ASX miners set for tough start even as commodity premiums hit a 14-year high

ASX mining shares could be under pressure this morning even though price premiums paid for commodities have risen to the highest since 2007.

Commodities premium ASX shares Female miner and male miner stand in open mine pit surveying the area

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX mining shares could be under pressure this morning even though price premiums paid for commodities have risen to the highest since 2007.

The BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) will be watched closely as their US and UK-listed shares lost ground on the weekend.

If these shares underperform the S&P/ASX 200 Index (Index:^AXJO), they could drag on the Fortescue Metals Group Limited (ASX: FMG) share price or other ASX miners.

Commodity price premiums hit a high

The sombre Monday morning outlook for the sector stands in contrast to the commodities futures market.

Contract prices for immediate delivery of many commodities are commanding higher prices than contracts for future deliveries.

This situation is called backwardation and Bloomberg reported that a range of commodities are in the deepest backwardation in over 14-years.

What is backwardation?

It isn't considered "normal" (if there's such a thing) for the market to be in backwardation. Prices for immediate or near-term delivery are usually lower and get more expensive the further the delivery is scheduled for.

The higher prices are to compensate for holding and others costs and the uncertainty of future operating conditions.

When near term prices exceed longer-term ones, it means consumers are willing to cough up extra to take the commodity now.

Global shortage of vital commodities

This is probably driven by two distinct tailwinds. First is growing demand due to the rebound in the global economy from COVID-19.

The other is worry about supply keeping pace as supply lines try to catch up after being severely impacted by the pandemic.

It isn't only hard commodities like iron ore and copper that are surging. About half of the major commodity markets tracked by the Bloomberg Commodity Index are in backwardation. These include oil, natural gas, copper and soybeans.

This explains why ASX agri shares, like the Graincorp Ltd (ASX: GNC) share price, have also performed well.

Foolish takeaway

Pimco pointed out that the current commodities rally reflects shortages in vital materials.

Coincidentally, the world is currently experiencing a shortage in computer chips that are used in everyday products from cars to consumer electronics.

How long commodities remain supercharged is an open debate. But the good news is that the outlook remains robust and many bigger ASX miners do not need prices to stay near record highs to make big profits and pay generous dividends.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Materials Shares

A mining employee in a white hard hat cheers with fists pumped as the Hot Chili share price rises higher today
Materials Shares

ASX mining in April 2024: The best stock to buy right now

Analysts at Bell Potter think this mining stock could offer big returns.

Read more »

a mine worker holds his phone in one hand and a tablet in the other as he stands in front of heavy machinery at a mine site.
Materials Shares

The Core Lithium share is down 27% in March: What's next?

Times have been hard for this lithium miner's shareholders. Will things improve?

Read more »

A female worker in a hard hat smiles in an oil field.
Materials Shares

Why it's a great day to own BHP shares

The Big Australian's shareholders have reason to smile on Thursday.

Read more »

a business man in a suit holds his hand over his eyes as he bows his head in a defeated post suggesting regret and remorse.
Materials Shares

Why did this ASX All Ords stock just crash 36%?

Investors have been hitting the sell button on Tuesday.

Read more »

A miner in a hardhat makes a sale on his tablet in the field.
Materials Shares

Lake Resources share price surges on sustainable lithium news

Lake Resources shares are enjoying a welcome lift today.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Materials Shares

Mineral Resources shares fall despite 'exceptional results'

This mining and mining services company has provided an update on its energy business.

Read more »

A man looking at his laptop and thinking.
Materials Shares

Are Pilbara Minerals shares in the buy zone or overvalued?

Here's what Bell Potter is saying about the lithium giant.

Read more »

Three guys in shirts and ties give the thumbs down.
Materials Shares

3 reasons to sell Core Lithium shares

This lithium miner's decline may not be over according to Goldman Sachs.

Read more »