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The Aussie Commodity Super Cycle - Australian Investment Education


Where it all began

A good place to start would be to dial back the clock somewhat 9-10 months ago, the market was in anarchy as cases of the Coronavirus were wreaking havoc and the economy essentially shutting down. When the pandemic first hit, no one really knew what to expect and so we saw somewhat of a log jam in commodity prices. As host Andrew Baxter describes, the best example of this was oil when prices went negative. Yes, you read that correctly – negative oil prices. When a commodity is bought to be used and stored, yet no one is using it – people were actually being paid to hold oil, creating ‘negative’ prices. This had never been seen before in history and is a true representation of just how much of an impact the pandemic had on financial markets; not to mention the impact it had on other commodities like copper and iron ore.

More on oil – a bell ringer

Since returning to travel (domestically) and everyone now back driving to work the need for oil has undoubtedly increased. With the price relying on a tight balance between supply and demand, oil prices (as per OPEC) now sit at somewhat $40 / barrel and as we venture into further economic recovery and normality, we expect to see this increasing trend continue. Taking an example in the form of an oil specific ETF, “OOO”, we have seen gains of nearly 25% over just the last year given the rise in oil prices – a bell ringer. Aussie stocks like Oil Search (ASX: OSH) for example are up more than 43% over just the last 6 months. As a great barometer to measure the rate of our economic recovery, oil prices are certainly hinting at a fast and rapid improvement to our economic situation thus far.

Copper prices are at nine-year highs

As probably the single best barometer to measure to overall strength of the global economy, here we have Copper prices at nine-year highs. As host Andrew Baxter mentions, there appears to be a shortage of copper at the moment which no doubt would be driving prices higher, nonetheless what we are seeing is incredibly strong demand. With uses in plumbing and electrical wiring just to name a few, as the manufacturing industry has been pumping so too has the price of copper. It therefore comes as no surprise when we see Aussie mining companies like BHP (who have a hefty exposure to copper) for example increase rapidly in share price to the order of 28% in the last half year. Realistically what we are seeing is an insatiable demand for commodities which Aussie companies like BHP are capitalising on with record prices. 

Iron Ore at record prices

As the talk of the town when it comes to commodities, it’s only fair we give iron ore a mention. Iron ore is now at record prices as demand for steel in China continues to go through the roof, rising in value by nearly 100% in the last year. Wow. This is why we have seen our Aussie iron ore producing companies like Fortescue Metals (ASX: FMG) nearly 2.5x their value in the last year, operating in somewhat of an oligopoly. As a three-horse race between FMG, BHP and RIO (which all happen to be Aussie companies), the iron ore market is controlled by us and is certainly reflecting positively for our producers with massive jumps in share price. Despite increasing tensions with China as the biggest buyer of our raw materials, there really is no competition and thus no external threat – leaving our iron ore miners to clean up massive profits.

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