For long-term investors, investing in ASX commodity shares can be a bit dicey. That's because the price of commodity stocks tends to rise and fall in step with the price of the commodities they grow or dig from the ground. And commodity prices are generally much more volatile than those of services or finished goods.
Interestingly, the share prices of companies that provide the proverbial picks and shovels – the logistics – required to source, store and transport commodities to their end users, are prone to similar ups and downs as the commodity shares they service.
Atop that, agricultural shares are subject to weather conditions. And miners are exposed to the quality and life expectancy of their mines, alongside their ability to uncover fresh resources. In the latter case, when they get it right and uncover 'the motherlode', stand back and watch their share prices rocket. Likewise, if they get it wrong and uncover little but dirt, their share prices are likely to plummet.
Just pull up the long-term price chart of most any ASX hard or soft commodity shares. You'll inevitably see boom periods and bust periods for the listed miners and agricultural companies and the shares that service them. Both of which may last several years or more.
With that in mind, the 2 shares we look at below might not be ones you hold for life, but rather 6 to 12 months before reassessing.
So what was that about 2 booming trends?
Growing demand and tightening supply
First up is copper. Or 'Dr Copper' to be precise.
If you're not familiar with this term, copper is said to have a PhD in forecasting the outlook for the world economy. That's because it's used extensively in infrastructure and building construction for plumbing, roofing and wiring, among others. When the global economy is in growth mode, the price copper tends to reflect this.
Not only is copper resistant to corrosion, it's also highly conductive. That makes it a core element in electric vehicles and home battery setups.
As the world increasingly moves towards sustainable energy sources, copper miners should benefit. More immediately, developed nations the world over are launching, or preparing to launch, huge new infrastructure programs to lift their economies from their COVID-19 driven recessions.
This has already seen demand in China grow more than 30% year-on-year as the nation engages in a fresh building boom. And China doesn't have a lot of domestic copper supply, making it reliant on imports from Australia, among other nations.
And the growth in demand comes as the supply tightens. Global copper production is forecast to fall more than 1% due to mining disruptions caused by the pandemic.
No surprise then that the price of copper, currently at US$6,923 per tonne is near 2-year highs. Not only is the price up 50% from its 23 March 2020 lows, it's up 12% since 2 January, well before anyone had heard of the coronavirus.
The booming copper price has been a boon for OZ Minerals Limited (ASX: OZL) shareholders.
Oz Minerals owns and operates the Prominent Hill copper-gold mine and the Carrapateena advanced exploration copper-gold project, both in South Australia. It also has operations in Brazil and an exploration project in Sweden.
Oz Minerals' share price is up 167% from the 23 March lows, more than 3 times the increase in the price of copper. Year-to-date the share price is up 51%. By comparison the S&P/ASX 200 Index (ASX: XJO) is down 8% in 2020.
Now you won't see another 167% share price leap over the next 7 months. But with strong demand for copper and a sliding global supply, I believe Oz Minerals is well-placed to ride this booming trend into 2021.
Moving on…
Selling 'picks and shovels' to Australia's agricultural industry
After suffering through a difficult drought, Australia's agricultural industry is enjoying the fruits of above average rainfall across much of the east coast. This is forecast to result in the biggest wheat harvest in 4 years.
As Bloomberg reports:
New South Wales is now set for a record season, according to IKON Commodities, which recently lifted its national forecast to over 30 million tons, more than double last year… Barley crops are also set to benefit from the rains, with output poised to rise more than 25% from last year, IKON said.
GrainGrowers chair Brett Hosking says, "It's looking really exciting at the moment on the east coast of Australia. Even if they weren't coming off a drought, they'd be looking at a really good harvest."
That's great news for the farmers, their communities, and an Australian economy that can use any boost it can get.
From an investors' perspective, one way you can gain exposure to the forecast surge in wheat and barley output is via Graincorp Ltd (ASX: GNC).
The company has an integrated supply chain, starting from accumulation and storage which links up to road and rail freight options as well as port facilities. In other words, a lot of GrainCorp's revenue comes from storing and transporting grains.
The GrainCorp share price is up 27% from its 25 March lows, and down 1% year-to-date.
With a bumper crop set to come in on the east coast, I believe the current share price of $3.68 per share could represent a good entry point to ride this second booming trend.
