I had the opportunity to speak with Andrew Geoghan and discuss the outlook with respect to various commodities. Please click on the link below to access and watch the interview:
https://ausbiz.com.au/media/chinas-shadow-and-opportunities-beyond?videoId=31105
Market Overview
Commodity markets remain in China’s shadow, specifically sluggish economic growth that continues to disappoint, and hopes for more government stimulus measures. China is the world’s biggest buyer of virtually all commodities, so it’s economic underperformance is really weighing on the resource sector her, and internationally. As a result, iron ore and base metal prices are really struggling.
Crude Oil
One of the commodity stand-outs amongst the gloom is crude oil, which continues to trade strongly around the $80 per barrel mark, supported by very strong demand and supply factors. On the demand side, crude oil demand hit an all-time high during July, whilst on the supply side Russia and Saudia Arabia are continuing to rein in production, which has dramatically reduced the overhand in the market, while in the US inventories are continuing to decline. Unlike most other commodities, the supply side is being heavily controlled, which is helping to support prices.
From an equity perspective, the oil and gas sector is performing strongly internationally, and we can see it here in our domestic with respect to companies at both the big and smaller ends of the market, Woodside Energy and Strike Energy (share price performance chart attached). In the US, the oil and gas sector is incredibly cheap from a value perspective (reflected in the attached graphic), with Warren Buffett boosting his exposure. The energy sector is trading at the lowest price-to-earnings valuation of any sector in the S&P 500 Index, but it also generates the most cash flow per share.
Uranium
The uranium market continues to surprise, both in terms of spot uranium prices and the performance of uranium equities. Uranium has posted a healthy 16% year-to-date return and has continued to show strength relative to other commodities, whilst over the longer term, uranium has demonstrated even greater resilience as it’s risen by 118% over the past five years.
Major recent nuclear sector developments have included the commissioning in Georgia of the first newly constructed nuclear power unit in the U.S. in over 30 years; in China approval of the construction of six nuclear power units, meaning China has the largest number of reactors under construction and planned; in Japan a nuclear power plant has restarted, which now brings the number of Japanese reactor restarts to 11; and in South Korea, the government is considering new nuclear power plants.
In terms of uranium equities, the world’s biggest listed uranium producer, Cameco, has just hit a 12-year high in share price terms. In response to growing demand, Cameco is scaling up production from its McArthur River mine in Canada.
Gold
Gold is treading water, as it continues to be buffered by a double-whammy of interest rates and the US dollar. We’ve seen gold slip this week below $1900 per ounce for the first time since March, as the 10-year treasury yield in the US has hit its highest level since 2007. Central bank demand for gold remains robust, and speculative investor demand remains strong, but financiual market uncertainty means that heavyweight investment funds are staying away from gold in the near-term, instead buying bonds as a safe haven. We can see the inverse relationship between the performance of gold and 10-year real yields in the attached graphic, so we would expect that gold will outperform and make up lost ground once interest rate hikes reach their peak.
