The rise of commodity

“US consumer confidence climbed higher in August”

“US economy has strongest quarter since 2015”

“France growth pace holds at 0.5%”

“Italian economic confidence hits post-financial crisis high”

“German inflation heats up more than forecast in August”

“Eurozone economic confidence hits pre-crisis high”

“Chinese exporters report rising volumes and prices”

“Japan retail sales growth outperform despite faltering consumption”

“Japan’s labour market strongest since 1974”

The above sentences are headlines that adorn the financial media in recent weeks.

The recent financial news in the media is very different from the news of the past decade.

At a glance, the above sentences describe the recovery as well as a fairly convincing global economic growth.

Usually, after the initial recovery, confidence is up and the economy is gaining momentum. This is the healthiest period of the business cycle, in a sense because economic growth can be robust without any signs of overheating or sharply higher inflation. Typically, there is increasing confidence, with consumer prepared to borrow and spend more as unemployment starts to fall. Concurrently, business build inventories and step up investment in the face of strong sales and increased capacity use. Higher operating levels allow many businesses to enjoy lower unit costs, so that profits rise rapidly. As the effect of economic expansion, demand for basic industry and materials categories such commodities reaches a zenith and show period of bull market cycle.

Therefore, I am bullish on the commodity sector, especially metal (nickel and tin).

I know, guessing the direction of commodity prices is a futile job, but we still have to guess the direction of commodity prices in investing in commodity stocks. Waiting for clearer data is a late act.

After suffering over the past decade, many mining companies are tightening their belts by reducing capital expenditures. In turn, this action will not increase the supply. On the other hand, as shown by the economic cycle above, sooner or later demand for commodities will soon increase if recovery and economic growth continue. The imbalance of demand and supply will increase commodity prices.

Some might ask, is it not too late to get into the commodity sector at the moment, given that commodity prices have soared?

Fair enough, because nickel prices have gone up 15.62% since the beginning of the year:

And the price of tin was not left behind:

But if we look more closely, a sharp rise in the price of nickel and tin only occurs when viewed from the bottom that incidentally occurred in June-July17.

In fact, nickel only rose 15.62% while tin even down 1.91% compared to the beginning of the year.                    
We seem to have to wear larger glasses to see this:

Visually, it appears that the price of nickel and tin is currently below the average price over the last decade.

There were no signs of bubbles in the nickel and tin.

And INCO and TINS stock valuations are not too expensive:

	Mcap (USD mio)	P/E18	PBV17	10Y PBV
INCO IJ	2,059.00	57.29	1.20	2.45
VALE US	57,097.90	11.66	1.30	2.56
TINS IJ	591.30	17.56	1.23	2.49
SMELT	87.60		1.41	1.35

I believe the high valuation of the above stocks by P/E is due to the delay of analysts revising the current nickel and tin prices. Whereas stock prices of commodity firms follow commodity price movement rather than waiting for the company's earnings, so investing while waiting for cues from analysts and the release of profit will always be too late.

Although we should not be too optimistic, but the fact is that the price of commodities is still below the average price over the last decade.

And the price of mining stocks was below the average of the last 10 years (on PBV basis).

In conclusion: the potential for rising demand, no additional supply and relatively low commodity prices and stocks are sufficient catalysts to increase the weight of commodity stocks in the portfolio. Although guessing the direction of commodity prices can be categorized as an act of speculation, but in the current case, speculation is done with more caution.

Overweight INCO & TINS for a period of one year ahead.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.