An introduction to Commodity

In the next episode, we will be looking at the commodity. At its simplest level a commodity is just, is the price going up or is the price going down?

A common mistake made by non-professional investors, and indeed by many professional investors as well, is the assumption that all commodities are mean-reverting, and that when the price is low, it's going to go higher, and when the price is high it's going to come back to the mean.

It's also very simplistic to say there's a general trend towards, for example, electrification or electric vehicles, and therefore, battery metals must all go up because the demand profile is there. The reality is far more complex than that. Each commodity has its own set of constraints. Some commodities, for example those used in electric vehicles, can be considered niche. Some are minor metals, others are major metals. What are the implications of that?

For retail investors, such as members of the Club, it's really important to understand that not all commodities are the same. Some are simple, others are complex. It's worth looking at what's contract-based and what's on the terminal market, what has traded widely and is fungible between Singapore, New York and London, and what is highly dependent on the specific chemical characteristics of the concentrate going to 1 customer. It's not just the macro demand picture or the price of the commodity that's important, one also has to look at the market size and transparency. On the episode on commodity, I'll go through some of the major and minor commodities, and also some of the niche ones.