Commodities are in a world of their own: We’re entering the age of Under supply

• The rules of the commodity game have changed, it’s all about supply

In it’s Q1 earnings call yesterday, this is what energy giant Shell had to say when asked if they were seeing demand destruction due to high prices:

• No, “we see a continued increase in product demand around the world”
• “We definitely do not see a reduction in demand”
• “We also see — by the way — is a continued decrease in investment in supply”

In any other period in the post-2008 era if you were to see the combination of:

1. A China shutdown
2. A global growth scare — particularly in Europe
3. A brutal rout in global risk assets

You would easily see oil down upwards of 10%. Yet we’re on track to finish higher for second week in a row.

It’s not just oil either. US natural gas prices are at the highest since 2008.

Copper prices have fallen but this hardly looks like the kind of price action we’re seeing in other markets (though does bear watching closely).

If you go down the list it’s the same thing over and over. Steel prices remain high, lumber prices remain at historically high levels despite all the doom and gloom around housing with mortgage rates at 5.6%.

Go down the list and it’s tough to find any real sign of weakness.

Maybe that’s still to come. Demand remains high but markets are forward looking and the stock prices of commodity producers are certainly underperforming the underlying commodities.

I can certainly see the case for caution.

At the same time, I go back to this comment from Shell, which is similar to what so many other commodity producers in so many industries are saying:

“We also see — by the way — is a continued decrease in investment in supply”

If you dig down into these commodities, it’s the same thing over and over. Global supplies have been picked over and there’s no rush to build a new mine, even with prices high. Part of that is that commodity producers are trading at such low multiples.

This is what Canadian steel producer Stelco said in today’s earnings call when asked about capex:

“We’re still looking at a very, very low multiple [for our shares]. Trading at a little bit over 1x. It’s very difficult on the inorganic side to do anything. It would be dilutive for us to buy anything.”

So company after company is simply buying back shares. So whatever global growth does in the next year or two, it isn’t changing that we’re in a world that’s undersupplied in commodities.

Moreover, if you want to get behind what Marko Kolanovic and others are saying — countries will be looking to shore up strategic reserves of everything.

There’s a signal in these prices. We’re in the age of under supply.