The commodities sector is easily the most exciting area on the ASX, in my opinion. The impacts of coronavirus change almost daily, exposing risks and commodity opportunities.
Here are 3 trends for investors to watch this week.
Steel stockpile reduction
The re-opening of the Chinese economy is real. Chinese steel inventories have been trending downward following the all-time highs in March.
The pandemic has caused production cutbacks across Europe, Japan and South Korea. Accordingly, the iron ore spot price has fallen to a 6 month low. These factors are largely offset by ongoing production issues with Vale and the low Australian dollar. China is also preparing to commission more than 50 million mt/year of new hot-strip mill capacity over the next 2 years.
The iron ore majors are likely to see their output remain constant or drop slightly overall. However several mining contractors will also benefit – momentum within the market is currently with NRW Holdings Limited (ASX: NWH).
Gold market imbalance
Physical gold has become very difficult to purchase. Perth Mint recently stated that they had not seen demand at these levels since 2013. The mint is also ramping up production to meet demand for physical kilo bars of gold in New York, 11,000 miles away.
Purchases require either wait time or high premiums predominantly due to supply chain constraints. This has caused a marked difference between trading products like ETF's and the price of physical gold.
The commodity opportunity is St Barbara Ltd (ASX: SBM) is a well managed gold mining company selling at a reasonable price. It announced its quarterly results on Tuesday where it reaffirmed current guidance.
Grain is a generational commodity opportunity
At the time of writing, the Ukrainian agricultural sector is forecasting a reduction in harvest volumes due to dry weather and supply chain constraints due to the virus. At the same time, the worst locust plagues for a generation are rising up in Africa, the Middle East and South Asia. The last major key is the hoarding of food and cancelling exports, particularly of grain.
Food security is the looming crisis within a crisis on a global level. Within Australia this will pose a good opportunity for GrainCorp Ltd (ASX: GNC).
Foolish takeaway
If you are willing to do the work and research, then commodity opportunities are easy to identify. It is a basic supply and demand dynamic. The challenge is knowing when a commodity is likely to rise. During boom periods, the share price of commodity companies increases more than the growth in spot price.
