May 19 and 20, 2008, may well go down as benchmark days in the history of the commodities boom, a secular move that took hold in early 2002 and is yet to convincingly blow off. It was on these two days that the world's biggest oil stock, Exxon Mobil, traded close to record levels, and also when BHP Billiton, the world's biggest diversified resources stock, traded at record prices. BHP Billiton straddles both key resources worlds; while principally a miner, it also has an operating division in oil and gas.
Since those two days a month ago, resources stocks of practically all kinds have been brutally sold off around the world, moving in the opposite direction to energy futures, which have traded up from one fresh record to another. Futures prices for crude oil, natural gas, heating oil and coal have moved relentlessly upwards, going beyond global headlines and onto the tops of agendas at political meetings everywhere.
Investable commodity indices, such as Reuters/Jefferies CRB, and S&P GSCI GFI-Futures, along with commodity exchange traded funds (ETFs) and commodity exchange traded notes (ETNs), also moved on and up to fresh records, further undermining the performance of listed resources stocks. The attraction of broader commodities was enhanced beyond the significant moves in energy futures as a number of food futures, led by corn and soybeans, moved up to fresh records.
The most likely interpretation behind the brutal sell off of listed resources stocks is that investors increasingly see value destruction, mainly via energy prices, at operations that produce commodities. Even listed oil stocks have been sold off: investors would rather be invested in malleable and saleable commodities, than in the entities that produce the commodities. Exxon Mobil is now trading 8% below its highs; BHP Billiton's stock price has retrenched by 16%.
Rising energy costs translate directly into higher operating costs for most businesses of any kind, right across the world (with the exception of those in countries that subsidise energy costs). At the same time, maintenance and project costs increase, putting further strain on profitability. Unlike commodity contracts, moreover, operating entities are also directly subject to specific operating risks, such as human or managerial error, geopolitical issues, and so on.
The broader damage occasioned by higher energy futures has been seen in declines of practically all broad equity indices, across the world, over the past month. Broad indices in resource rich countries have been particularly badly hit, especially in Brazil and New Zealand. At the same time, the dollar has been broadly firmer over the past month, a move that is traditionally negative for dollar commodity prices. This has not applied to energy futures and most food contracts, but has been seen very much across the rest of the commodities complex.
The one glaring exception right across the board has been seen in the global resources subset that produces potash (and also, normally, phosphates and nitrogen), led by Canada's PotashCorp. This select grouping of just 12 listed stocks holds a hugely valuable position in supplying the key minerals for fertiliser. After decades in the doldrums, the demand for fertiliser is now growing exponentially, in line with increasing recognition that much of the world's arable farmland requires heavy, and scientific, reconditioning.
The 12 listed stocks in the potash group offer an investable market value of over $200bn. There are no easily available futures or other contracts in potash, phosphates or nitrogen, or other relevant minerals such as sulphur and lime, but just as investors have been chasing energy indices and ETFs, so broader commodities indices with an agricultural component have been rising.
The rotational push into potash stocks can be seen as something of a laggard in the commodities upcycle. Copper and aluminium, key base metals, first peaked in 2006; precious metals blew off in March this year. Iron ore started its big run last year, to be followed by coal. Wheat peaked last year; rice earlier this year, while corn and soybeans are currently at new highs.
GLOBAL LISTED RESOURCES STOCKS
Composite weighted 12-month net price gains
* Investable market capitalisation
** IMC counted in other sub-sectors
Note: the 12-month price gains calculation assumes
1. A weighted amount of USD are invested in each of 688 stocks
2. At the stock's lowest price in the past 12 months, and
3. That each stock is still held at the current date.
Source: Analysis by Barry Sergeant
Selected commodity prices
NYMEX sweet, light crude
NYMEX sweet, light crude
Natural Gas (US)
Heating Oil (US)
Thai white rice
Rough Rice (US)