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‘We have so much of what the world needs’: Why James Aitken is so bullish on Aussie commodities

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There’s no denying that most commodity baskets are now stuck well within a super-cycle that’s seen huge upswings across the board.

The S&P/ASX 300 Metals & Mining Index (ASX: XMM) is up 5% for the year and is now outstripping the benchmark S&P/ASX 200 Index (ASX: XJO) by over 7 percentage points in 2022.

Australia, one of the largest exporters of commodities, has long been front and centre of the world’s economic growth with its supply of key elements like iron ore and lithium, used in tasks like steel manufacturing and battery production.

Add in the flavours of conflict in Europe, supply chain and manufacturing bottlenecks due to COVID-19 lockdowns, plus enormous liquidity programs from central banks, and that’s a tasty recipe for commodities to stage a rally in 2022. And as much as that’s been the case this year, momentum had been building for the last 12 months at least.

Now we’ve even seen unfathomed activity in the London Metals Exchange (LME) these past few days as the price of Nickel shot to record highs.

The parabolic move sent the LME into meltdown, prompting its CEO to cancel trades and broker orders so that a fistful of large metals’ players could remain solvent.

But that’s not all – a quick scroll down a list of year on year changes in the prices of global commodities is all but a constant flow of green.

In other words, most segments are up well into the green and energy is leading the pack. TTF Gas futures have risen 497% year on year whilst coal, having just clocked back down sharply in the past week, is up 271%. Agricultural commodities aren’t far behind.

The age of ‘commodity nationalism’?

It’s no surprise that the onset of COVID-19 and now conflict in Europe has global leaders questioning themes like globalisation and self-sustainability.

This could be sending us into a different realm when it comes to essentials like energy and food, according to London-based consultant James Aitken.

The financial expert reckons there is an energy crisis currently in situ, but that the world is finally recognising that “we have a nascent food crisis”, as well, speaking to The Australian Financial Review.

Each of these factors could have dire consequences for emerging markets he says, something that will take time to digest and for leaders to evaluate.

The results could be the nationalisation of commodity sectors, Aitken notes, meaning nations could potentially restrict global supply and concentrate on their own shores instead.

“It’s going to take time to fully understand the consequences of what’s happening in Ukraine and the spill-overs. But I think we could be heading into a world of what you might call commodity nationalism,” he told the AFR.

This kind of scenario is heavily bullish for ASX commodity players, especially given Australia’s reputation on the global scale as a reputable supplier that adheres to code.

Not only that, but Australia also has an abundance of different commodities as well, ranging from grains like wheat to LNG, iron ore and of course coal.

“We have so much of what the world needs. We are a reliable supplier…we [even] have wine”, he said.

Interest rates are now a factor again

After a period of record low interest and base rates over the past few years, the US Federal Reserve finally raised its federal funds rate and terminal funds rate this week.

The terminal rate hadn’t been revised since June 2019 and was hiked to 2.8% – around 40 basis points higher than what the market was pricing.

These figures are important as the US dollar is the world’s reserve currency and US interest rates are quoted in numerous financial calculations as well. Not only that, but the US is the world’s biggest economy, at almost $21 trillion in GDP – ahead of China at $15 trillion.

In fact, there’s a saying – “when America sneezes, the world catches a cold” – that highlights the economic might the US has.

The Fed’s chair Jerome Powell is raising rates to combat hot running inflation, which is now at risk of outrunning the Fed’s interest rate curve into the future.

Over-inflation isn’t something that goes away overnight and the Fed is likely to continue tightening its policy in 2022-2023, Aitken said.

“The market’s thinking that the Fed will barely get back to 2%, and I think they’re going to go a lot beyond that.”

A jump above 2% would, in fact, return interest rates to levels not seen in years over in the US, something that is already being considered by the Reserve Bank of Australia amid surging house prices as well.

This sets the scene for commodity markets to rise further, he added, because investors will need to own more tangible assets and commodity stocks instead of the tech-heavy decade that’s just been.

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