By Michelle Dunstan, Henry S. D'Auria
This year's impressive commodity run has delivered big rewards to investors in energy and metals/mining stocks. But is this a sustainable rally, or just a dead-cat bounce?
There's no simple answer, because all commodities were not created equal. Determining whether the rally is real requires understanding each commodity's supply and demand intricacies.
Metals and mining stocks have advanced by 34% in the year through June 30th, outperforming energy stocks, which rose by 14%. In the coming months, we believe that a close look at industry segments - and careful choices about positioning in companies - will be crucial to investing success, as the relative performance of each sector could change course.
Energy and Metals: A Closer Look
In energy's case, despite the recent dip in oil prices, we believe the rally is indeed sustainable. Prices will be volatile but will continue to trend higher, in our view. In the case of metals, however, the evidence supporting increasing valuation is less compelling. Take iron ore, for example. Iron is the key component in steel, which is primarily used in infrastructure. Demand for iron ore and steel, like that for most metals, has been driven by China, where growth is slowing. Even those investors most optimistic about Chinese GDP don't believe steel demand growth will ever again reach the double-digit levels we saw earlier this century.
While demand is moderating, iron ore supply continues to grow (Display). It takes a long time to build a mine and bring it online. From the time a miner finds a mineral deposit and the process goes through permitting, design and construction, it can take an average of seven years. We are finally seeing the last wave of mines that were approved before the 2008 financial crisis come online.
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