For those brave enough to ride the commodities roller coaster, here are six to consider.
Want to take a roller coaster commmodities ride? Here are six to consider
A decade ago the world was said to be on the brink of a commodity supercycle, as voracious demand from emerging giants such as China and India pushed prices to all-time highs.
Some analysts claimed the supercycle could last for more than 40 years, but lately it has slowed. The price of gold, for example, has collapsed from a peak of more than $1,900 an ounce in 2011 to around $1,300. Silver lost its shine.
Industrial metals such as copper and iron ore have also mined lows lately, while oil trades at around $106 a barrel, down from $125 just two years ago.
Commodities are notoriously cyclical, says Dan Dowding, the chief executive (Middle East & Asia) at IFAs Killik & Co in Dubai. “Commodities have underperformed equities and bonds over the last four years, but now could be a good time to switch back into this sector.”
So, if you’re tempted to ride the commodities roller coaster, here are six to consider:
Copper is a key industrial metal. An excellent conductor of heat and electricity, it is used in wiring, electrical circuits, generators, transformers, mobile phones, TVs and computers and is also vital to the construction, shipbuilding and car industries. When the world is building and booming, this is a copper-bottomed investment.
The price of copper sank to a four-year low of $6,440 a tonne this year, on fears of an economic hard landing in China, and a Chinese government crackdown on using copper as collateral for financing deals.
It has since recovered to around $7,087 thanks to lower global inventories, a slowdown in new mines and signs of a US recovery.
When the global economy is growing, the price of copper should rise, says John Greenwood, chief executive at the offshore discretionary fund manager Creechurch Capital. “It has genuine industrial uses, which means it also avoids some of the ‘hot money’ hype and speculation associated with precious metals such as gold and silver.”
Analysts at Capital Economics expect copper prices to remain flat this year, but say prices should recover in 2015 as stronger global growth boosts demand and supply dwindles.
How to invest?
You can invest directly in a mining company such as Rio Tinto, BHP Billiton, Anglo-American or Xstrata, all quoted on the London Stock Exchange.
Or you could buy an exchange traded fund (ETF), low-cost tracker funds that can be traded quickly and cheaply through online stockbrokers. There are thousands of ETFs tracking almost every global index, asset and commodity.
Mr Greenwood recommends the iPath Dow Jones-UBS Copper Subindex Total Return ETN. “You should understand the forward-looking nature of commodity pricing, which means this ‘party’ is sometimes worth leaving early.”
If you’re making steel, you need iron ore. This industrial metal is another play on global growth in general, and China in particular, which buys up roughly half the world’s annual production.
The iron ore price recently fell to a two-year low of $89 a tonne, down from $135 at the start of the year.
This is largely because of a drop in Chinese demand for iron ore, says Jason Webster, from Fleming Family and Partners, manager of the VAM commodities fund. “The market isn’t completely dead, because the global automotive industry and China’s massive rail network development is sustaining demand. The problem is that a number of new mining projects are coming on stream now, leading to oversupply.”
Iron ore has rebounded to around $97 in recent weeks and Mr Webster expects further growth. “As uneconomic mines are shuttered or projects cancelled, and Chinese GDP growth strengthens, we should see prices move back towards $120 a tonne.”
Others are more cautious. Morgan Stanley recently dropped its future price estimates by more than 20 per cent, predicting iron ore will fall to $87 a tonne by 2016.
Given current economic and political uncertainties, investors need a little iron in their soul.
How to invest
Try the stocks of producers such as Rio Tinto, which generates 60 per cent of its earnings from iron ore, or BHP Billiton and the Brazilian miner Vale.
Mr Webster says brave investors could target the fast-growing miner Fortescue Metals Group, launched in 2003 but already the world’s fourth-largest iron ore producer.
There is no exchange traded fund dedicated to iron ore, but the Market Vectors Steel ETF includes large holdings of iron ore miners, as does the iShares S&P Global Materials ETF.
Aluminium is another way to cash in on growth, especially in the industrial and housing sectors. Forward prices can move swiftly and unexpectedly, which attracts risk-loving traders.
Aluminium is suddenly a hot metal. It is trading at a 13-month peak of around $1,960 a tonne, helped by Ford Motor’s plans to launch a new aluminium-intensive truck this year.
Takashi Ishiyama, chairman of the Japan Aluminium Association, has predicted that the aluminium price could hit $2,500 per tonne if more car makers follow Ford’s lead.
Aluminium is lighter than steel and helps to make vehicles more fuel-efficient, says Dan Dowding at Killik & Co. “As demand from the automotive and aerospace sectors continues to grow, supply shortages could force prices higher.”
How to invest
Forget aluminium futures, they’re only for testosterone-fuelled traders.
Top stocks include Alcoa, the world’s largest aluminium producer, or the Aluminum Corporation of China.
You can also invest in a pure-play aluminium ETF, such as iPath DJ-IBS Aluminum ETN or Global X Aluminum.
Some investors develop a taste for agricultural commodities such as corn, wheat, cocoa, coffee, sugar, palm oil and soybeans.
Food prices are at the mercy of droughts, floods, monsoons and El Niños, but this also offers opportunities for investors.
The cost of wheat shot up when the Russians imposed an export ban in 2010, while the US drought in 2012 also ramped up prices.
Food prices have been on an upwards trajectory for the last 25 years, says Desmond Cheung, a member of the natural resources equities team at the fund manager BlackRock. The rising global population, newly wealthy emerging market consumers and biofuel production are all boosting demand.
How to invest
Popular stocks include Amira Nature Foods, based in Dubai, the North American fertilizer maker Potash Corporation of Saskatchewan, US agribusiness Deere & Company and seed producer Monsanto Company.
Or you could invest in a number of companies through actively-managed funds such as the Pictet Agriculture Fund or DWS Global Agribusiness.
ETF choices include Market Vectors Agribusiness or the DB Agriculture Fund. There are scores of individual commodity funds, such as the Dow Jones UBS Coffee, ETFS Cocoa or iPath Pure Beta Sugar.
Oil is still the black gold pumping through the veins of the global economy. Aside from transport, it has a host of industrial and agricultural uses, including asphalt, heating, fertiliser, petrochemicals, plastics and solvents.
Despite concerns about so-called peak oil, supply isn’t running out just yet, but it is getting harder and more expensive to access.
The price of a barrel of Brent crude hit $146 in the summer of 2008, helping to precipitate that autumn’s stock market crash, then plunged to around $40 in January 2009. Today, it trades at around $106.
Regular oil shocks from Libya, Ukraine, Iraq and elsewhere should keep the price high, says James Sutton, client portfolio manager at specialist commodity fund JPM Natural Resources. “Supply disruption in Iraq could become a problem if militants in the Islamic State in Iraq and the Levant (ISIL) move further south, where most of Iraq’s oil production is located.”
How to invest
Mr Sutton prefers high-growth exploration and production companies to the integrated oil majors such as BP, Esso and Royal Dutch Shell.
His favourite stocks include Anadarko Petroleum Corporation, Continental Resources and SunCore Energy in North America, Amerisur and Grand Tiera Energy in Colombia, and DNO International in Iraq’s Kurdish region.
Exploration is risky, but you can reduce the danger by investing in actively-managed fund the Junior Oils Trust, which invests in a spread of explorers.
There are also oil ETFs, such as the United States Oil Fund or PowerShares DB Oil Fund.
Unlike gold, silver also has an industrial value, because it is used in components for the electronics and automotive industries, says Glenn Mackersy, a dealer on the precious metals desk at ADS Securities in Abu Dhabi. “Whereas gold is a safe haven in troubled times, demand for silver can rise when the economy looks favourable.”
Silver can be volatile. Its price briefly spiked to $49.80 an ounce in April 2011, then quickly plunged. Currently, it trades at just over $21 an ounce.
Today’s low silver price looks tempting, Mr Mackersy says: “We have seen a dramatic increase in interest from investors in the UAE over the last couple of months.” Rising industrial demand is also pushing up the price. “Silver is now showing bullish tendencies, with most of the indicators turning positive.”
How to invest
One option is to buy shares in London-listed Fresnillo, the world’s largest primary silver mining company. Its share price is down 36 per cent over the past two years, but is up 25 per cent in the last six months.
ETFs include the iShares Silver Trust, ETFS Silver Trust or ProShares Ultra Silver.
Or you can buy the ingots or bars, Mr Mackersy says. “At ADS Securities we offer physical sourcing and delivery of all types of bars and expect Q3 to be extremely busy.”
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