The outlook for many commodities is attractive, but “roll yield” can still be a headwind if you’re buying ETFs
Cris Sholto Heaton Investment columnist
Commodities spent much of the past decade in the doldrums, as the excitement about “supercycles” faded into a familiar boom-and-bust. In the aftermath of the pandemic, that’s changed: investors are getting far more involved in metals markets, as James McKeigue explains on page 24. Meanwhile, long-term commodity bulls are getting a favourable hearing as they set out a case for rising demand and tight supply caused by the electrification of the energy system.
Bulls can get carried away by this in the short term: copper is actually down by $2,000 per tonne since Jeff Currie was interviewed by Bloomberg (see right). The dynamics look very complex right now. Chinese end-user demand is soft due to the weak economy (especially in real estate – construction uses a lot of copper). Yet Chinese copper stocks in warehouses have been building steadily and are at multiyear highs (that could reflect traders building positions in anticipation of a big government stimulus programme, which has so far not been forthcoming). That’s a large amount of metal that might be dumped back on global markets.
Miners have announced various production cuts and other supply disruptions. Meanwhile, smelters – who turn ore into refined copper – have added large amounts of new capacity in China and elsewhere, to the point where Chinese smelters have tried to coordinate production cuts because too many smelters competing for tight ore supplies has driven them into the red. Put all that together and it sounds a bit like a recipe for very volatile prices in the near term, rather than a one-way bet upwards. Still, over the longer term, there is a strong argument that we have not invested enough in supply to meet future demand.
Backwardation and contango
However, it’s also worth thinking about how short-term price dynamics can affect y
