The Commodity Boom Is Far from Over

The big news yesterday was China’s reversal of its ban on Australian coal.

According to widespread reports, three major utility companies and the nation’s largest steelmaker will all be allowed to use imported coal from Australia once again. That’s a big win for local exporters and a big win for energy investors.

As for how much material gain it will actually translate to, only time will tell.

However, the bigger distinction for investors has to be the thawing of trade relations itself. This move demonstrates that China is willing to negotiate across the trade table once more.

For a range of industries still facing heavy restrictions upon trade to China, that is very noteworthy. Because while this decision on coal may be an isolated one, I wouldn’t be surprised if we saw more bans overturned in the future…

After all, with China scrapping its ‘Zero-COVID’ policy, it seems clear that growth is its objective. And the quickest way to secure that growth, as it has always done, is to lean into manufacturing and building. These are two industries that have long relied upon materials from Australia.

Ol’ reliable

Right now, it seems many are fearing a China slowdown. I think even the CCP is worried about that, which is why they’ve scrapped the Zero-COVID plan.

So, with that in mind, I think investors need to start considering iron ore once again. Because despite the volatile climate, I would not be surprised to see a huge push for more construction in China to boost growth.

I’m confident in this bullish prediction because of the new ‘China Mineral Resources Group’, or CMRG. This State-run mega-corporation is set to become the world’s largest iron ore buyer as soon as this year as it sources materials for 20 of the biggest steelmakers in the nation.

According to Reuters, the group is already in talks with Rio Tinto, BHP, and Vale for supply contracts. In other words, the government is already looking to prop up steelmakers once again for sustained growth.

Whether or not this centralisation of imports will be good for iron prices, however, is another matter entirely. All I’m suggesting for the moment is that it seems likely that demand for the material itself is looking positive.

And that is something that can also be said of most commodities…

Racing ahead

See, despite concerns of a global slowdown, commodities are still running hot. As Bloomberg columnist and former commodities editor for the Financial Times, Javier Blas, notes:

‘Indeed, an economic slowdown is already on its way. The US Federal Reserve, the Bank of England and the European Central Bank are all firmly pushing the brakes via higher interest rates. The British economy is already in recession, and Europe is edging toward a cliff.

‘The US is oscillating between a soft and a hard landing. But even if macroeconomic forces ease some commodity cost pressures, microeconomic factors, such as low inventories and limited spare capacity, will keep prices higher than during past recessions in 2023.’

As Bloomberg’s own Commodity Spot Index shows, prices may have already fallen, but they’re still sky-high. Just take a look for yourself:

This is not only a testament to how big the boom has been but also how sticky these microeconomic factors are, as Javier puts it.

Underinvestment in capacity and new supply is still a glaring issue, and it isn’t going to go away in the event of a recession.

In fact, it may only get worse…

That’s why our own commodities expert, James Cooper, has been so insistent on his ‘Age of Scarcity’ thesis. He can see that supply, not demand, is the real concern. And for investors like yourself, it is the difference you should be looking for in terms of investment opportunities.

The commodity trend isn’t going anywhere in 2023.

In all likelihood, it is just getting started.

Regards,

Ryan Clarkson-Ledward,
Editor, Money Morning

Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.