Sunday, August 1, 2021

Quotes of the Day: The Ongoing Commodities (and producers) Setup

While, like all tradable markets, the commodity space will absolutely see its share of volatility* (down and up) in the months and years to come, as we've firmly stated herein, in our view the longer-term setup remains historically-attractive.

*Note: Looking at the reported numbers and speaking with folks in the medical industry this weekend, the Delta variant is a thing (albeit less of a thing than the original) and, therefore, can definitely roil markets (including commodities) in the near-term. 

Bloomberg's article from yesterday titled From Miners to Big Oil, The Commodity Cash Machine is Back effectively sums up much of what you've read herein over the past year.

Here are some key snippets:   emphasis mine...

"The economic rebound from last year’s Covid slump has
powered an explosive rally in commodity prices as consumers
forgo vacations and dining out and spend their money loading up
on physical goods instead: everything from patio heaters to
start-of-the art TVs.

Politicians are helping, too, lavishing 
hundreds of billions on resource-heavy infrastructure projects."

"“Demand continues to improve with increasing global
vaccinations,” Joe Gorder, the chief executive of Valero Energy
Corp., one of the world’s largest oil refiners, said earlier
this week."

"...there are structural factors at play as well. Miners
and oil companies have cut spending in new projects savagely,
creating a supply shortfall.
The miners were first, as they
curbed investment from 2015-16 as investors demanded more
discipline; oil companies followed up last year and some major
energy companies this week announced further cuts in spending
for 2021.
The result is that while demand is surging, supply
isn’t -- at least for now.
The oil majors are benefiting too
from the work of the OPEC+ alliance of oil producers, which is
still holding back a large share of output."

"Anglo American, which announced $4 billion in dividends, is
probably the most remarkable turnaround story in the natural
resources sector, but its profits were still dwarfed by its
bigger rivals. Rio Tinto Group and Vale SA, the world’s two
leading iron ore miners, together vowed to hand back more than
$17 billion in dividends last week. There’s still more to come
for investors, with both BHP Group, the world’s biggest miner,
and Glencore Plc, another big miner and commodity trader, yet to

"And for once, the world’s biggest steelmakers were not only
able to absorb the costs, but pass them on. An industry that has
spent much of the last decade in crisis is now also able to
reward long suffering shareholders. The world’s largest steel
maker outside China, ArcelorMittal SA, that was forced to sell
shares and scrap its dividend just five years ago, posted its
best results since 2008 this week and announced a $2.2 billion
share buyback program."

"With cash flow surging, Shell, which last year cut its
dividend for the first time since the Second World War, was able
to hike it nearly 40%, and announced an additional $2 billion in

"“We wanted to signal to the market the confidence that we have
in cash flows,” Shell CEO Ben van Beurden said. Chevron and
Total also announced they will buy shares. Exxon, though, is
still licking its wounds and focused on paying down debt."

Whether the natural resources boom can last is hotly
contested. Many investors worry climate change makes the long-
term future of the industry hard to read and they also fret
about the tendency of executives to approve expensive projects
at the peak of the cycle. Mining executives fear Chinese demand
will slow down at some point, hitting iron ore in particular.
But the current lack of investments may support other
commodities, like copper and oil.

But Shell’s Van Beurden summed up the bullish case earlier
this week: “Supply is going to be constrained and demand is
actually quite strong”.

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