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Why Commodities Have A Lot Of Runway

·7 min read
Bob Minter
Bob Minter

​ETF.com chatted with Bob Minter, abrdn’s director of ETF Investment Strategy, at the recent Exchange conference in Miami Beach, Florida. Abrdn offers eight commodity ETFs in the U.S. market with a combined $8.5 billion in assets under management. Minter sees a lot of opportunities throughout the commodity space due to current events and trends related to geopolitics and weather, but he has a clear view of the controversies and problems associated with rising costs and environmental concerns.

This interview has been edited for clarity and brevity.

ETF.com: What do you think is the best way to approach commodities in the current environment, where things are so strange and unpredictable?

Bob Minter: What we've been talking to people about is giving them some perspective. If you just look at commodities as some way to play the disruptions in Europe, you then get into a question of, “How long does this last?” And you have to get into exactly how military strategy plays out there, and probably the principals involved don't even know how that's going to work.

We like the outlook for commodities [that started] last year. In agriculture, there's something called El Nino and La Nina. That's basically when Pacific Ocean temperatures are either warm or cold. When they're cold, that's called La Nina. Then you get drought conditions in South America, and about half the time you get drought conditions in the U.S.

What's really rare this time is we have two of them back to back. The last time we had that was 2010-2011, when we saw just tremendous agricultural price spikes. But agriculture traders will love this. This is like their Mardi Gras.

[We’re] going into this situation where you can leave a year when there wasn't a whole lot of agriculture produced and go into another year of drought, where you didn't get to replenish all the inventories. And then you get hit again with low yields.

When you add on to that the fact that fuel is about 56% of agricultural costs and then what happened to fertilizer prices—because a lot of fertilizer comes from Ukraine and in Russia—then you start building on these things.

Ukraine is called the breadbasket of Europe. It was one of the first settled areas in all of Europe, because it has a particular type of soil that's not seen anywhere else, so it's a key spot.

Even if you were able to overcome the seed problem, the fertilizer problem, the fuel problem, the space problem, you still don't have a port to send it out of. This is adding something on top of an already difficult situation.

ETF.com: How does banning trade with Russia impact the situation?

Minter: It's really very easy for governments to say, “We don't want to buy commodities from Russia, because we feel like it's going to fund something that we don't want to happen.” That's the easy part. The other side is, if you're not going to let any wheat come out of that area, who are you denying wheat?

It [can be] really unfortunate, because it's countries that have a fraction of the standard of living we do—places like Egypt. We start to think about some of the historical parallels, and food inflation was one of the contributors to the Arab Spring.

So you're talking about a populist trend that we need to be really careful about, aside from the fact that we're taking food away from people who really don't have much. That's the agriculture side, and there are similar parallels in base metals and oil.

ETF.com: What’s the situation with oil?

Minter: We've under-invested for five years. Every year, the average oil field has a 4-6% depletion ratio. Every year, if you don't reinvest in more, it drops. it's about $500 billion that you have to reinvest.

In addition, inventories, which can sometimes buffer situations like this, fell dramatically last year, by 2 million barrels a day globally. So we have low investment for the future, we have low inventories and we have almost no spare capacity for a problem.

Drilling for oil is a dirty, dangerous business and things happen. Since 2014, we've had situations in the Middle East, like one country firing missiles at another, or a drone attack, which really didn't do a whole lot to the price of oil, because there was a massive amount of spare capacity. The U.S. was producing a lot, and there was a lot of inventory.

We've all read stories that say Russia exports 7 million barrels of oil and products a day, which is 7% of the global supply. That doesn’t sound like a lot. Let's draw a parallel [regarding] what kind of a slowdown in the economy would we need, so that no country would need those 7 million barrels of oil.

The global financial crisis [caused a] 4% slowdown. COVID in 2020 [caused] a 10% decline. If we are slowing the global economy so that we don’t need any Russian oil, we're looking at a slowdown between the pandemic and the global financial crisis. No one is signing up for that.

So far, only about 2 million of the 7 million barrels are off the market. And we'll see exactly how it plays out. But I suspect a lot of the reactions will be very similar to the U.K., [which] said they were not going to take any Russian oil and gas starting Dec. 31 of this year, because it's very hard to change things in the short term.

ETF.com: What’s the situation with base metals?

Minter: We're big believers in renewables and energy transition. In a really ironic stroke, miners have been having a hard time getting their mine permits approved, because environmentalists are pushing back. But you need three tons of copper for a wind turbine, you need four tons of copper for a 10 megawatt solar array.

So you're talking about massive amounts of materials. You need to pull 300,000-500,000 pounds of material out of the ground to make one Tesla. I've been telling people that the growth industry is mining. Somebody's going to have to run that stuff.

On top of all of these resourcing issues we have, we have clear hints of de-globalization. The current president reinforced some of the already existing rules that were in place at the federal government level so that if something had to be, say, 10% made in the U.S., he upped it to 20% on a number of different things, which matches what Europe is doing. [European countries] want to get all of their materials from within Europe.

China, of course, has always looked after its supply chain. All these things are happening at exactly the time when materials are going to be scarce. The governments are starting to realize that these materials just like oil, are national security issues.

I think what we will see is a shift towards looking at the energy transition and putting more things on the table to get us to that energy transition.

ETF.com: Is all this setting us up for a commodity supercycle?

Minter: I actually don't like the word “supercycle,” because there are different interpretations, such that some people think that that means every single commodity. In the Bloomberg Commodity Index, there are 23.

And that's not even close to all of them. There are five that are left out that are pretty large: platinum, palladium, two types of coal and iron ore. It doesn't mean that all of them go up, but it does mean that we do go in cycles.

[With] these portfolios, everything was FANG [stocks], all technology, no one had anything real in there. So we sent [our clients] a note last year that said, “Sell your electrons and buy something you wouldn't want to drop on your foot.”

I think that it is more a cycle towards real assets, towards real foundational things that are part of the economy.

Contact Heather Bell at heather.bell@etf.com

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