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Markets are underestimating structural change in commodities

Russia’s unprovoked invasion of Ukraine is causing structural changes to commodity markets that will be with us for a generation, says Pendal resources and midcap manager BRENTON SAUNDERS

RUSSIA’S unprovoked invasion of Ukraine is causing structural change to commodity markets which will not be easily reversed as the world weans itself off Russian energy and mineral exports, says Pendal’s Brenton Saunders.

Saunders, who manages Pendal Midcap Fund and has extensive experience in resources, says the market is underestimating the depth and longevity of the changes that will result from Russia’s aggression.

The war will lead to long-term rises in commodity prices, he says. And buyers are likely to turn to Australia for commodities they once bought from Russia.

“Russia is such a big player — natural gas and coal but also steel, aluminium, fertiliser, nickel and palladium,” says Saunders.

“The eventuality, extent and longevity of the Ukraine invasion has led to an evolution of thought about what it means — not only for Russia, but how the free world reorganises itself to lower its dependence on Russia and protect itself against further military issues with Russia.”

Long-term support for commodity prices is enhanced because rising energy prices drive production costs higher, Saunders says.

“When energy prices go up, the cost curves for all the commodities go up. As long as energy prices stay high, commodity prices stay high for longer.”

The market dislocation should also take some of the pressure to decarbonise off the fossil fuel industry as the world reorganises itself to go without Russian energy.

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Saunders sees a growing role for uranium and nuclear power as the once-maligned fuel gets new consideration as a climate friendly energy source.

“Uranium has been sidelined in the wake of the Fukushima disaster, but it should play a much bigger part in the decarbonisation process,” says Saunders.

“Now it’s being recognised as a necessary part of the landscape again by a whole host of OECD countries.”

Implication for portfolios

The implication for portfolio construction is to seek exposure to the commodities that with be beneficiaries of the transition away from Russia, Saunders says.

“By and large we are in a defensive frame of mind, but it’s a stock-picker’s market and there are some real gems out there that we’re finding.”

Pendal analysts recently met with BHP’s marketing team who relayed stories of sustained disruption in commodity supply.

“When you speak to the BHP marketing and logistics team that are dealing with these cargos for their customers all over the world, you can see that the impact and implications from this are wide-ranging and immediate.

“You have got ships that won’t go to certain parts of the world anymore to transport commodities. Ships that can’t get insurance to go to certain parts of the world. Traders that can’t get collateral to deal with parts of the world they have been dealing with for decades.

“This is the biggest dislocation I’ve ever seen in commodity markets.

“The war will — and we pray it does quickly — but the implications will be with us for a generation.

“I’m not sure the markets completely understand that.”

About Brenton Saunders and Pendal MidCap Fund

Brenton is a portfolio manager with Pendal’s Australian equities team. He co-manages Pendal MidCap Fund and our natural resources portfolio, drawing on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.

Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at April 6, 2021.

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