Why is trading up?
Glencore, one of the world’s largest commodities traders, has seen its revenue increase considerably this year. In fact, it’s on target for a record year.
The Anglo-Swiss multinational commodity trader is active in markets for metals and minerals as well as energy products and agricultural goods.
Last week, Glencore said its annual portfolio mix adjustment guidance was expected to increase massively due to the “unprecedented dislocation” in energy markets.
In February, the firm put its full-year commodities trading guidance at $32.8 per tonne. However, Glencore is now expecting to increase that guidance to a range of roughly $82-86 per tonne for the first half of 2022.
The commodity trading industry is enjoying is most profitable period ever as war rages between Russia and Ukraine.
Amid rising inflation and rocketing diesel and electricity prices, Glencore also expects its average FOB (freight on board) thermal unit cost for the first half to be $75-$78 per tonne. That’s up from an earlier guidance of $59.3 for 2022.
As a result, RBC Capital Markets expects Glencore’s coal earnings to reach $7.9bn in the first half alone.
Would I buy Glencore stock?
So it is right for my portfolio? I’ve been staying away from commodities this past month, and I’m sticking by that.
However, analysts at Citi recently reiterated their “buy” recommendation and set the target price of 700p. That’s some distance ahead of the 480p we’re seeing today. Citi also cited the potential for cash returns of up to $20bn.
Most forecasts are suggesting that we’re entering an era of scarcity and commodity prices should remain higher for longer. In such a case, you’d expect firms like Glencore to continue doing well in the long run.
As electric vehicle sales increase, the group can expect demand for its copper, cobalt, lead and zinc to skyrocket. An uptick in global infrastructure spending is also likely to see an increase in the price of iron ore and other metals used in the creation of steel.
However, such forecasts can be wrong. And there’s clearly a lot of volatility in the market right now. One of the biggest issues putting me off the commodity market right now is the constant threat that fuel-guzzling China will be sent back into lockdown without warning. This would hurt demand for all commodities.
I’ve got Glencore on my watchlist, but I’m not buying for now.
I foresee downward pressure on commodity prices this year as China attempts, on multiple occasions, to stamp out Covid-19 and because of negative economic forecasts around the world.
So it looks likely that the US, UK and parts of the EU will experience a recession in the near future.