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Commodities from A to Z

Investing in these products can be tricky. From aluminum to zinc, OMAR EL AKKAD tells which are running hot and which are not


Aluminum has recently dropped in price along with other commodities used as raw materials by industrial companies. Still, aluminum had a great 2005, helping companies such as Falconbridge post higher profits. However some investors still believe aluminum is a better play than the companies that use it, since high energy prices have added to those companies’ costs.

Often cited by environmentalists as a serious hazard, cadmium is found in many electronics and, if not disposed of properly, can seep into the earth or the water supply. Recent bans on the use of hazardous materials such as cadmium in electronics and other goods means this is one commodity that probably shouldn’t be at the core of your portfolio. It’s also pretty hard to find a reputable cadmium dealer.

Canola is one of the stars of the Winnipeg Commodity Exchange, as it is the exchange’s primary commodity. Canola prices didn’t rise as sharply as those of other commodities in 2005, meaning Alberta’s oil sands aren’t facing much competition in the wealth department from their farming neighbours to the east. But futures contracts show Canola is expected to rise in price this year, and some people are even considering the commodity as an energy substitute as gas prices continue to rise.

Prices have been on the rise as of late because of supply disruptions last year and high demand from the world’s stainless steel producers. Stainless steel production accounts for the vast majority of global ferrochrome use. With stainless steel producers raising production to meet increased demand, many traders expect the spot price of chrome to continue rising this year.

Even as investors flock to oil and gas companies looking to make a killing on rising prices, coal may yet prove the surprise story in the energy sector. The grubby commodity is far more prevalent than oil — especially in Alberta, where 70 per cent of the country’s coal is located — and rising demand from growing economies such as China and India is making it more lucrative to sell the stuff. Advances in producing cleaner coal have also helped reverse some of the pollution stigma surrounding it.

The price of copper is seen as a good indicator of overall economic activity because of its widespread industrial uses. Last year, the commodity rose to a record high, but some analysts predict copper has reached the peak of the current cycle and will likely go lower before it rises again. World consumption of copper is slowing somewhat, as industrialized nations switch to other materials such as plastic. China is also expected to add copper smelting capacity this year and next, boosting production.

Most investors may not know it, but cotton was by some measures the ninth best performing commodity in the world last year. The price of this ubiquitous clothing staple rose more than 21 per cent, beating the much-talked-about gold rally. Cotton’s rise was fuelled by a number of factors, ranging from increased demand to hurricane damage in some cotton-producing parts of the United States. Increased production from the U.S., China and India is expected to limit further price increases, however.

There isn’t much that hasn’t already been said about the world’s favourite shiny yellow metal. Political instability, speculation and a host of factors helped gold prices rise to multi-decade highs last year, much to the delight of paranoid gold bugs everywhere. Because a small price increase in gold can mean a huge profit increase for gold companies, many investors would rather invest in the companies themselves than the commodity directly. Hedging and energy costs sometimes make this a disappointing endeavour, however. There’s no shortage of folks predicting four-figure-an-ounce gold, but even more reputable analysts think the gold rally may still be on this year.

Iron ore
Prices have been soaring since 2004, making the commodity increasingly lucrative to sell. Because of consolidation, a small number of companies control the supply of iron ore, which is used to make steel. Since there are a larger number of steel companies, iron ore producers were able to raise prices without much risk. The dynamic makes iron ore a better play than steel for many investors.

Lead was one of the commodities riding the price wave in 2005. Its use in rechargeable batteries may make it a must have for commodity investors over the next few years, if soaring gas prices boost interest in all things electric. Late last year, the London-based International Lead and Zinc Group predicted that demand for lead will rise in 2006.

Natural gas
This was the best performing commodity in 2005, almost doubling in price over the year. Almost every major world event last year helped raise prices, from hurricanes to political instability to changes in winter temperature forecasts. While some analysts predict prices may not rise as rapidly this year as they did in 2005, demand from energy-hungry China will likely keep natural gas futures from dropping too low in the near future.

Used in everything from metal alloys to batteries, nickel is another commodity that’ll benefit greatly from increased demand for products such as hybrid cars. Some analysts saw the drop in prices during the second half of last year as the start of a cyclical downturn. Other market players say the effect was caused by steel producers working through inventories and that a shortage of nickel will turn prices around soon.

The most widely traded commodity in the world, oil was the business story of the year in 2005. While some analysts predict oil will have to drop somewhat from its highs last year — the price per barrel flirted with $70 (U.S.) at times — others think high prices are here to stay. The argument for rising oil prices is largely based on the belief that cheap oil is gone and that remaining world supplies are largely composed of the kind of heavy oil that costs more to extract.

Despite what the dismal state of the Canadian forest products industry may have you believe, pulp and paper prices have actually been rising for the past two years. However paper prices are denominated in U.S. dollars, so the surging loonie has all but wiped out those gains for Canadian producers. Higher prices are expected to last this year, but investors looking to cash in may want to consider whether the loonie is destined to weaken any time soon.

As gold soared in 2005, platinum also went along for the ride, hitting 25-year highs. One of the most expensive materials in the world, platinum broke through the $1,000-an-ounce (U.S.) mark last year for the first time since 1980. Platinum prices are influenced by many of the factors that also influence gold prices but without as much media attention. Analysts attribute much of platinum’s price increase last year to favourable fundamentals and investment demand, which may keep prices high in 2006.

Silver prices soared along with gold and other metals in 2005. Rising 40 per cent over the year, it easily beat gains in gold prices and was the sixth-best performing commodity in the world. Like gold, silver gained from rising demand among consumers in developing countries. However silver is cheap compared with gold, meaning a bigger portion of China and India’s rapidly growing population can afford to buy the commodity in the form of chains and bracelets. Because silver is used in a lot of electronics and other products, it also tends to trade in line with industrial metals.

Steel prices can sometimes gauge the health of entire economies because of steel’s integral role in so much of the industrial sector. With iron ore prices rising, steel prices should also rise, since iron ore is used in the making of steel. However steel producers are stuck between a relatively small number of iron ore producers and increasingly unprofitable car manufacturers in north America. As such, the pressure to keep steel prices down has been immense even as input costs go up. Despite this, steel prices have risen about $200 a tonne over the past two years, and if industry consolidation continues, prices may continue to go up.

You probably didn’t have money riding on sugar last year, but you should have. World sugar prices rose more than every other commodity in the world except natural gas. Late last year, sugar prices hit a 10-year high of 13.26 cents a pound in New York. The main driver has been supply worries from Europe and Brazil. Brazil has been using more of its sugar to produce ethanol, thus diverting it from the market. As gas prices continue to soar, sugar investors may find themselves indirect beneficiaries of the energy boom.

Nuclear power is slowly coming back from the shadow of such disasters as Chernobyl and Three Mile Island, and with it, the price of uranium is soaring. China and India are looking to expand their nuclear energy capacities as the two nations continue to grow. The rest of the world is not far behind: the International Atomic Energy Agency is forecasting 60 additional plants will be added by 2020 to the approximately 440 currently producing power in 31 countries around the world, meaning uranium will be in demand for a long time.

Even though it rose 12.2 per cent in 2005, wheat was one of the worst performing commodities futures last year. Like other agricultural commodities, wheat prices can fluctuate based on unpredictable weather and other factors that make an all-wheat portfolio a pretty bad idea. But with the world population growing, there’s upside potential for any means to feed those extra mouths.

Zinc finally caught up with soaring nickel and copper prices last year after lagging the commodities’ price gains in the first part of this decade. Prices began moving up in late 2004 as global stockpiles of the metal — used primarily in galvanizing steel — began to shrink. Some analysts expect a supply-demand crunch that began last year is likely to intensify in 2006, leaving zinc prices with more upside potential.

© The Globe and Mail

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