The 2022 Commodity Super Cycle - Andrew Baxter

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The 2022 Commodity Super Cycle
For the first time in a long-time, commodities have actually outperformed equity prices in 2021. In what is a rampant inflationary environment, commodity prices could be set to benefit further this year as we head into a potential ‘super cycle’. Here’s why:

Commodity Prices are Soaring
It comes as no surprise when we say that commodity prices have actually performed better than equity prices when you run through some examples. Commodity prices are soaring – lithium is up over 171% YoY, coal nearly 170% YoY and natural gas over 50% in the last 12 months also. As one of the contributing factors to inflation, and also an asset class that typically benefits from inflation, host Andrew Baxter says we could be heading into another super cycle for the commodities. Below we explore some reasons as to why and also how you might like to get some exposure to this.

Real Returns and Inflation
If we take a look through the lenses of 2021 for a moment to decipher why exactly prices have been so strong for commodities, we need to think on a real basis. After inflation (ie. on a ‘real’ basis) commodities tend to hold their value quite well as despite the cost of refining them or transporting them soaring, this can be easily passed onto consumers. Think about it – despite fuel prices being at 7-year highs, are you still going to fill your car up today? Of course you will and is hence why there is a real structural argument for having some exposure to these in your portfolio says professional trader of 29 years, Andrew Baxter. The demand for energy and commodities is relatively inelastic, meaning price fluctuations aren’t absorbed by consumers much easier. 

A Push Towards ‘Greenification’
This is something that has become ever more popular in the last decade and that is the push towards being more environmentally friendly, or ‘green’. A term deemed ‘Greenification’ in episode 40, season 2 by portfolio manager of $9B, James Harwood, has really seen commodity prices benefit as a result. As an example, electric powered cars require the use of cobalt and lithium batteries – faring well for both commodities. The long-term demand for this also benefits the short-term fix being the use of fossil fuels in the meantime, as we know in some instances it may be our only option – this is hence why coal prices have performed so strongly the last year. The green movement is only going to continue to fare well this year says Baxter. 

Supply vs. Demand and Oil Prices
We’re all sick of hearing the term ‘supply chain bottlenecks’ throughout this COVID period, albeit this is something that really has driven up prices in commodities, especially oil. With limited supply from OPEC, political tensions between Russia and Ukraine, plus a lack of stock sitting in our emergency oil reserves – this creates a perfect storm for oil this year. Draw downs in inventory leaves a lack of supply, pushing prices higher as demand remains strong considering reopening of borders and easing of travel restrictions. Host Andrew Baxtersays he sees 2022 the year where oil prices cross above US$100 a barrel – potentially the highest in over a decade. 

How to Trade Commodities
Now, considering the above we have no doubt your interest has piqued in actually making some money trading commodities. Host Andrew Baxter says for new, retail investors – ETFs are a great way to gain broad sector exposure to these commodities themselves. Unlike trading in the futures market at the big end of town, ETF’s allow easy access to owning a basket of stocks which sit in a broad sector (ie. energy) or that may be a little more specific (ie. Lithium companies). Otherwise, for the savvier and more seasoned investor, trading some individual commodity stocks in the energy space could be lucrative for you this year also. In what is likely to be a very different year of trading compared to the last couple, hostAndrew Baxter says looking for those momentum plays is key – to which commodities already have a clear head start on. To learn more, reach out to Australian Investment Education.

 

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