Commodity pricing divergence calls for ‘discerning and tactical’ investors now that it’s tougher to pick winners – by Peter Koven (Financial Post – August 30, 2016)

During the commodity bull market from 2002 to 2011, it was almost impossible not to make money in this space. The price of nearly every energy, metal and agricultural commodity dramatically rose, driven by China’s massive economic growth. Some performed better than others, of course, but the proverbial monkey with a dartboard could pick winners as well as many humans did.

It was just the opposite from 2012 to early 2016. There was nowhere to hide in this period as commodities got mashed. They didn’t all drop at once, but they ended up in the same gutter by early 2016.

Now a bifurcation is emerging: Some commodities have spiked this year, some have gone up a little bit, some are more or less flat, and a handful have actually weakened during what is supposed to be a market recovery. As a result, a very strong understanding of the supply-demand balance is needed if investors want to pick the winners and come out ahead.

The days when commodities moved largely in concert appear to be over, and experts say the new pricing variances could last for a long time since they don’t see a catalyst on the horizon that would shake things up in a meaningful way (as China’s boom did in the early 2000s). Instead, commodity markets are likely to behave similar to how they did decades ago, when price moves were tamer and tougher to call.

“We’re going back to a ’60s, ’70s or ’80s-style boring, slow-cycle market where it pays off to know which (commodities) will perform better,” said Terry Ortslan, an independent analyst. “That’s what analysts get paid for. In good times, you don’t have to be an analyst.”

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