Materials Risk

“I’m a decent man who exports flowers.” – Pablo Escabar

In South America, farmers, typically poor and land scarce often have little alternative source of income other than to grow coca leaves – the raw material for the cocaine trade. The farmers typically operate on low margins, but must also bear the substantial economic risk of their crop being destroyed.

Authorities in the region (supported and encouraged by the United States and other major drug consuming countries), have sought to eradicate the coca crop. Either yanking it up by the roots, burning the fields in which it is grown, or spraying it from the air with weed killer. The logic behind the assault is that simply by reducing the supply of coca, the narco supply chain will be cut off from their raw material, in turn making it less profitable and thereby cutting the amount of illicit drugs entering overseas markets. read more

As WWII was drawing to a close the Allies came together to establish a new international financial order that could help correct the extreme imbalances that can grow from international trade.

The parties also wanted to avoid the deflationary bias that occurred under the gold standard where gold reserves became scarce due to low levels of gold mining and hoarding by holders of gold. Extreme imbalances and inflexible, deflationary monetary systems contributed to the Great Depression of the late 1920’s. A repeat of this type of scenario had to be stopped if the Allies wished to avoid a repeat of the conditions that led to hyperinflation in Germany and the emergence of Nazi military ambitions in Europe. read more

High and rising commodity prices. The natural tendency for investors is to ask what the knock-on impact will be, who benefits, who loses and how best to position our portfolios.

Historically, emerging markets have been the first port of call as commodity prices rebound.

Early signs of a weak dollar and rising commodity prices tend to be beneficial to emerging economies, particularly commodity producers. In these cycles, emerging market currencies appreciate and their domestic economies benefit from the expansion in liquidity and credit with stock returns potentially significantly higher in USD terms. read more

As many of you will know, I have been preparing a second edition of my book, Commodities: 50 Things You Really Need To Know. The original book, published in 2015 was an introduction for many investors unfamiliar with commodity markets. The second edition builds on that work, and goes into greater depth on lots of different issues – everything from the commodity capital cycle and previous energy transitions, to the difference between thermal and met coal, the dry bulk and tanker markets and onto less well known commodities such as hydrogen and palm oil. read more

Geopolitical Alpha: An Investment Framework For Predicting The Future”, by Marko Papic (US) (UK):

Instead of focusing on the narrative of the personalities performing on the geopolitical stage, Papic contends that it is much better to focus on the wider context in which decisions are made. It’s only there that you can see the constraints that limit the choice of options. For example, political leaders may say they want a certain political outcome, but constraints limit their ability to actually deliver: read more

Whatever your views are on ‘net-zero’ policies, our job as commodity market investors is to assess the risks and opportunities of any investment, irrespective of our own political or ideological perspectives.

It’s with that introduction that I believe we are close to getting a signal as to how governments will look to temper demand for the metals essential for a net-zero energy transition – copper, lithium, nickel, cobalt, etc.

A fast transition to electric vehicles will of course require enormous amounts of these metals, and given the bottlenecks to production, the impact on prices may be so strong that this acts to dramatically slow the speed at which the net-zero energy transition takes place. read more