The Commodities “Super-Cycle” Is Still Well At Hand

By Aaron Levitt | September 30, 2013 AAA

As emerging market nations have seen their economies explode over the last few decades, the idea of a commodity super cycle was born. The basic premise was that as these nations grew the need to fuel that growth with all mater of natural resources would spur higher and higher long term prices for such raw materials. Investors dove headfirst into steel, oil and other commodities in order to take advantage of the trend.

Yet, recent slowing growth in the emerging world has caused some analysts to question whether or not the super-cycle was in fact, dead.

However, despite the recent slowing, the trend of higher natural resource demand- along with higher prices- could still be at hand. For investors, the super cycle may still be the key for future portfolio gains. According to consultants McKinsey & Co, the commodities super cycle may only be in its seventh inning

Slowing Down, But Growth Still There

The consultant predicts that prices for commodities will continue to rise in the next few years due to various cost floors. McKinsey cites that many resources have unavoidable costs that are now in place. For example, while tapping shale via fracking has unearthed abundant supplies, using that technology is incredibly expensive. The inflation-adjusted average cost of starting a new oil well has more than doubled over the past decade. Likewise, arable land in China and Brazil is disappearing as the two nations urbanize, while the time it takes to launch a new mine is now hitting 20 years to develop. That’s up from just six in the 1980s and ten years in the 1990s. All in all, these factors will help push up prices of the commodities produced.

While commodities will most likely see huge jumps in prices, there still will be demand-driven growth coupled with supply issues. That makes them still worthy of a portfolio.

How To Play the Continuation

Given commodities' potential and the fact that many of them- along with their producers- are beaten down, investors may want to give the sector a go.

The Market Vectors RVE Hard Assets Prod ETF (NYSE:HAP) could be the prime way to bet on the various producers. The ETF holds roughly 355 securities across six different hard-assets sectors- including water and renewable energy. This provides one of the widest swaths of exposure to the theme available. Top holdings include BHP Billiton (NYSE: BHP), Exxon (NYSE:XOM) and seed maker Syngenta AG (NYSE:SYT). Expenses to own the ETF run 0.52%. The WisdomTree Global Natural Resources (NASDAQ:GNAT) can be used as well for broad exposure, albeit not as broad as HAP.

The PowerShares DB Commodity Index Tracking ETF (NYSE:DBC) remains the behemoth in the space and allows investors to bet directly on commodities pricing. The fund tracks a basket of 14 different natural resources, including copper, crude oil and wheat. DBC uses a special index that allows the ETF “roll” its futures without the worries of contango or backwardation. That’s allowed the fund to outperform other competitors in the space- like the iPath DJ-UBS Commodity Index TR ETN (NYSE:DJP) and iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) since its inception.

Finally, some of the biggest gains for the commodities sector could come from the energy markets. As expenses continue to rise for deepwater drilling as well as fracking shale, the producers of crude oil and natural gas should benefit from higher prices. The Vanguard Energy ETF (NYSE:VDE) offers one of the cheapest ways to access the sub-sector.

The Bottom Line

After a decade of torrid growth, the natural resources sector has taken a bit of a break during the last year. This has given birth to the idea that the “super-cycle” is dead. However, there could be still plenty of room for growth in the future. The previous picks- along with the SPDR S&P Metals & Mining (NYSE: XME) make ideal selections to play the future growth.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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