The Great Commodity Collapse: Is Now The Time To Buy?

Do you remember the 9th March 2009? That was the day that the FTSE touched an intra-day low of 3,460 — a 49% decline from its high of the 15th June 2007, just before the credit crunch and the worst global recession for 60 years.
Yet for some investors — including yours truly — March 2009 is remembered as a time of opportunity, not simply fear and plain.
Quite simply, share prices had been slaughtered across the board, with blue-chip bargains on offer just about everywhere.

Analysis paralysis

Investors who held back in March 2009 have been looking longingly at share price charts ever since. If only, if only…

But they didn’t buy. They sat on their hands, paralysed by fear and uncertainty, sure that things would get worse — and the market recovery and ensuing bull market passed them by.
All of which I mention because — just possibly — another such opportunity may be hoving into view.
It won’t be bargain-basement prices across the board, to be sure. But in two significant sectors of the global economy — oil and gas, and mining — share prices appear to be exhibiting significant weakness.

Buying into an income stream

Now, let’s be clear. As someone in their sixties, my main investment focus is on securing an income, and buying shares that pay decent — and sustainable — dividends.
Not for me the murkier shores of AIM, where investors in oil and mining stocks can clock up enormous gains, but also enormous losses.
What interests me is a different proposition altogether: giant FTSE 100 oil and mining stocks, along with some of the FTSE 100 and FTSE 250 businesses that supply them with vital goods and services.
Royal Dutch Shell, for instance, which hasn’t cut its dividend in decades. Rio Tinto. BHP Billiton. BP. Anglo American. Plus, as I’ve said, the mining and oil services supply companies that support such businesses.

Spotting the low

Over the long term, these companies have rewarded businesses very handsomely, and there’s every prospect that this track record will continue, despite the risks of some short-term pain.
So as an income investor, I’m eyeing up the prospect of buying into a nice stream of — hopefully, rising — dividends. And, of course, capital gains — should I ever wish to sell — as markets recover.
The question is, recover from what, exactly?
Because right now, this is the question that underpins any buying decision.

Follow the market

Just take a look at commodity prices. Brent crude oil is down from $108 per barrel to $53 per barrel, over the past 12 months. Gold, down from $1300 per ounce to $1100. Copper, down from $7050 per tonne a year ago, to $5189 now. Aluminium, down from $2000 a tonne a year ago, to $1715 a tonne now. Iron ore? $50 a tonne, versus $93 a year ago.
And so on, and so on. These are significant price falls — enough to break smaller and less-profitable businesses, or those operating in marginal conditions.
Shares in Australia’s Atlas Iron, for instance, fell 70% on Monday, after the company resumed trading after a hiatus caused by the collapse in ore prices. Now worth just AUS 4¢, they’re down from AUS 71¢ a year ago.

Closer to home, BHP Billiton — in which I have a stake — is down from £20.96 a year ago, to £11.30 as I write these words. Royal Dutch Shell, another holding, is down from £25.50 a year ago, to £17.60 today.

Unknown unknowns

Bargain — or bear trap? The truth is, no one knows. In mining, a lot depends upon the state of the Chinese economy, which consumes a huge amount of commodities, and so has a major impact on prices. In oil, Saudi Arabia and Iran are the big unknowns.
Plus, of course, these are very cyclical industries, with some observers worried that — especially in mining — a ‘supercycle’ is coming to an end, heralding not just months of low commodity prices, but years.
So while some investors are screaming “Buy!”, others are reaching for their bargepoles. No one really knows what will happen.

Finger poised…

Me, I’m biding my time. What I will say is that priced at £11.30, BHP Billiton is at almost exactly the £11.56 it was in early March 2009, back at the market’s nadir — although BHP Billiton’s own nadir was a few months earlier, in November 2008, when the stock briefly touched £7.97 as the global economy ground to a halt.
And somehow, things don’t feel as bad as 2009. Not by a long chalk. So there’s definitely an argument that BHP — and others — are starting to get seriously cheap.
At some point in the next few months, I’m fairly sure that I’ll be adding to my holding in BHP Billiton — and also Royal Dutch Shell, and one or two mining and oil industry support businesses.

But I don’t think that the time is quite right, yet.

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Malcolm owns shares in Royal Dutch Shell, BHP Billiton and BP.  The Motley Fool do not own any shares mentioned in this email.