The Seasonal Commodity Trade – Should Not Be A Surprise

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

January 8th 2018

The Seasonal Commodity Trade – Should Not Be A Surprise

  • Commodities and commodity stocks have had a very good start to the year. This should not be a surprise as there is both a seasonal and economic driver behind the investor interest.
    • If we are going to run out of a commodity in any year – i.e. demand catching up with supply – it is generally evident by the end of the first quarter – order books for the year adjust to reflect expected increased demand and if there are shortages we will know quickly.
    • Commodities and commodity stocks often show early year strength, just in case this is the year. Now we have the added driver of strengthening growth globally and high oil pricing.
  • High oil pricing is as much a factor of strong demand as it is producer discipline and current demand and pricing is a function of the stronger economic activity.
    • The higher prices also increase the margin umbrella for US producers of basic chemicals, and this has added to the enthusiasm for stocks like LYB, WLK and DWDP.
    • Positive earnings revisions for the US chemical names as analysts refresh their models for 2018 – DWDP the exception in our view where estimates remain far too low.
  • Metals pricing is rising for the same reason – possible stronger growth, leading to metals shortages and higher pricing throughout the year.
    • Aluminum and copper prices, while stable last week, rallied significantly in December.
  • While this is not a riskless trade for investors, it has some relative security because of the timing in the year. If we run short of product and it persists, some of these stocks could double in 2018: we have written about peak valuation for ethylene in recent research.
    • If April comes and it does not look like companies have the pricing power to run up to peak pricing and margins, there is plenty of time for investors to look for alternative investments for the balance of the year. Historic seasonality is shown in Exhibit 1 on the second page.
  • We would stay positioned exactly as we were at the end of 2017 and as suggested in our Friday Email: commodity and many diversified chemicals, plus AA and FCX.

Exhibit 1

Source: Capital IQ and SSR Analysis

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