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