After commodities’ deep breath: is it time to go full throttle?

Years of stuttering performance, policy shifts and geopolitical unrest meant a rather bumpy ride for most commodities, but 2018 was a breath of fresh air: market watcher Coalition recorded commodity trading by the top twelve banks last year at levels $3.6 billion higher than the year before. We can attribute the bump, in part, to innovative investment strategies accessing untapped profits.

A cautious outlook

If we have turned the corner on a downward trajectory, it seems too soon to call the start of a new commodity super-cycle. Here and there the mood is gloomy despite positive signals; lacklustre global growth will likely play to the downside; inflation is subdued.

As China shifts its focus from foreign to domestic demand against a backdrop of severe and ongoing trade tensions with the US (farm products, metals, energy), it adds complexity and uncertainty to financial markets that generally prefer the converse. Goldman Sachs announced a further shrinking of its iconic commodity trading division in March, blaming thinner margins, and importantly changed its commodity outlook from bullish to cautious.

Room for optimism

Still, there are positive secular trends with ample revitalisation potential, especially assuming a medium-to-long-run prospective. While the days of making easy money in commodities may be largely behind us (probably), market participants who cleverly embrace changing dynamics face terrific profit possibilities. History tells us so.

The rise of alternative commodities

Just two of those trends emerged more energetically over the past year or two. Long considered a non-traditional commodity, liquefied natural gas is in the mix for an increasing number of independent trading houses. Overproduction and overcapacity is presently an issue for LNG – watch the industry for a few months, however, and you’ll discern levels of panic about just the opposite: a lack of production and few coastal facilities able to receive shipments. The LNG space is still somewhat young and skittish, so avoid trading without the guidance of an expert, but the long-term perspective is bright as the market is predicted to double to 600 million tonnes a year by 2040.

Meanwhile, BP is looking that far out to predict that renewable energy will make up 30% of global production by 2040, a sharp uptick from its 25% estimate of only twelve months ago. The Guardian has us consider the fact that oil took 45 years to go from 1% to 10% of global production. This may give us a sense of just how disruptive the energy transition is going to be.

As focus turns towards commodities with high potential, the natural, cyclical surge in investment and hiring will ensue. As for the physical majors, at least those who see the writing on the wall for traditional (oil-based) commodities, they will be timing entry into these new growth areas and the building of new teams cautiously, getting the most out of the status quo before the inevitable seismic shift.