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Commodity Update

Commodity Update: Is the Summer Slump Over?

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Summer Slump: Commodities Return -5.7% in Q3

Commodity Update for Q3 2016

Last update, we triumphantly proclaimed that commodities were “back”.

However, we did forget to add one important caveat, which is that they could still get hit hard in the short-term by the classic “Sell in May and Go Away” market sentiment.

In Q3, commodities as a whole entered a “summer slump”, returning -5.7% as measured by the GSCI (Goldman Sachs Commodity Index). Performance was dragged down mostly by agricultural goods such as wheat, corn, and soybeans, but also by uranium which had another poor quarter.

Despite this bump in the road, most commodities are still having big years on a YTD basis:

  • Silver, crude oil, and zinc are all up over 30% on the year.
  • Gold, palladium, natural gas, and nickel are all up over 20%
  • Uranium is the only metal in red, down over -30%

Here’s Q3 and YTD performance for each commodity:

 Q3YTD
Silver-3.2%39.0%
Brent Oil-1.2%34.2%
Zinc-3.2%31.4%
WTI-2.1%30.1%
Palladium19.1%28.4%
Gold-1.3%24.3%
Natural gas-2.7%23.8%
Nickel11.9%23.5%
Platinum-2.8%15.9%
Aluminum1.4%12.8%
Soybeans-18.0%10.4%
Copper-0.5%3.6%
Corn-6.5%-5.9%
Coal1.3%-7.7%
Wheat-6.3%-14.4%
Uranium-12.0%-31.6%

There’s no doubt that Q4 will be another interesting quarter for the sector.

In November, the U.S. election will take place, and pundits are warning that a certain result would cause extreme market volatility. At the same time, some experts think that this unpredictability could fuel a mega-rally in gold and other precious metals. We think both of these things are possibilities.

Meanwhile, the recent tentative OPEC deal has brought crude oil to four-month highs. However, markets are skeptical that the deal is for real, and the general sentiment seems to be that a production freeze may fail to materialize as all parties try to finalize the deal.

What are your predictions for commodities over the next three months?

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Base Metals

All the World’s Metals and Minerals in One Visualization

This massive infographic reveals the dramatic scale of 2019 non-fuel mineral global production.

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All the World’s Metals and Minerals in One Visualization

We live in a material world, in that we rely on materials to make our lives better. Without even realizing it, humans consume enormous amounts of metals and minerals with every convenient food package, impressive building, and technological innovation.

Every year, the United States Geological Service (USGS) publishes commodity summaries outlining global mining statistics for over 90 individual minerals and materials. Today’s infographic visualizes the data to reveal the dramatic scale of 2019 non-fuel mineral production.

Read all the way to the bottom; the data will surprise you.

Non-Fuel Minerals: USGS Methodology

A wide variety of minerals can be classified as “non-fuel”, including precious metals, base metals, industrial minerals, and materials used for construction.

Non-fuel minerals are those not used for fuel, such as oil, natural gas and coal. Once non-fuel minerals are used up, there is no replacing them. However, many can be recycled continuously.

The USGS tracked both refinery and mine production of these various minerals. This means that some minerals are the essential ingredients for others on the list. For example, iron ore is critical for steel production, and bauxite ore gets refined into aluminum.

Top 10 Minerals and Metals by Production

Sand and gravel are at the top of the list of non-fuel mineral production.

As these materials are the basic components for the manufacturing of concrete, roads, and buildings, it’s not surprising they take the lead.

RankMetal/Mineral2019 Production (millions of metric tons)
#1Sand and Gravel50,000
#2Cement4,100
#3Iron and Steel3,200
#4Iron Ore2,500
#5Bauxite500
#6Lime430
#7Salt293
#8Phosphate Rock240
#9Nitrogen150
#10Gypsum140

These materials fertilize the food we eat, and they also form the structures we live in and the roads we drive on. They are the bones of the global economy.

Let’s dive into some more specific categories covered on the infographic.

Base Metals

While cement, sand, and gravel may be the bones of global infrastructure, base metals are its lifeblood. Their consumption is an important indicator of the overall health of an economy.

Base metals are non-ferrous, meaning they contain no iron. They are often more abundant in nature and sometimes easier to mine, so their prices are generally lower than precious metals.

RankBase Metal2019 Production (millions of metric tons)
#1Aluminum64.0
#2Copper20.0
#3Zinc13.0
#4Lead4.5
#5Nickel2.7
#6Tin0.3

Base metals are also the critical materials that will help to deliver a green and renewable future. The electrification of everything will require vast amounts of base metals to make everything from batteries to solar cells work.

Precious Metals

Gold and precious metals grab the headlines because of their rarity ⁠— and their production shows just how rare they are.

RankPrecious Metal2019 Production (metric tons)
#1Silver27,000
#2Gold3,300
#3Palladium210
#4Platinum180

While metals form the structure and veins of the global economy, ultimately it is humans and animals that make the flesh of the world, driving consumption patterns.

A Material World: A Perspective on Scale

The global economy’s appetite for materials has quadrupled since 1970, faster than the population, which only doubled. On average, each human uses more than 13 metric tons of materials per year.

In 2017, it’s estimated that humans consumed 100.6B metric tons of material in total. Half of the total comprises sand, clay, gravel, and cement used for building, along with the other minerals mined to produce fertilizer. Coal, oil, and gas make up 15% of the total, while metal makes up 10%. The final quarter are plants and trees used for food and fuel.

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Commodity Update

How Commodities Performed in H1 2017, and Why They’re Very Cheap

Here’s how all major commodities have done so far this year, as well as one chart that shows why they could still be very cheap for investors.

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If you’re looking for action, the commodities sector has traditionally been a good place to find it.

With wild price swings, massive up-cycles, exciting resource discoveries, and extreme weather events all playing into things, there’s usually never a dull day in the sector. That being said, it’s hard to remember a more lackluster period for commodities than in the last couple of years.

For commodity bulls, the good news is that the sector is no longer tanking. The bad news, however, is that all the recent action has been in relatively niche sectors, as metals like cobalt, zinc, and lithium all have their day in the sun.

At the same time, the big commodities (gold, oil, copper) have all slid sideways, having yet to revisit their former periods of glory.

Commodity Winners So Far

Before we highlight why commodities could still be cheap, let’s look at recent performance to get some context. Here are the commodities that have positive returns in H1 2017 so far:

Commodities with Positive Returns in 2017 H1

Palladium is the best performer in 2017 so far, and it has now almost passed platinum in price. That would be the first time since 2001 that this has happened, and for the stretch of 2007-2012 it was even true that palladium traded at a $1,000 deficit to platinum.

Agricultural goods like rough rice, lean hogs, oats, and and wheat have also gotten more expensive so far this year. Meanwhile, metals like gold, copper, and silver have seen modest gains – but these are only after dismal performances from the last part of 2016.

The Losers So Far

Here is the scoreboard for the commodities in negative territory, with the most noticeable losses in sugar and energy.

Commodities with Positive Returns in 2017 H1

Are Commodities Cheap?

From the post-crisis bottom in 2009 until today, the S&P 500 is up a staggering 215.4%.

During that same timeframe, most major commodities crashed and then went sideways. The Goldman Sachs Commodity Index (GSCI) is down roughly -31.2%, which is a strong juxtaposition to how equities have done.

This extreme divergence can be best seen in this long-term chart, which compares the two indices since 1971.

S&P 500 vs. GSCI

In other words: despite the lack of action in commodities that we noted earlier, the sector has never been cheaper relative to equities even going back 45 years.

That means that there could be some much-needed action soon.

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