On its first quarter earnings call yesterday, here’s what energy giant Shell had to say when asked if it’s seeing demand destruction due to high prices:
- No, “we are seeing a continued increase in demand for products around the world”
- “We certainly don’t see a reduction in demand”
- “We are also seeing – by the way – a continued decrease in supply investment”
In any other period of the post-2008 era, if you were to see the combination of:
- A shutdown in China
- A fear of global growth – especially in Europe
- A brutal rout in global risk assets
You would easily see oil drop more than 10%. Still, we’re on track to finish higher for the second week in a row.
It’s not just oil either. US natural gas prices are at their highest since 2008.
Copper prices have fallen, but this bears little resemblance to the type of price action we see in other markets (although one should watch closely).
If you go down the list, it’s the same thing over and over again. Steel prices remain high, timber prices remain at historically high levels despite all the pessimism around housing with mortgage rates at 5.6%.
Go down the list and it’s hard to find a real sign of weakness.
It may still be to come. Demand remains high, but markets are looking forward and commodity producer stock prices are certainly underperforming the underlying commodities.
I can certainly see the case for caution.
At the same time, I come back to this comment from Shell, which is similar to what so many other commodity producers in so many industries are saying:
“We are also seeing – by the way – a continued decrease in supply investment”
If you dig into these raw materials, it’s the same thing over and over again. Global supplies have been recovered and there is no rush to build a new mine, even with high prices. This is partly because commodity producers are trading at such low multiples.
Here’s what Canadian steelmaker Stelco said on today’s earnings call when asked about investments:
“We are still looking at a very, very low multiple [for our shares]. Trading at just over 1x. It is very difficult on the inorganic side to do anything. It would be dilutive for us to buy anything.”
So one company after another simply buys back shares. So whatever global growth does over the next couple of years, it doesn’t change the fact that we’re in a world that’s undersupplied with raw materials.
Also, if you want to go along with what Marko Kolanovic and others are saying, countries will seek to build strategic reserves of everything.
There is a signal in these prices. We are in the age of undersupply.