Signs of Life in Commodities Continue

In today’s Money Morning…commodity prices continue to hint at good things…history’s repetition offers a boon to smart investors…tips to stay ahead of the herd…and more…

Last week I wrote about how ‘Dr’ copper was making new 12-month highs. And how this was an important signal that perhaps the underlying global economy was actually travelling quite well.

Or at least expected to do well in the future.

Well this week it was the turn of nickel. It’s within touching distance of new 12-month highs after a surge of 14.6% over the last month.

The stainless-steel ingredient has been supported by rising stainless output in China and concerns over supplies from top ore exporter, the Philippines.

In fact, you might not have heard much about it in the mainstream press but most of the industrial metals are going well.

Zinc is at its highest point since August 2007, aluminium’s at three-year highs and iron ore was up by as much as 46% over 3 months.

Even oil producers are reporting profits this earnings season.

Santos [ASX:STO], Australia’s second-largest independent oil and gas producer, reported underlying profit of $US156 million for the six months to June 30. That’s its biggest profit since the first half of 2014 and up from a loss of $US5 million a year ago.

International heavyweights including Royal Dutch Shell Plc, Exxon Mobil Corp. and Chevron Corp. improved earnings as oil prices in the first half averaged about 30% higher than a year ago, near $53 a barrel.

And in a bonus for some oil investors, PetroChina announced today that they will pay its entire half year income as a dividend to shareholders, a windfall of US$1.9 billion.

Though profits are still quite far down on previous years, the fact they are turning a profit is an improvement on 2016.

It’s not just the commodities and the producers making money. Even the beaten down mining services industry are starting to get busy again.

Take It All 25-08-17
Source: Bloomberg
[Click to enlarge]

Monadelphous [ASX:MND] released its earnings yesterday and announced a net profit figure of $57.6 million, $1.8 billion-dollar worth of new contracts, operating cashflow of $111.2 million and a 22.7% improvement in net cash.

The stock is up 249% in 2017.

So, what’s going on with commodities?

Have we sleepwalked into a new bull market?

The commodities bull case

It’s too early to say of course. But when it’s obvious the good opportunities will be gone, so it’s worth thinking about now.

Speculators seem to be positioning themselves for a renewed boom. So, what do they see that looks so great amidst all the doom and gloom out there?

Here’s the bull case as I see it.

The world is potentially on the cusp of a new infrastructure boom. With low interest rates and growing populations, governments are keen to keep economic growth going.

Especially in China.

In 2013 China had originally announced plans for a $1 trillion ‘silk road’ project. It seems that the idea is being resurrected by China’s President Xi.

You’ve probably heard of the Silk Road, the ancient trade route that once ran between China and the West during the days of the Roman Empire. It’s how oriental silk first made it to Europe.

It’s also the reason China is no stranger to carrots.

Here’s the scale of the project.

One Belt One Road 25-08-17
Source: Lowy Institute
[Click to enlarge]

Beijing says it will ultimately lend as much as $8 trillion for infrastructure in 68 countries. That adds up to as much as 65% of the global population and a third of global GDP, according to the global consultancy McKinsey.

Guess who that is good news for? (Answer: commodities)

Why is China looking at doing this?

It’s not neighbourly generosity.

One strong incentive is that Trans-Eurasian trade infrastructure could bolster poorer countries to the south of China, as well as boost global trade.

Domestic regions would benefit — especially the less developed border regions in the west of the country, such as Xinjiang. This is an important political objective to stem regional unrest in a country dominated by Beijing and Shanghai.

The economic benefits are many, but perhaps the most obvious is that trading with new markets could go a long way towards keeping China’s national economy buoyant. New markets means less reliance on current trading partners such as the USA and Europe, though clearly that is a long term objective.

Among domestic markets set to gain from future trade are Chinese companies — such as those in transport and telecoms — which now look poised to grow into global brands.

Chinese manufacturing also stands to gain. The country’s vast industrial overcapacity — mainly in the creation of steel and heavy equipment — could find lucrative outlets along the New Silk Road, and this could allow Chinese manufacturing to swing towards higher-end industrial goods.

And infrastructure is a theme across the world at the moment. From Trump’s wall to Australia’s rail.

Decision time

The market doesn’t know the future. It’s just a best guess. But the signs are that the big investors are expecting a better 12 months ahead.

They could be wrong but if they’re right then the benefits for investors now are very high.

That’s because no one is really talking positively about commodities or the stock market in general. People are still expecting a crash soon. The shakiness of global politics has kept fear ahead of greed — the two main drivers of mass investor behaviour.

But if you shut out the noise and just follow one thing — the price action — then the signals are that it may be time to start looking at re-positioning your portfolio.

I talked a bit about natural human biases this week as well and one bias which stops investors making money is the need to be part of a herd. To only invest in something when everyone else is doing it. Unfortunately, that’s the reason why most people lose money in the stock market.

It’s time to think for yourself

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: My colleague Greg Canavan has just completed some very interesting research in three oil companies that he thinks have the potential to make 1,000%+ returns. I strongly urge you to read his report then make up your own mind. If he’s right then you will certainly be investing before the herd. Click here for more info…

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia