The Threadneedle (Lux) – Enhanced Commodities fund has not had a good decade, with an annualized return below -5% in 10 years that have been difficult for basic resources. However, the commodity portfolio manager of Columbia Threadneedle Investments, Nicolas Robin, considers that the prices of the main raw materials in the market are now inviting to buy and there is now an opportunity that should not be missed.
What is most conditioning the commodity market at the moment?
There are three elements, mainly. The first is deglobalization. What has happened in this crisis is that the need has arisen, on the part of many actors in the developed world, to secure the production of Asia that is disappearing.
This is going to generate a lot of investment in production infrastructure now and for this many raw materials are needed. The second point is the lack of investment in energy, something that is going to have to be fixed in the medium term because fossil fuels are going to be needed for the energy transition and because of current energy prices. The third factor is geopolitical risk, since one must think about securing energy sources.
The rise of the dollar is affecting raw materials downwards. Can it be worse than 20 years ago?
The rally in the dollar does not help, but the situation is different from what it was 20 years ago, because the United States is a net exporter of oil, and there is not that impact from the increase in crude oil prices as there was before, when they had to pay for imported oil. That has an impact on the correlation, because when the dollar rises almost all the commodities that are priced in dollars become more expensive, and that has a negative impact on prices in dollars.
Do you expect a recession that will punish the demand for raw materials?
I think that Europe is not in a comfortable situation due to the whole gas issue, so I expect there to be a significant slowdown, especially in winter. But if you look at the United States, the situation is very positive. It has an advantageous position because they have oil, cereals to a certain extent, metal… And because the natural gas market is still very domestic in the United States. It does not have much capacity to export.
Can the increase in the prices of raw materials affect the production of materials itself, due to the increase in costs? How expensive has it been?
I don’t have exact numbers on this, but for example, if you look at copper, it’s very sensitive to the fact that mining is going down. When you were mining copper of a certain quality 20 years ago, it probably doesn’t exist anymore, so you are mining copper of a lower quality. A significant part of production costs is fuel for machinery, and as we have higher energy prices, that has an impact. It is an inflationary factor.
What prospects do you have now for oil?
We have just seen how OPEC has cut production, by about 2 million barrels per day. The actual numbers are likely to be less than that figure, probably by 1 million barrels a day, which is going to come mainly from Saudi production. Now there has been a separation between fundamentals and prices. I think the impact of the recession has been overestimated, and I hope that the deterioration in demand is not as high as discounted. The oil market now has a fairly tight supply and demand situation and unless there is a very deep recession, more like what we had during the lockdowns, the market now appears to be in good health. And this looks set to continue.
The UN Food Price Index is at a high of 2011, when we saw the Arab springs. What is happening with agricultural resources?
One of the main factors affecting food prices is the cost of energy, because you need it for machinery and to produce fertilizers. In addition, Ukraine and Russia are major exporters of fertilizers, and as long as this problem is not solved, the markets will come under continuous pressure. And the weather factor is also a problem. We have had great droughts in Europe and in the United States the levels of the warehouses were already quite low, and there has been no opportunity to increase them. Looking ahead, 12 to 18 months, I think they’re going to continue to be very low, with no big changes on this front for a while.