Each week a professional investor tells MoneyWeek where he’d put his money now. This week: Michael Hulme, fund manager, Carmignac Commodities, Carmignac Gestion
The global commodities market has been on a roller-coaster journey in recent months. The plunge in oil prices has been partly offset by a near-50% rebound since March. Industrial metals and iron ore remain weak.
Yet we are cautiously optimistic on the outlook for some commodities. Oil prices continue to inch higher and longer term the fundamentals of supply and demand could push them to $90 a barrel. Longer term, global supply constraints outweigh shorter-term oversupply from US shale companies, which are not far off reaching their peak productive capacity.
It is worth looking at companies involved in oil sands, such as Suncor (NYSE: SU), rather than US shale producers. Their production profile is relatively stable, so they should benefit more from an oil-price rally than shale producers. The money to build those oil sands resources is largely deployed, and production has a low decline rate, while shale oil needs constant heavy reinvestment to maintain output.
Oil services should also benefit as US shale springs back to life as prices recover. Drillers such as Helmerich & Payne (NYSE: HP) should enjoy a high return on capital.
In the long run, diversified services firms with a technological edge, such as Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), should offer good returns as they help unlock less accessible oil and gas reserves, both onshore and offshore.
In the gas sector, the bear market in US natural gas seems to be ending, as liquefied natural gas (LNG) export projects approach completion. Southwestern Energy (NYSE: SWN), with its Marcellus shale assets, is well placed to benefit from any recovery.
Finally, it is worth looking at industrial metals. Weak Chinese economic data, along with the US dollar rally of the last six months, have hurt copper. This has created buying opportunities – copper has the best long-term fundamentals of the industrial metals, given grade declines (that is, it’s harder to get it out of the ground), delayed mine development, and continued world electrification.
We expect demand growth to outstripsupply from 2016, setting the scene for a sustained rally over the next five years. Our top stock pick is Lundin Mining (Toronto: LUN). This Canadian miner has high free cash flow plus a strong nickel business.
As the industrial metal that creates steel, iron ore has been the foundation for China’s decades-long fixed-asset investment boom. The commodity has plunged over the last year as China’s GDP growth has slowed. Prices are down by more than two-thirds to $60 per tonne today. This presents opportunities as the industry consolidates and reshapes itself for the next bull market. Rio Tinto (LSE: RIO), the world leader in iron ore, with the lowest-cost production and a strong balance sheet, is a buying opportunity.
But the underlying macro picture is crucial, as China consumes almost half of all industrial metals. The government is directing its economic stimulus into consumption plays, the “green” industry and, to a lesser extent, national infrastructure. So it will not translate directly into metals demand.
We believe real evidence of a recovering private sector is needed before investors can be confident of demand-driven higher metal prices.
| The stocks Michael Hulme likes | |||
|---|---|---|---|
| 12mth high | 12mth low | Now | |
| Suncor (NYSE: SU) | $43.49 | $26.56 | $30.40 |
| Helmerich & Payne (NYSE: HP) | $118.95 | $54.00 | $75.49 |
| Schlumberger (NYSE: SLB) | $118.76 | $75.60 | $91.77 |
| Halliburton (NYSE: HAL) | $74.33 | $37.21 | $47.19 |
| Southwestern Energy (NYSE: SWN) | $47.70 | $21.45 | $28.70 |
| Lundin Mining (Toronto: LUN) | CAD6.57 | CAD3.68 | CAD6.26 |
| Rio Tinto (LSE: RIO) | 3,530.5p | 2,600p | 2,977p |