2014: A Mixed Year for Commodities Investors
After the country’s economic slump at the start of the year, commodities investors are shifting their focus away from China to more “Western” shores. Keeping the current global scenario in mind, investments are finding their way back to the West from the emerging markets of Asia.
This shift has begun to show it’s effects in the global commodities market.
The earlier shift, from the developed countries to the rapidly growing ones, resulted in a super-cycle in commodities prices. Commodity super-cycles are decades-long price movements over a wide range of commodities. The current shift may result in a super-cycle which proves favorable to the West, and the strengthening economy of the United States, in particular. The flexibility of the United States’ economy can help to create lower prices for the raw materials the country is self-sufficient in, and energy, or use its currency’s purchasing power to import resources it isn’t self-sufficient in. The drop in energy prices in the States also helps to attract foreign investment.
Low inflation, falling interest rates and commodity prices in addition to rising growth will result in long-term recovery and higher earnings for Western economies. In stark contrast, emerging market economies are currently struggling with rising inflation, growing interest rates and poor growth. It is thus more advisable to invest in the currently safer markets of the West. One of the major catalysts for the US economy’s revival has been the freeing of large amounts of oil and gas held in shale rocks throughout the country. The balance of power has also shifted towards the US, and away from the Middle East where a few countries sustain their economies on the high prices they extract from other countries in exchange for the resources they hold. A fall in supply and a rise in demand yields gains. However, in 2013, supply overwhelmed demand, and most commodities have fared poorly. The PowerShares DB Commodity Index ETF (which tracks commodity prices) has tumbled nearly 10% this year, lagging behind the 25% gain of the S&P 500.
Metals fared poorly in 2013. Zinc was the only metal that fared well last year. Copper and aluminum, both used in the manufacturing and construction sectors, fell 8% and 9% respectively. Iron ore was down 6% and metallurgical coal was off by 22%. Producers have begun to hold back output in the hopes of stabilizing prices. This process has begun to show results in certain areas, however it requires a lot of time to have a greater effect. Despite this poor showing of bulk commodities, analysts remain cautiously optimistic with hopes held on to the strengthening growth of the US, which they believe will provide a much needed boost to the market. However, there are certain risks to take into account. Commodities are quite sensitive, and if the US and European economies don’t show further signs of strengthening in 2014, then many commodities could fall even further.
What we can gather from this news is that it would be wise to follow the basic rules of supply and demand in order to yield profits from investments.