Which commodity producers will win the waiting game?


Nov. 20 2020, Updated 5:22 p.m. ET

Waiting game

In its truest sense, driving through an oversupply situation in commodity markets is a waiting game. The commodity producers that can wait until the others fall out will win in the long run.

For example, if Alpha Natural Resources (ANR) can survive the weak met coal (KOL) market and Walter Energy (WLT) falls, ANR will benefit. When WLT’s supply isn’t continued, it will increase prices.

The phenomenon is even clearer in the iron ore market. Vale S.A. (VALE), Rio Tinto (RIO), and BHP Billiton (BHP) control a large portion of the market. If they can survive until marginal producers go out of business, they will benefit from higher prices in the future.

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How long should producers wait?

Even the strongest producers can’t have low prices forever. In that sense, the current bear run in commodity markets is unique. The global economic growth remained subdued—despite efforts by central banks and governments around the world. Normally, the oversupply is corrected when marginal producers go out of business. It can also be corrected when demand increases.

For met coal, producers announced production cuts. Even for iron ore, the three largest companies could emerge as winners. However, shale oil discoveries altered the crude oil industry. In that sense, the current oil war is between OPEC (Organization of the Petroleum Exporting Countries) and shale oil producers. If neither side budges, the war could continue for a long time.

Who wins and who loses?

While the stronger and lowest-cost producers may eventually be winners in each of the commodity markets discussed in this series, their respective industries are clearly at a loss over the short to medium term. This conforms to the prisoner’s dilemma. We discussed the prisoner’s dilemma in the first part of this series.

Visit the Market Realist Energy and Power page for more analysis. Don’t forget to keep checking our Basic Materials page for analysis on iron ore and metals.


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