The prices of many commodities continue to surge, with oil once again taking centre stage. However, in recent weeks there has also been increased interest in agricultural commodities, particularly livestock.

Nik Bienkowski, chief operating officer at ETF Securities, reports that short oil and livestock have been the two major areas of interest among investors using its Exchange Traded Commodity (ETC) products. He observes that ‘The growth in our livestock ETCs shows that investors are demanding access to more specific commodities and that investors’ understanding of commodities has matured rapidly over the past few years.  Livestock ETCs have not been correlated to precious metals or agriculture, and this provides additional diversification benefits.’

Profiting from volatility
With regard to the growth in demand for the ETC that allows investors to go short of the oil price, Bienkowski adds, ‘The immense interest for ETF’s Short Oil indicates that there is substantial demand from investors for short products. Short ETCs allow investors to directly access investment strategies that previously were only accessible to specialist investors who could sell short and borrow.’

Because of its key role in many industrial activities, a high oil price has a significant impact on other areas of the economy. Robin Batchelor, fund manager of the BGF World Energy fund at BlackRock, observes that ‘As investors in energy stocks are seeing, wholesale gas prices are being dragged into the “UP” elevator along with the oil price. But it is more complex than simply the oil price. Utility companies, particularly in Asia, that had been resisting taking gas at higher prices, are capitulating and signing supply contracts. Territories with heavy reliance on hydro power are concerned they are going into the summer with low water levels, and Japan needs to compensate for lower-than-expected production from its nuclear power plants.’

Robust steel demand
Rising commodity prices have had a dramatic impact on steel. According to Charlie Awdry, materials analyst and fund manager of Gartmore’s China Opportunities Fund, ‘The spot price of hot rolled steel coil, steel rebar and plate has risen in 2008, in spite of slowing demand from the US auto and construction sectors. For the moment, this trend is being more than offset by the expansion of demand from emerging markets.

‘BRIC countries accounted for 40 per cent of steel usage in 2006, according to the International Iron and Steel Institute. It forecasts that figure will increase to 45 per cent in 2008, driven by large-scale investment in infrastructure.

‘Major steel producers are also enjoying better pricing power following a phase of industry consolidation. By 2006, the world’s top ten steel producers controlled 27 per cent of global production, compared with just 15 per cent in 1999. This has allowed dominant producers to push for better terms in the contract market.’

And recent events in China will also have a significant impact on the steel market. ‘China is the world’s largest steel producer, followed by Japan and the US,’ says Awdry. ‘China has had a 25 per cent steel export tax in place to discourage product leaving the country. This had the effect of tightening conditions in the global steel marketplace.

‘Tightening has been intensified by the severe earthquake experienced in China last month. The event prompted Chinese authorities to prioritise the production and acquisition of steel products for the reconstruction of infrastructure and one million temporary homes. This is reported to have contributed to Chinese inventory levels of commercial products falling to low levels.’