The Commodity/Shipping Market Cycle7 Jan 2021 11:43
Today's equity markets have similar characteristics to 2000 - the main indexes (S&P 500 and FTSE100) - are on very high valuations at or close to all time highs, while the counter cyclical O&G, Industrial Metals and Shipping markets are in the early stages of surging off multi decade lows.
During 2000 to 2006 the main indexes remained permanently in correction territory more than 20% down until late 2006.
During that period the counter cyclical oil and copper markets commenced a new cycle that saw the spot price rise by 298% and 496% respectively by 2006, and by 460% and 650% respectively by the 2008/9 peak of the recovery stage of the market cycle.
Rising Oil, Gas and Copper prices produced strongly increasing cash flow generation at the now super lean, low operating cost O&G and mining businesses that survived the long recession, spectacularly lifting the valuation of their equity; by way of example: BHP Billion went up 9 fold, Clarkson Shipbroker 11 fold, Premier Oil 17 fold, Talisman Energy 11 fold during the new commodity market cycle.
The remarkable growth performances of these and many other well run companies in these sectors were the result of a 6 year recession bottoming in 2000, which forced the management to take severe action to survive - they remorselessly drove down the cost base while increasing their operating and production efficiency. By 2000, the survivors were extremely efficient, low cost operators ready to hugely benefit from even a modest improvement in the price of their production assets.
$50 oil last year saw many crude oil producers generate strong operating cash flows - while at $70 oil they produced astonishing levels of cash flow by historic standards - by way of example JSE has produced circa $35/bbl and $55/bbl operating cash flow respectively at $50 and $70 Brent over the last 12 months.
In the O&G sector I continue to be a buyer of TXP(last purchase was 127p), Jadestone, Petrotal and Savannah Energy - hold 7 figure positions in each of them - and unless the story changes significantly for the worse expect to still be holding most of those positions in 2025 when I'm 65!
Having employment scars earned at the coalface from the last two commodity market/shipping cycle recessions etched deep in my back, I believe we're still in the infancy of this new market cycle recovery stage, which, over the last 70 years, has seen the four previous versions average between 6 and 9 years duration.
This latest commodity/shipping market cycle has the fundamentals to be one of the strongest on record as a result of the unprecedented global economic impact of the Covid Pandemic, likely kick starting massive government spending programmes worldwide on renewable energy and infrastructure development, which the high population emerging Nations of SE Asia and Africa will be layering on top of their existing urbanisation programmes - modernisation, electrification and development of their cities, transport networks
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