoghan regarding the state of commodity markets at present. You can watch the interview by clicking on the link below:



Commodity markets are hamstrung by uncertainty and a lack of direction and conviction, company earnings have been good but not great, and the industrial sector is more tantalising for investors at present. A lot of the problem relates to China and its opaque economic picture. Markets typically look to China for guidance. Unfortunately, China’s stimulus measures appear to be having less of an impact that in the past, and what has been promised in terms of future stimulus to kickstart the economy and to maintain the targeted 5% growth rate, seems to have disappointed the market. As a result, we’ve seen a significant pull back in the price of iron ore since January, from above $140 a ton to below $110 a ton. Iron ore is probably the most China-leveraged commodity around.

The only commodities with strong investor positioning presently are gold and uranium, they are the path of least resistance for investors as that they have the most attractive demand – supply characteristics. Nevertheless, whilst gold is attractive as a commodity, equities are still underperforming relative to the price of the metal itself. Two of the world’s biggest gold producers, Newmont and Barrick, have significantly underperformed the gold price (Newmont -19% and Barrick up 1%, whilst the gold price is up 19% over the past 12 months).

Bargain hunting is evident in nickel and lithium but is not based on any real conviction of an imminent or sustained recovery. Both commodities are faced with both demand and supply side issues in the near-term that are wreaking havoc on prices. Nickel is down 25% and lithium 82% over the past 12 months. Nickel remains challenged by the influx of nickel pig iron from Indonesia, and for the first time an Indonesian producer is set to have its product traded on the LME, as it will now meet purity standards. For many other nickel producers, however, it marks an ominous moment in the transformation of Indonesia’s growing production dominance into exchange pricing power.

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