Thinking out aloud about commodities.
If the mortgage rate has doubled, of course, housing is going to slow. That means less demand for lumber, steel, and all the stuff that goes into a house. If goods demand has declined, as services rise, that means less demand for copper, aluminum, and stuff that goes into toasters & TVs.
If the emerging markets slow, because of reversed capital flows, because of less or lower share of wallet left over after food and energy, then the incremental demand for commodities will decline.
What plausible path is there to maintaining present pricing?
We have a sizeable exposure to AWC and more modest exposures to BHP and IPL. We are still very underweight metals and mining and in general quite underweight resources.
AWC has underperformed, equally, about half the cost curve is loss-making given current pricing (revenues not high enough given energy impacts), which is likely unsustainable. Either that uneconomic production exits, in which case the supply curve shifts, or the price of the commodity increases, and AWC should do well in either case.
Longer run, the positive demand case for aluminum as a transition to renewables enabler suggests that having exposure at current pricing makes good sense.
But the point of the note is not so much about the relative merits of AWC, BHP, or IPL, but rather the observation that we cannot see a path to permanently higher commodity prices.
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