Title: Time to Consider Buying Commodity ETFs Amidst Potential Super Squeeze
Global commodity markets are currently experiencing a unique phenomenon known as a super squeeze, which HSBC’s chief economist Paul Bloxham recently described. Unlike high prices driven by robust demand growth, the super squeeze is primarily caused by supply constraints, presenting a less positive outlook for global growth. Contributing to this situation are geopolitical tensions such as the Israel-Hamas conflict and the Ukraine war, disrupting global trade and shipping.
Furthermore, climate change is exacerbating supply chain disruptions, particularly in the agricultural sector. The pursuit of a net-zero carbon future is also increasing demand for energy transition metals like copper and nickel. However, there is a noticeable lack of investment in procuring these critical minerals, resulting in a sharper supply squeeze. The potential shortage of metals like graphite, cobalt, copper, nickel, and lithium in the next decade has been highlighted by the Energy Transitions Commission, emphasizing the need for increased investment in mining and production.
The implications of this super squeeze could deepen or prolong if supply disruptions related to geopolitical issues, climate change, or energy transition problems exceed expectations. While advancements in metal extraction technology may mitigate some of these challenges, a potential way out of this squeeze could be a global economic downturn, which would likely lower commodity prices.
In terms of commodities outlook, metals are expected to see significant upside, with iron ore standing out due to decreased inventory and a lack of investment in capacity expansion. Despite China’s ongoing property crisis, its steel production continues to fuel demand for iron ore and coking coal. However, some analysts believe that commodity markets are still adequately supplied, with a focus on slumping demand due to the sluggish global economy.
The role of Chinese demand will play a vital role in the future trajectory of commodity markets. In 2023, unfulfilled demand from China significantly impacted these markets. Therefore, a rebound in Chinese demand could be crucial in determining their future.
Considering the current trend, a few commodity ETFs have shown potential for continued upward movement:
– KraneShares California Carbon Allowance Strategy ETF (KCCA): Up 2.7% this year
– iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT): Up 2.3% this year
Investors may want to keep an eye on these ETFs as they align with the prevailing trend in the commodity markets.
In summary, the global commodity markets are facing a unique super squeeze driven by supply constraints and geopolitical tensions. Climate change and the pursuit of a net-zero carbon future further exacerbate this situation. While metals are expected to experience significant upside, the future of commodity markets hinges on factors such as Chinese demand and the resolution of global challenges. As always, investors should stay informed and consider various perspectives to make informed decisions regarding commodity ETFs.
