Commodities used to get no respect. A decade ago, trading in commodities were seen as being risky and obscure, an asset class best left to those with intimate technical knowledge of the market, writes Dambisa Moyo, an economist and former investment banker, in her book “Winner Take All: China’s Race for Resources and What It Means for Us.”
That era ended when hedge fund manager Jim Rogers argued in his 2004 book that the asset class deserved both respect and investment. “Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market” triggered a 60-fold increase in investment from 2000 to 2011.
These newcomers mostly speculated on the trend of continued growth, a relatively safe assumption in the last decade as Chinese demand skyrocketed. But going forward, investors may be better off leaving metals to the true commodity wonks.
Analysts say the market will likely revert to an era where betting on across-the-board price trends is a losing strategy, and only commodity experts trading on the smaller minutiae of the industry see consistent gains. Winning investments are likely to be made by trading on short-term ups and downs related to inventory changes, supply and demand shifts for individual metals or even weather patterns.
But even leading commodity experts disagree on the particulars of the market. In the short term, a major debate among analysts is how much of an effect China’s stimulus measures will have on commodities prices. China’s central government has approved US$111.5 billion in railway spending this year to bolster the economy, in addition to local government plans to spend at least US$600 billion.
Ian Roper, a commodity strategist at CLSA, said the stimulus will bring little unexpected spending, and that previously planned projects are just being sped up. “[Beijing officials] are getting more like Western politicians, just re-announcing policy.” However, Mike Elliott, head of metals and mining at accountancy Ernst & Young, said that the announced infrastructure spending could increase metals demand soon if the central government executes on its plans quickly, as it is known to do. For example, the government has announced US$8 billion in railway spending and approved 25 railway projects in recent months, which would increase steel demand.
In the meantime, the announcements themselves have lifted metals markets, said John Mothersole, senior economist at consultancy IHS Global Insight. But prices will fall if data begins to show that the stimulus is not having its intended effect, and many analysts doubt that governments will follow through on these ambitious plans. “In some sense, this is a classic [case of] buy on rumor, sell on fact.”
Deciphering the impact of stimulus spending will be difficult. The easy gains of the last decade that earned commodities respect are giving way to increasingly uncertain returns. As the market shifts, investors may continue to respect commodities – but they don’t have to like them.