The key to commodities investing now is idle capacity. And how quickly it gets back into production
In its regular report on June iron ore production, delivered on July 22, BHP Billiton (BHP) gave investors the key to investing in commodities over the next year. Ignore this at your portfolio’s peril. BHP just told us all what to buy, what to avoid, and when.
Ready for those words of wisdom: “Commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”
Let me translate into language useful to investors: Yes, commodity prices are climbing as consumers of raw materials rebuild their stock piles. And yes, we are seeing what is a real increase in demand and not just a result of inventory rebuilding. But don’t get carried away by short-term spikes in commodity prices. So many commodity producers have idled mines or wells or whatever that any big increase in price will be temporary as it will bring that idled capacity back into the market. And that will depress prices–for a while. Expect, then, a start-stop price chart where the trend is gradually higher, but where the trend is punctuated by spikes and plunges as demand and supply lurch toward equilibrium.
And from that I think investors should be able to figure out what commodity stocks to buy. I’ll lay out three general prices of commodity investing–in the current scenario–in this post. And I’ll give you a stock to buy later today. Read more
Two winning stocks in the war over iron ore
The body count is five and rising.
First, the Beijing government arrested four Rio Tinto (RTP) staffers in China to negotiate the price of iron ore with Baosteel and other Chinese steel makers. Then, the Chinese detained an executive at steelmaker Shougang Group and announced that Baosteel, Anshan Iron & Steel, Laigang Group, and Jigang Group are all under investigation.
The charges? Spying, specifically stealing state secrets, and bribery. (And just in case you think the Chinese aren’t serious, on July 15, Chinese courts sentenced Chen Tonghai, former head of Sinopec, to death (suspended for two years) on a bribery charge.)
But with the question of what constitutes a state secret so vague in China—if the authorities so decide even doing due diligence on a company about to list on the stock exchange could involve state secrets—no one doubts that the arrests are merely another round in the battle for control of the world’s raw materials.
I don’t know how that battle will ultimately come out, but I can name two companies that stand to come out ahead just while the fight rages.
