The credit crisis will fuel commodities super-cycle

It’s not all doom and gloom in the world of commodities. As demographics change globally, prosperity in emerging markets increases and urbanisation continues, demand for commodities is likely to remain strong in the long term.

Reserves of many key commodities are finite, and production is becoming more and more expensive.

In time, we believe the credit crisis will fuel the commodities super-cycle, not slow it down. In recent years there has been a high level of investment in real estate and financial sectors, at the expense of areas such as infrastructure, energy and agriculture. As the economic recovery takes hold, demand for commodities has a fair chance to pick up.

Investors may be asking how best to benefit from this potential. Should they invest directly in commodities, or invest in commodities stocks? The latter is interesting for several reasons. If the price of a commodity rises, in principle this has a positive impact on the relevant commodities firms, be it oil companies, mining companies, or agricultural producers. The potential earnings enable the firms to increase their capacities and search for further reserves.

Price increases in underlying commodities are not the only driver of these companies’ share prices. Increase in production volumes has a direct impact on turnover, results and share price. With disciplined capital expenditure and appropriate cost structures, commodities firms can still increase their earnings when commodity prices are standing still, or even when they are falling.

This potential gives commodities stocks an advantage over the long term, which is good news for investors.

(Dirk Kubisch, commodities specialist, Julius Baer Asset Management - Citywire - 13/10/09)