Blog Materials Risk

As much as you or I like to think of ourselves as forward-looking, we are all backward-looking and we update our perception of the world only gradually. Known as the recency bias, forecasters often give greater weight to very recent events in their forecast and let what could just be random events colour their perception of how the future will evolve.

This is the third in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 3 looks at copper.

One of the greatest sources of edge is the one and only thing you have any power over – your own behaviour. If you can keep your head, while everyone else is losing theirs, then you can be there to exploit the mistakes of others and scoop up what is being left on the table.

The Wall Street Journal (WSJ) polls institutions every month on a range of economic variables including inflation, unemployment and West Texas Intermediate (WTI) crude oil prices. Each month, the survey asks for predictions for the forthcoming June and December. For the sake of consistency, I have reviewed the accuracy of forecasts made both six and 12 months prior to June and December each year. I reviewed surveys from mid-2007 to the end of 2016 and so this covered booms and busts, financial crises and quantitative easing, the Arab Spring and the shale revolution.

Both personal and business loans can help your business promotion at certain stages of its development. If you're just launching your own small business and have no business credit yet, you may consider getting a personal loan to purchase all the stuff you need to get started. If you already have a successful business but want to bring it to a new level, a business loan can also be a great investment in your bold ideas and goals.

Commodity markets are typically interpreted through the lens of changes in supply and demand and the impact on inventories in any particular year. This model works for most commodities that are ‘consumed’ (crude oil, wheat, etc.), but is useless to understand the value of those commodities used for investment purposes. I think this distinction is so important for investors to appreciate that I’ve shared how wealth management company Incrementum outlines it (highlights my own).

The best performing commodity of 2021 is a raw material that most people will never have heard of – iridium. For a precious metal, iridium has achieved the types of returns that gold and silver investors could only dream of. Since the start of 2021 the price of iridium has increased by 140% to $6,300 per oz.

When the US Federal Reserve and other major central banks embarked upon their quantitative easing programs shortly after the Global Financial Crisis many feared that the impact would be inflationary.

1) Weather
The weather has a significant impact on crop yields and thus overall agricultural production. The wrong type of weather at the wrong time in the planting cycle, even if not prolonged or extreme, can also adversely affect the production of soybeans. The weather can also affect the shipment and logistics of transporting crops to market.

Published in October 2015, David S. Abraham’s book, The Elements of Power “tracks the trail of rare earth metals from mine to gadget”. Working in the Japanese Ministry of Economy, Trade and Industry he had a ring-side seat to watch how the escalation of a territorial dispute between Japan and China evolved to a situation where China cut off its rare earth metal exports to Japan. As Abraham’s outlines, China was now using a new geopolitical trump card with its competitors, “The battle over resources, which started when the first person learned how to coax metal from stone, had expanded into a larger battle-a war over the periodic table.”

This is the fourth in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 4 looks at natural gas, in particular the US market.

“In an age of images and entertainment, in an age of instant emotional gratification, we neither seek nor want honesty or reality. Reality is complicated. Reality is boring. We are incapable or unwilling to handle its confusion.” – Ryan Holiday, Trust Me, I’m Lying: Confessions of a Media Manipulator

Up until now investor attention has focused on the downside risks to the publicly traded oil industry resulting from a transition to a low carbon future. Specifically the risk that companies will have to write down ‘stranded’ assets and face declining demand for their products. Yet there is a much bigger potential problem that investors may need to face: sovereign credit risk of state owned oil producers and escalating geopolitical conflict.

1) Concentrated production
There are two main commercially grown types of coffee beans: Arabica, which accounts for 70% of the world’s coffee, and the Robusta bean which is far cheaper and easier to grow. The largest producer of coffee is Brazil accounting for about one-third of global production and about half of the worlds arabica output. The second major producer is Vietnam, accounting for just under 19% of global output and around half of robusta production. This concentrated output means that supply disruptions in one or both of these countries can have a significant impact on the price of coffee.

In a previous post I explained the various long-term cycles that tend to characterise commodity markets. Recall that there are two types of long term cycle. The first type sees prices rise for 15–20 year super-cycles, and then slide over the following 10–15 years. Since supply is price inelastic an increase in demand results in higher prices until eventually excess investment leads to a flood of supply and the cycle resets. This shorter of the two cycles takes 25-35 years to complete.

Rabobank has published new research on the global potash industry highlighting the potential for further price falls but that buyers need to keep a close eye on the long term as suppliers may be close to managing output more effectively providing a floor to prices. The outlook for potash prices is especially important for US farmers who are likely to be strong buyers of fertiliser as the spring planting season begins.

Since the start of 2020 gold prices have increased by one-quarter, silver prices are up by 50% and the price of palladium up a respectable 14%. What then of platinum, the poor cousin to the other stellar performers in the precious metals space? Down 2.5% year to date! The expectation by many investors betting on a rebound in platinum prices is that it will eventually play catch-up versus palladium as auto-catalyst manufacturers substitute expensive palladium, for cheaper platinum.

1) South Africa
As of 2016, South Africa produces approximately 70% of the world’s newly mined platinum. As a result, conditions in South Africa are crucial to the supply of platinum. Given that South Africa’s political environment has become increasingly volatile in recent years, platinum supply is subject to a fairly high degree of political risk. Platinum production from their mines have been hit by labour disputes and foreign currency instability. These risks were felt particularly hard in 2014, when workers for for a number of miners all went on strike hitting 40% of global platinum production. Geological problems have also hit the nations miners with flooding causing the shutdown of mines in the past. Meanwhile the country’s crumbling electricity infrastructure has also caused production to be delayed as intermittent or longer electricity cuts delay platinum production.