How to profit from the commodities bull

published 17 October 2007

This column is not known for its readiness to praise the financial services industry, so readers may be surprised to find that today I bring good news.

I have long been bullish on commodities and have suggested all sorts of ways to get exposure to them, but none has been quite right. It's too easy to lose money spread betting on prices, and derivatives are too complicated for most of us.

Investing in commodities: mining shares

Until now, I've considered the best solution is to buy shares in big mining companies such as Xstrata (XTA) and BHP Billiton (BLT).

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But this also comes with complications. You don't only get exposure to rising commodity prices, but also to the various risks that come with each company. Those risks are rising. As demand has soared for most hard commodities, so has the average price of getting them out of the ground.

We heard a lot earlier this year about how production was being constrained by a shortage of big tyres for mining trucks, while rising energy prices have bumped up the cost of running mining equipment.

There have also been staff shortages for some years now. The average age of mining engineers is well above 50 and the miners themselves are aware they are in short supply: workers at Chile's Escondida, the world's largest privately owned copper mine, recently went on strike after rejecting a pay rise of 3% and demanding 13%. This is unlikely to be the last strike of its kind in this bull market.

All these factors squeeze miners' profit margins and make them look a less attractive investment than they were, and certainly a less attractive investment than, say, a couple of tonnes of already mined copper.

Investing in commodities: investing in softs

I've had even trickier problems finding simple ways for private investors to get into the agricultural, or "soft", commodities markets.

It's true that I've been talking about grain, sugar, soybean and hog prices for a few years, but without ever being able to suggest much in the way of a route in for the ordinary investor.

That's a shame, as coffee, orange juice and wheat prices are all roaring ahead.

So how nice would it be if there was a way to get exposure to the commodity markets without having to buy company shares, with their attendant risks, and without actually having to fill up your garage with physical soybeans or silver? Well, here's the good news. Now you can. ETF Securities tell me that within the next month it intends to launch 29 ETCs (exchange-traded commodities) that will allow investors to track directly the prices of almost every mainstream commodity from coffee and corn to heating oil and zinc, as well as various baskets of commodities (precious metals, agriculture and the like).

Investing in commodities: ETCs

ETCs operate much like ETFs (exchange-traded funds) in that they can be bought and sold just like a share on a stock exchange, but they track a particular commodity index.

The result? For the first time private investors will be able to dabble in the commodities markets both easily and cheaply: the ETCs will charge annual fees of a mere 0.49%. Better still, all the ETCs are eligible for both Isas and self-invested personal pensions. All this makes ETCs a rare and extraordinary thing: an innovation from the financial-services industry that is actually useful to investors.

Should you invest in commodities?

So now you can invest directly in the commodity markets, here's the next question: should you? The answer is probably yes, if you can cope with volatility and are in for the long term. I've made the case for metals and oil before (supply is limited, demand is not) and it still stands.

The case for soft commodities is just as good, if not better. Prices haven't risen anywhere near as fast as those of hard commodities, but over time there is every chance they will.

The emerging middle class across Asia is fast improving its diet, which will push up demand for proteins and grains (it takes a lot of grain to grow a chicken).

Add this to the boom in the production of biofuels (made from grain, sugar and palm oil), which is likely to continue if oil prices remain high, and the agricultural-commodity markets look a good place to have some of your money. That said, I wouldn't put too much into single-commodity ETCs because individual softs prices are notoriously volatile. Instead, I'll be investing my own money into either the "softs" ETC, which includes sugar, cotton and coffee, the "grains", or "agriculture" which combines the two.

For more information on the different ETCs visit etfsecurities.com.

First published in The Sunday Times 3/9/06

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.