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.

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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.

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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.

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