Which commodity investment has trounced both bitcoin and Tesla in the last year? Copper has been a great post-pandemic play. It bottomed in March and has barely stopped rising since. But it's still "only" up about 80%-odds in the last nine months. That's hardly Tesla (up about 1,000% over the same time) or bitcoin (up about 800% - as judged by the most recent high of $41,000, anyway).
Rhodium is more like it. The platinum group metal hit a bottom of below $2,000 in March 2020 and is now trading at closer to $16,000. That's still not quite keeping pace with the bubble assets du jour though.
If you really wanted a performance to brag about, one commodity has thrashed them both.
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Asian LNG – a better return than Tesla
The price of liquefied natural gas (LNG) in Asia fell to record lows in late spring last year as coronavirus went global. That's not a surprise, given the demand slump; the price of oil went negative at the same time, after all. However now, less than a year later, the price of LNG shipped to China, Japan and South Korea (the three biggest LNG importers in the world) has leapt 15-fold, to all-time highs.
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According to a report in The Wall Street Journal, the price of LNG in Asia (as measured by S&P Global Platts) “has shot up by 87% so far in 2021”. In other words, prices have almost doubled since the start of the year alone. Like I said – even better than Tesla or bitcoin. So what's going on?
On the demand side, northeast Asia is having a worse winter than usual. Temperatures in Beijing hit their lowest point since 1966 last week, apparently. So demand for natural gas to burn for electricity to heat workplaces and homes is up.
On the supply side, the problem is not the LNG itself – the world is not short of LNG. The problem is getting it from where it is to where it's needed. Hence the regional pricing (the price for US natural gas is currently up about 20% on this time last year - and has been falling for the past three months).
As you can imagine, LNG is a pretty tricky thing to transport; you need specialised ships to move it across the globe, and specialised ports to handle it. Now, the nice thing about markets is that they incentivise the best use of these ships. With the price soaring in Asia, exporters are going as fast as they can to get the stuff over there to profit from the leap in prices.
However, there's a snag. In effect, there's a traffic jam in the Panama Canal. A “seasonal backlog of container ships” is holding things up. That queue has been “aggravated by the strong demand for consumer goods during the pandemic”. That means the LNG ships either have to wait in line or take the long way round.
Either way, it means two things. Firstly, LNG can't get to Asia fast enough to accommodate demand. That's driving up prices of both LNG in the region, and the price of its knock-on products, such as wholesale electricity. Japan in particular is struggling with record-high electricity prices, as its nuclear power industry is still a shadow of its pre-Fukushima self.
Secondly, it means that prices for LNG tankers are shooting up too. Again, according to the WSJ, the daily rate for chartering an LNG carrier to head from the US to Japan and back, has shot up from about $190,000 a day at the end of 2020, to over $320,000 a day by the end of last week.
This is all very well and sort-of interesting, you're thinking. But what does it mean for your money?
Why this matters for your money
There are a few points to make. One is that this disruption is having an effect on our gas prices here in the UK. Suddenly we're competing for supply with Asian buyers – you're not going to sell to the UK if you can fetch a much higher price in Asia.
Now, this will all get ironed out within a few months (unless something really odd happens weather-wise), but it's a valuable reminder that not everything in the world is digitised or digitisable. Sometimes you still need to get something physical from A to B, and it's not always possible to do that as quickly as you might like. The plumbing of global trade is still incredibly important.
Secondly, this will probably give a beneficial boost to some of the LNG producers and shipping companies. I haven’t looked into which individual stocks might have exposure to any price spike and potential restocking boom later in the year, but on a wider note it’s likely to improve sentiment towards the energy sector in general.
But the most important point is probably my third and final one: we have traffic jams in the Panama Canal. We have surging heating demand in countries whose economies are not currently as hard hit by the pandemic as we have been in the UK.
None of this points to a global economy on the verge of a deflationary slump. Instead, it points to a world which is itching to get back to normal in terms of demand, but where supply is at risk due to bottlenecking and producer uncertainty. That, to me, is a recipe for inflation. And a more rapid return to inflation than markets mostly expect right now.
We've been discussing this in MoneyWeek magazine in detail for most of the past year, and we'll continue doing so. If you don't already subscribe, get your first six issues free here.
