Bullish on Developing Macro
Mar 2023 -

I am bullish on the developing world, which makes me bullish on commodities.

Emerging Market Boom

Because of cheaper commodities from russia, priced in their own currencies, emerging economies will be able to expand faster. For example, buying commodities in rupees, India can print growth, which even lowers the risk premium on infrastructure.

But didn’t Russia suspend that? Yes: “Moscow believes it will end up with an annual rupee surplus of over $40 billion [of 50 billion in total exports] if such a mechanism is worked out and feels rupee accumulation is ‘not desirable’"

But I deem this a temporary roadblock. It seems Russia wanted to immediately convert the rupees on the open market due to poor product fit in the Indian export market. But Russia is interested in non-dollar currencies e.g. Yuan or even Baht, which they can spend easier (seeing many Russian tourists, large imports to Russia etc.)

Thus the parties are exploring higher volume structured bridges / triangle vehicles, e.g. converting Indian rupees in the UAE which has a large indian expat community and exports many services to russia. To date, some trade has been in Dirham, but this would enable full dedollarization (India in turn has a trade deficit with the UAE, complicating matters.)

Hungry Green Transition

See Vaslav Smil, Mark Mills, Robert Friedland Decarbonization is commodity heavy, yet ESG concerns limit capacity expansion of mines and environmental regulations place pressure on existing facilities. This gives existing operations extraordinary value as increasing demand will squeeze prices on limited supply.

Commodity Supercycle

We all understand the boom and bust cycle: Since 2008, capital expenditures have at best remained muted, but more commonly decreased. Systemic underinvestment leads to structural undersupply. Demand slowly increases as world economy expands, until suddenly surpassing world production and digging into industrial stocks, causing prices to rise (60-70s, 2000s). Later, rising prices would lead to capital inflows and capacity expansion, causing prices to collapse again (80-90s, 2014-2020), however this time it’s different.

Policymakers are exploiting elevated price levels to transition away from fossil fuels as governments and financial institutions constrain capital on oil and gas projects, distorting price signals. Even with recent high prices, capital expenditures remain scarce, artificially reducing supply. Unable to balance the market, management teams opt for greater shareholder returns:

shareholder returns

Since the 80s, oil production has pretty much followed population growth; using a ratio value of 4 barrels/person/year, one can accurately predict supply level for crude oil plus NGL (C+C+NGL) with an accuracy of +/- 2 Mbpd

With capacity no longer keeping up, we can expect price runs. Inelastic in supply and demand, oil has a steep price curve, so prices form an upward trending sawtooth wave, with flash jumps and collapses. Bad for the world, good for our wallets.

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