{"id":1368,"date":"2021-08-05T16:47:45","date_gmt":"2021-08-05T14:47:45","guid":{"rendered":"https:\/\/a2kadvisory.com\/?p=1368"},"modified":"2021-09-15T00:20:39","modified_gmt":"2021-09-14T22:20:39","slug":"commodity-traders-harvest-billions-while-prices-rise-for-everyone-else","status":"publish","type":"post","link":"https:\/\/a2kadvisory.com\/fr\/2021\/08\/05\/commodity-traders-harvest-billions-while-prices-rise-for-everyone-else\/","title":{"rendered":"Commodity Traders Harvest Billions While Prices Rise for Everyone Else"},"content":{"rendered":"
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Clockwise from top left: Lithium, steel, corn, copper, oil, salt, aluminum, diesel fuel and iron.
Source: Bloomberg (7), Getty Images (2)<\/p><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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From oil to steel, raw material prices are surging. As the world economy recovers, how much further does the boom have to run?<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Doug King set up his hedge fund in the early days of the commodity super-cycle in 2004. It was perfectly timed: voracious Chinese demand lifted the price of everything from oil to copper to record highs. Investors flooded the commodities sector. At the peak, King\u2019s Merchant Commodity Fund was managing about $2 billion.<\/p>

But the boom ended abruptly after the 2008 global financial crisis and the onset of the U.S. shale revolution. Prices plunged, big institutional money got out and many specialist hedge funds closed.<\/p>

Fast forward more than a decade and King is having one of the best years of his career: a broad-based commodities boom has pushed up his hedge fund nearly 50% this year as raw materials from steel to soybeans hit multi-year highs.\u00a0Commodities are back, and from pension funds to physical commodity traders, everyone is making money. The question now is whether it\u2019s a temporary snapback from the pandemic or signals a longer-term shift in the structure of the global economy. King is in no doubt.<\/p>

\u201cWe are facing a structural inflation shock,\u201d King said. \u201cThere\u2019s a lot of pent up demand, and everyone wants everything now, right now.\u201d<\/p>

For the first time since the pre-crisis years before 2008, the commodities boom means central banks are fretting about inflation. The rally will have a political impact, too. With oil\u00a0back at $75 a barrel, Saudi Arabia and Russia are back in the driving seat of the global energy market \u2014 a remarkable come back from negative prices just over a year ago. The boom is also an unwelcome development for policymakers tackling the climate crisis: rising commodities prices will make the shift more expensive.<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Steel rebar at a metals yard in Shanghai, China, where the boom in commodities has pushed factory inflation to its highest in more than a decade.
Photographer: Qilai Shen\/Bloomberg<\/p><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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China, reliant on raw materials imports to feed millions of factories and building sites, is so nervous the government has tried to force prices lower, threatening crackdowns on speculators and releasing strategic stockpiles. It\u2019s worked to some extent \u2014\u00a0copper has given up all its gains this year\u2014\u00a0but prices across the complex remain robust: iron ore is still near a record, U.S. steel prices have tripled this year,\u00a0\u00a0coal has risen to\u00a0a 13-year high and natural gas prices are on a tear.<\/p>

Even after the recent pullback, the Bloomberg Commodities Spot Index, a measure of 22 raw material prices,\u00a0is up 78% from the\u00a0March 2020 low when the pandemic first hit.<\/p>

And\u00a0crude oil, the global economy\u2019s most crucial commodity, keeps powering higher as the world emerges from lockdown and the OPEC+ alliance puts\u00a0 a lid on supply. Benchmark Brent prices are up 45% this year, prompting traders and Wall Street banks to talk again about the potential for prices to surpass $100 a barrel for the first time since 2014.<\/p>

As prices have surged, so has Wall Street\u2019s interest. The annual Robin Hood investor conference, which every year congregates hedge fund luminaries from Paul Tudor Jones to Stanley F. Druckenmiller and Ray Dalio, featured a panel on commodities earlier in June\u00a0\u2014 the first time in at least five years the conference has found time to discuss raw materials.<\/p>

Jeff Currie,\u00a0Goldman Sachs Group Inc.<\/a>\u2019s veteran head of commodities research, who argues for a long-term bull market across commodities despite the recent sell-off in metals and grain, says there\u2019s room for a lot more investment into the market.<\/p>

\u201cCommodities are back in vogue,\u201d Currie said, but\u00a0so far the excitement about sky-high prices hasn\u2019t yet attracted the money flows the sector harnessed during the 2004-2011 boom.<\/p>

For those investors and physical traders who have already poured cash into commodities, betting on post-pandemic recovery, the rally has showered them in money.<\/p>

Take\u00a0Cargill Inc<\/a>. The world\u2019s largest trader of agricultural commodities made more money in just the first nine months of its fiscal year than in any full year in its history as net income surged above $4 billion.<\/p>

Or\u00a0Trafigura Group<\/a>, the world\u2019s second biggest independent oil trader, where the more than $2 billion in net profit posted in the in six months to the end of March was nearly as much as it made during its previous best ever full year.<\/p>

\u201cOur core trading divisions are firing on all cylinders,\u201d said Jeremy Weir, the chief executive of Trafigura.<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Corn stores at a Cargill grain terminal in Ukraine. The company\u2019s income has climbed over $4 billion in the first nine months of its fiscal year.
Photographer: Vincent Mundy\/Bloomberg<\/p><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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For consumers, however, the commodity boom means rekindling memories of high inflation. For now, companies are mainly absorbing the brunt of the impact, pushing factory inflation in some countries, including China, to their highest in more than a decade. But sooner or later, consumers will pay the price, too.<\/p>

From\u00a0Unilever Plc<\/a>\u00a0to\u00a0Procter & Gamble Co<\/a>., companies have announced plans to raise prices in the near term.<\/p>

\u201cWe\u2019re seeing levels of commodity inflation that we have not seen in a very long time,\u201d Graeme Pitkethly, the chief financial officer at Unilever, told investors after disclosing first quarter results. \u201cThe commodity inflation that we\u2019re seeing is impacting all businesses.\u201d<\/p>

For consumers, however, the commodity boom means rekindling memories of high inflation. For now, companies are mainly absorbing the brunt of the impact, pushing factory inflation in some countries, including China, to their highest in more than a decade. But sooner or later, consumers will pay the price, too.<\/p>

From\u00a0Unilever Plc<\/a>\u00a0to\u00a0Procter & Gamble Co<\/a>., companies have announced plans to raise prices in the near term.<\/p>

\u201cWe\u2019re seeing levels of commodity inflation that we have not seen in a very long time,\u201d Graeme Pitkethly, the chief financial officer at Unilever, told investors after disclosing first quarter results. \u201cThe commodity inflation that we\u2019re seeing is impacting all businesses.\u201d<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Clockwise from top left: Copper miners in Michigan, U.S. circa 1906. Warships under construction at a shipyard in Tyneside, U.K. in 1939. Construction of the Self Defense Forces headquarters in Tokyo in 1955.
Photographs: Hulton Archive\/Getty Images<\/p><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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The emergence of a fifth supercycle would be a major event. The price rally backs the talk of a new boom: the Bloomberg Commodity Spot Index, a basket of 23 raw materials, is nearly 500 points, matching the 2007-08 and 2010-11 peaks. And yet, what\u2019s more likely happening is that the world is still experiencing the impact of the China-led supercycle, now turbo-charged by counterintuitive economic shifts triggered by the coronavirus pandemic.<\/p>

Initially, Covid was bad news for commodity demand. The world went into lockdown, travel plunged and factories closed. The price of everything from oil to copper followed consumption, falling sharply between March and May of last year. But after the first few months, the world started to get back on its feet and consumption patterns changed in a way that favored commodities.<\/p>

To appreciate what happened, the key is understanding the typical relationship between commodity demand and wealth. Generally, poor countries consume few raw materials because most spending is devoted to basic needs, like food and shelter.<\/p>

The sweet spot for commodities is countries with per capita income between $4,000 and $18,000 \u2014 the middle-income range that China entered in the early 2000s. It translates disproportionately into commodity demand because it\u2019s at the level when countries urbanize and industrialize. At those per capita income ranges, families have money to buy cars, household appliances and other goods that require lots of raw materials. Industrializing countries also build railways, highways, hospitals and other public infrastructure.<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Spending everywhere has shifted from services to goods under lockdown.
Photographer: Christopher Dilts\/Bloomberg<\/p><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Above $20,000 per capita, demand for commodities starts to cool down as richer populations devote incremental wealth to services like better education, health and recreation.<\/p>

The coronavirus pandemic altered those dynamics. With many families under lockdown, spending shifted from services into goods everywhere, even in the richest nations like the U.S. In many ways, American and European consumers behaved for a few months like their counterparts in emerging countries, spending on everything from new bicycles to television screens.<\/p>

The U.S. economy offers the best example of the trend. Overall consumer spending remains below the 2018-19 trend, but that masks a huge divergence between spending in goods and services. According to the Peterson Institute for International Economics, household spending in goods is now running 11% above the pre-pandemic trend; meanwhile spending in services, like holiday, restaurants or entertainment, remains 7% below the pre-pandemic trend.<\/p>

\u201cUltra-accommodative monetary policy, unprecedented fiscal stimulus, pent-up demand, strong household balance sheets, and record savings all combine to paint a picture of a resilient and strong growth trajectory,\u201d said Saad Rahim, chief economist at Trafigura. The fiscal stimulus has other parallels with emerging markets as Western governments are targeting infrastructure spending, promising to rehabilitate their highways, railways and bridges.<\/p>

Governments are also keen to build a greener future, spending on electrification to move away from fossil fuels. While that\u2019s bad news for coal and oil, it means more demand for raw materials like copper, aluminum and battery metals like cobalt and lithium that are key for the energy transition.<\/p>

\u201cCommodity prices will stay strong for a long way longer,\u201d said Ivan Glasenberg, the outgoing CEO of commodities giant\u00a0Glencore Plc<\/a>.\u00a0For the first time the world’s two super powers, the U.S. and China, were simultaneously pushing big infrastructure projects as a way to rescue their economies from the impact of the coronavirus pandemic, he said.<\/p>

Supply is struggling to catch up. Some of the bottlenecks are due to deliberate moves by producing countries, like the OPEC+ alliance, which slashed oil production last year. And others are due to the difficulty of running mines, smelters, slaughters houses and farms in the middle of the pandemic.<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Battery metals such as lithium are key to global electrification efforts.
Photographer: Qilai Shen\/Bloomberg<\/p><\/div><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Crucially for the longevity of the rally, there\u2019s a structural supply constraint that means high prices may not work\u00a0as a signal to increase production and eventually bring the market back into balance.<\/p>

The forces slowing the supply response are twofold. First, companies are under pressure from shareholders and courts to join the fight against climate change, reducing their production of fossil fuels like coal, oil and gas. Second, the same shareholders are demanding that chief executives reward them with higher dividends, in turn leaving less money to expand mines or drill new wells.<\/p>

The impact of those forces are evident already in some corners of the commodity market, where companies stopped investing in new supply several years ago. Take thermal coal, for example. Mining companies have been cutting spending since at least 2015. As demand has picked up, coal prices have jumped to levels unseen in 10 years. The same has happened in iron ore, where prices shot up to all-time high earlier this year. Next is likely to be oil, where companies are cutting spending significantly.<\/p>

For the commodity bulls, like Doug King, the hedge fund manager, it\u2019s the sign to double down. \u201cThis is the beginning of a proper boom cycle \u2014\u00a0this isn\u2019t a transitory spike,\u201d he said.<\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Source : bloomberg.com<\/a><\/p><\/div><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>","protected":false},"excerpt":{"rendered":"

Clockwise from top left: Lithium, steel, corn, copper, oil, salt, aluminum, diesel fuel and iron. Source: Bloomberg (7), Getty Images (2) From oil to steel, raw material prices are surging. As the world economy recovers, how much further does the boom have to run? Doug King set up his hedge fund in the early days […]<\/p>","protected":false},"author":1,"featured_media":1369,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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Commodity Traders Harvest Billions While Prices Rise for Everyone Else<\/a><\/blockquote>