Commodities have gone back to basics. And not the market basics of supply and demand, but the hierarchy of needs basics.
Crop prices are up while gas prices have skyrocketed because of a cold winter in Asia. Both are related to the La Niña weather system, which has sent cool air north and contributed to weaker crop harvests in South America.
This new year opened with other major commodity moves – copper hitting another multi-year high at over $8,000 (£5,931) a tonne (t), for one – but the recent bidding up of food and domestic energy supplies shows there are still determining factors in prices that punters can understand without an in-depth knowledge of the Shanghai Futures Exchange.
The sharpest rise came from liquid natural gas (LNG), which hit more than $20 per British thermal unit (btu) in Asia this month after trading below $2/btu last May. Thermal coal has also come up but actually getting the power plant fuel to where it is needed has proved tough, after sea ice blocked up trade routes in northern China.
“Amid the cold winter in China, Beijing’s power load hit 24.51 gigawatts (GW) during the evening of January 6, not only a new record but also the first time in 20 years that the maximum winter power load has exceeded that from summer months,” said BMO Capital Markets analyst Colin Hamilton. “This strength has kept pressure on the coal market, where the cold temperatures are impacting unloading operations with material frequently frozen to wagons.”
Unfortunately for investors in London-listed producers, this surge in gas and coal prices won’t guarantee a surge in profits.
Gas producers like Diversified Gas and Oil (DGOC) and Savannah Energy (SAVE) are trading strongly for the sector, with the former actually trading in line with its pre-Covid-19 share price, but because of the geography differences a $20-plus price remains a dream for most sellers. The US hit a monthly LNG export record in December, according to Panmure Gordon’s Colin Smith, but this will likely benefit the majors more than smaller producers.
Royal Dutch Shell (RDSB) and BP (BP) also have assets in China and elsewhere in the region, so will get a revenue boost.
Lower crop production in South America has more of an impact for consumers. Saxo Bank head of commodity strategy Ole Hansen said at the start of January that conditions meant prices for soy, corn and wheat would remain high. This forecast was supported by a weak dollar, Chinese demand and dry conditions in Argentina and Brazil. “Soybeans surged past $13 a bushel for the first time in [over six] years while corn has recorded its longest run of gains in six decades,” he observed.
As of the latest Comex commitment update, covering the week to 5 January, traders had piled into food futures. Retail investors will have a harder time backing this move, but these price hikes will affect major food manufacturers like Associated British Foods (ABF) and Premier Foods (PFD). While both companies have hedging programmes in place, last year’s oil crash showed there was a limit to how much those exposed to commodities can manage in the face of major shifts.
The base of Maslow’s hierarchy of needs pyramid includes water and rest, on top of food and warmth. The real estate market has rest covered, and water rights are only traded at local levels. Let’s hope traders are happy with three of four basic human needs, and stay away from water.