Commodity prices are surging at the moment as the global economy is lurching toward reopening, but doing it rather unevenly as different industries get back up to full speed at different rates.
This has many smart investors wondering how long this might last and looking for opportunities to benefit.
The first thought is that producers are benefiting from higher prices and consumers will be hurt as those costs get passed on but it's not always so simple. Production and shipping issues are causing shortages that are primarily leading to a lot of the recent increase. Those issues are not expected to last long. Still, there are and will be winners and losers and the upward trend could potentially last longer than many expect.
What’s Happening?
A strong rally in raw materials is leading to companies raising prices for goods and adding to investors concerns about inflation. Commodities such as lumber, copper, crude oil, and corn have been some of the biggest risers so far. Lumber in particular, has been on a tear for nearly a year and is more than four times its usual price. This has pushed new home prices and renovation costs higher. Copper, a key component of anything electrical, also recently hit record prices. Additionally, crude oil is at its highest price since 2018 and corn is up over 50% so far this year.
The spike in commodity prices has only fueled the speculation that the economy is headed for inflation when paired along with massive stimulus measures and aggressive monetary policy. However, the rise in prices is heavily impacted by temporary production and shipping issues largely due to the faster than expected rise in demand coming out of the pandemic.
What’s happening with these shortages is similar to the chip shortage effect on car prices. Demand rose faster than producers were expecting after they slowed or halted production during the height of the pandemic.
Another way to think of it is the opposite of what happened with crude oil a year ago when futures traded below $0 as very few people were driving at the beginning of the pandemic and there was a temporary oversupply and shipping and storage facilities were overwhelmed.
What’s Being Affected?
The good news for consumers looking to not pay four times the price of lumber is that the spike in prices is temporary and should not last too long. Manufacturing is accelerating now after first picking up in China. While production is ramping up most analysts still expect the commodity rally to last until next year, which is also, similar to the chip shortages effect on car manufacturing.
Additionally, the rise in global demand has led to a surge in shipping prices. By some measures. shipping is now the most expensive it's been in roughly a decade. The demand increase has led to materials such as lumber competing with the traditional cargo such as iron and coal. Global shipping has struggled to keep up with the demand, but this has helped an industry that was hurting previously. Thus, the shipping companies are the clear winners while producers (and consumers down the line) have to pay for the higher shipping prices.
Featured Winners
A few names to look out for that will benefit from the trend are Freeport-McMoRan (FCX) and Trex Company (TREX). FCX shares have been along for the rise as they traded around $9 last May and currently hover around $44 a share. The large scale copper mining company has benefitted plenty from copper prices hitting a record high and demand is only expected to increase further as Biden’s proposed $2.3 trillion infrastructure bill moves forward. Freeport-McMoRan also raised its copper production targets to 3.8 billion tons this year and 4.4 billion tons in 2022.
TREX shares have also made massive gains over the past year as share price has nearly doubled in that time. Trex makes decking and other outdoor items out of alternative materials to wood and is positioned to benefit from rising demand as high lumber prices and shortages make Trex's products more competitive. The company recently outperformed first quarter 2021 estiamtes and stands to gain even more with more eco-friendly materials and prices that are now getting close to being competitive with wood decking. The company expects 36% revenue growth in the second quarter, an improvement over the 25% it just reported.
There are many other firms benefiting from the rise as well obviously such as the shipping company Danaos (DAC) which has seen its share price rise from just over $4 to $56 in a year. Higher prices can be a detriment for consumers but allow many others to benefit such as the sellers and investors in those companies.
