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Cyclical Commodities by Jordan at Investing Blog

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I wanted to take a blog post to talk about cyclical commodities. The markets as a whole are really very cyclical; we have recession then recovery then recession. But the market also demands different goods throughout this cycle. Think of a wave between another wave.

Cyclical commodities are those that are demanded more or less depending on economic conditions. Gold wouldn’t be a cyclical commodity, since it isn’t reliant on more or less economic growth. Oil, however, is a perfect example of a cyclical commodity, since more energy is used during periods of growth.

Goldman Sachs recently published a note about cyclical commodities and how they were the investment class for 2011. I couldn’t agree more. Here are a few of my favorites.

Platinum / Palladium

First things first, there is a difference between platinum and platinum. That sounds silly, right? Well, for the most part, when you see “platinum,” it is in reference to the metal. However, on a few occasions you’ll see “platinum” as a reference to the “platinum group.” The platinum group actually contains six different elements, including palladium. Then there is the singular metal, platinum. And the metal palladium.

Platinum and palladium have several uses. Platinum is very bright, very shiny, almost like a whiter silver color and becomes remarkably popular in jewelry when the price falls. For the most part, however, platinum is used in industry. Palladium is almost exclusively used in industry.

Most commonly, platinum and palladium are demanded by the automotive industry for use in catalytic converters, the autopart that makes your car more eco-friendly. Platinum is used in diesel catalytic converts while palladium is used in gasoline catalytic converters.

When more cars are produced, platinum and palladium see huge spikes in demand. And as you can imagine, more cars are demanded during economic booms than during recessions. So, for that reason, platinum and palladium are very cyclical commodities.

Recent Factors

There are three major developments affecting platinum and palladium.

1) The US automotive fleet is older today than it has ever been. The average car in the total “US fleet” is more than ten years old and has anywhere from 125,000-155,000 miles on the odometer. This statistic is startling, and shows how many vehicles will soon need be replaced.

2) Lenders are lowering their lending standards, with the average credit score for newly approved loans continuing a downward trend.

3) Leases are expiring like crazy. These leased cars will either be turned in, the leasee will buy the car outright, or a new car will be leased. That’s new demand for new cars. A total of 15.3 million cars are expected to be sold in the US next year. (The article headline seems to discount my reason #2, but the article is mostly centered around the fact that people who have expiring leases are mostly people with good credit.)

Wrap up

Catalytic converter demand plus a play on zero real interest rates makes platinum and palladium attractive to investors. Consider buying through ETFSecurities’ funds, PPLT or PALL.

Copper

Copper can be used for almost everything. It’s used in wire and telecommunications, electronics, and even as a roofing material. Relays, switches, circuits all contain copper, and its even used for plumbing and piping. Simply put, copper is a metal that makes everything work. When the economy gets to moving, it wants copper.

Recent Factors

Growth in Asia is seen as one of the best drivers of growth for the copper industry, especially in China and India. Recently, it was discovered that a single trader owns 90% of LME copper. While that may seem like a lot, and it is at $3 billion, it’s really only about eight days of annual production.

That point leads into another important point: many believe that copper production is peaking, and that demand will soon exceed supply. That’s good news for people looking to make some money.

Wrap Up

You’ll want some exposure to copper. It’s a great way to play Asian growth from infrastructure spending and profit on a metal that is slowly disappearing as the world demands more and more of it.

Oil

Oil is the tried and true play on economic growth. Oil is used for everything from energy to the production of plastics and polymers. Oil was one of the biggest beneficiaries of the movement toward globalism and international trade, as well as the developed world’s thirst for personal transportation.

Recent Factors

China and India are each seeing a new middle class emerge, and they want cars! In India, Tata Motors is taking home the bacon while Toyota and Honda are seen as the luxury car of choice in China.

Every product you buy and consume is likely made thousands of miles away. Foods are shipped from the warm climates to cold climates, your shirt probably traveled halfway around the world, and the computer you’re using to read this article is mostly a product of the Asian Pacific rim. Transporting all those goods eats up oil. Thus, economic recovery means more oil consumption.

Wrap Up

Oil is the ultimate cyclical commodity. Unlike copper and palladium, the centralization of oil production means that it lags the economy more so than others. Typically, OPEC keeps output flat during recession meaning temporarily lower prices until the glut is burned during recovery and prices spike higher again.

This is the one commodity everyone should own with producer stocks. Since we all buy and consume products that are transported with oil burning cars, trucks, boats, and planes, protecting yourself from higher prices at the pump/storefront is a good idea.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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