There’s pressure on commodities. Prices for many commodities — from gold to livestock — are under pressure and that’s funneled through to some companies in the commodities space that might be unfairly maligned. Will Rhind,…
There’s pressure on commodities.
Prices for many commodities — from gold to livestock — are under pressure and that’s funneled through to some companies in the commodities space that might be unfairly maligned. Will Rhind, founder of GraniteShares exchanged-traded funds, says the stronger dollar is one of the major factors pressuring commodity prices. Most commodities are dollar-denominated, making the goods more expensive for buyers outside of the U.S. Trade wars are a concern, too, Rhind adds. “But apart from that, the backdrop is actually pretty good in terms of demand for commodities,” he says.
China has been aggressively reforming its iron ore and steel industries from the supply side and it’s affecting the global industries, says Seth Rosenfeld, equity analyst for metals and mining at Jefferies. By pushing steel-mill utilization rates higher and seeking out high-grade raw materials in an effort to control pollution, China has made sustainable, structural changes to its steel industry that haven’t been reflected in equity valuations. As a supplier of high-grade iron ore, Cleveland-Cliffs is set to benefit. Although the firm principally sells iron ore in North America, recent contract changes have dramatically increased its exposure to international benchmark prices, which are rising because of China’s changes.
Crude oil prices could rise in coming months as Iran sanctions take effect in November. Stewart Glickman, energy equity analyst at CFRA Research, says the market is overestimating how much Russia and Saudi Arabia can fill the gap. That leaves the door open to U.S. shale-oil producers. But Glickman prefers those who have less exposure to the Permian basin in Texas, which is dealing with logistical problems. For shale plays, he likes Marathon Oil, which gets less than 5 percent of oil production from the Permian, and it represents less than 20 percent of its capital expenditures this year. “They have bigger fish to fry than the Permian,” he says.
With so many shale-oil drillers in the Permian basin, it’s led to congestion problems for companies to get oil out of the region. These companies are forced to take a discount on production versus the benchmark West Texas Intermediate crude oil price, by as much as $16 a barrel recently, Glickman says. That’s why he prefers shale producers with a diverse lineup, like exploration and production energy company EOG Resources. While EOG has exposure to the Permian, it also has plays in Eagle Ford, Texas, and North Dakota’s Bakken region. “Those are other areas that I think are doing well,” he says.
Shawn Hackett, president of Hackett Financial Advisors, says he’s monitoring highly contagious African swine flu that’s affected hog herds in Europe and Russia, and has been discovered in China. It doesn’t hurt humans, but is deadly to pigs and there’s no vaccine. Russia and the EU culled 10 to 15 percent of their herds, and if China does the same thing, it will decimate their pork supplies. Hackett says there isn’t enough global pork supply to cover that loss. He says Brazilian meatpacker JBS, traded over the counter, is in prime position to benefit from reduced global supply and increased demand as it has no operations in the affected areas.
Gold prices are weaker, but royalty streaming companies like Franco Nevada are still a good way to play the gold-equities market, says Frank Holmes, chief executive and chief investment officer at U.S. Global Investors. “It’s less risk than owning a mining stock directly,” he says “They get a royalty on [gold production] and Franco Nevada pays more dividends than any gold stock.” Royalty companies lend money for exploration and production projects to mining companies in exchange for some of the profit. Franco has high revenue per employee, at $21 million, and no debt, which allows it to increase dividends. FNV receives royalties from 41 producing mines, which gives broad diversification.
A strong economy encourages driving and strong gasoline demand helps refineries, Holmes says. Crack spreads, which are the differences between crude oil prices and petroleum-product prices like gasoline, are positive, which benefits the refiners who turn crude oil into usable products. Considering pickup trucks and crossover sport utility vehicles remain the top-selling vehicles in the U.S., that translates to greater gasoline demand. Refineries in general are doing well, and Holmes says he likes PBF Energy because the refiner has strong free cash flow on a relative basis. He says refiners have some cushion because the barriers to enter the business are high, given environmental concerns.
Natural gas prices are weaker, and seasonally that’s often the case since the fuel isn’t used as much in summer. But starting in October, heating demand will pick up, and Glickman says by that time it appears U.S. supplies may be down relative to historical averages. Unless there’s a significantly warmer winter than is forecast, natural gas prices should rise going into year’s end. Glickman says he likes COG, saying it’s the low-cost leader in the field. “They don’t need much of an improvement in natural gas prices, so even if prices lingered kind of on the lower side, I think they can still make decent money,” he says.
Trade tensions have hit certain commodities more, with copper one of the commodities to fall. Prices are down 22 percent year-to-date. Tyler Richey, co-editor of the Sevens Report newsletter, says trade war concerns are overshadowing a positive backdrop for copper, as the U.S. and global economy is strong. Copper gets used in a host of applications, ranging from plumbing to air conditioners to autos. That’s hit companies like FCX, the world’s biggest miner of copper and a miner of gold and molybdenum. If there is trade resolution, especially with China, Richey says copper prices could easily rebound 10 to 20 percent.