Materials Risk

The USA is one of few countries in which the government stores large volumes of crude oil. The Strategic Petroleum Reserve (SPR), is the largest emergency supply in the world with the capacity to hold up to 727 million barrels of oil.

In the aftermath of the Arab oil embargo of 1973-74 and the resulting oil price shock (in which the price of imported crude tripled), the US government decided it would be wise to invest in an emergency reserve of crude oil. In 1977 the government began to fill vast salt caverns, deep underground across four sites near the coast of Texas and Louisiana. read more

Seasonal trends are often used by investors to give an indication of where prices may move next. Take the example of gold. The middle of the year tends to mark an inflection point between gold and the US dollar. The chart below illustrates that the period between June and October is usually very strong for gold prices, at the expense of US dollar weakness. At other times of the year gold and the dollar broadly move in the same direction.

There is a good reason why prices might move higher towards September and October. Diwali (also known as the Festival of Lights) is a major shopping season in late October or early November. Families typically splash out on gold jewellery. Merchants and jewellers purchase gold during the third quarter of the year in anticipation of a surge in demand . read more

What should the owner of a non-renewable resource do? Should they keep the commodity in the ground and hope for a better price next year, or should they extract it now and sell it to invest the proceeds in an interest bearing asset? Therein lies the fundamental decision underpinning one of the earliest theories around resource extraction, developed by American economist and statistician Harold Hotelling in 1931.

Hotelling’s rule (or Hotelling’s theory) states that the most profitable extraction path for a non-renewable resource is one along which the price of the commodity (determined by the marginal net revenue from its sale) increases at the prevailing rate of interest. read more

Many of the readers of Materials Risk will be familiar with the extreme price movements in the lumber market over the past year. Much like other markets the price of lumber initially fell sharply as coronavirus spread across North America. After all, who would want to even think about an extension in a pandemic after all? North American mills cut production in expectation of plunging demand. Lumber prices declined by 45% during March 2020 to around $250 per 1,000 board feet (mbf).

However, the mills didn’t count on a surge in home renovation projects and an exodus from the cities as urban dwellers pined for a country retreat. Lumber’s barn storming bull market had been set alight and prices barley missed a beat all the way up to a peak of over $1,700 per mbf on the 10th of May 2021. read more

Back in mid-April I published an article outlining a number of compelling reasons to expect a new super-cycle in dry bulk freight rates. Since then the Baltic Dry Index (BDI) has increased by almost 30% to 2,944. The index had previously increased to a high of 3,265 in early May, and after a brief correction the BDI has continued to rise since the beginning of June.

Freight futures are signaling that higher rates are here to stay with futures indicating the BDI could average around 3,500 over the next 6 months. Over the past two decades the BDI has only spent 16% of the time over 3,500, all of it during the boom period between 2003 and 2008. read more

Crop failure was common in the Soviet Union. The cold climate, frequent droughts and mismanagement led to regular shortages of basic foodstuffs. 1972 was one such year. High temperatures scorched Europe leading to drought across much of the continent. By summer much of the ‘Black Earth’ region (a belt of rich and fertile soil stretching eastward from Moldova and the Eastern Ukraine) was in danger of being ruined. Coming straight after a poor harvest the previous year, the Soviet leadership realised that a catastrophic wheat crop failure meant famine was becoming a very real danger. read more