Fast-moving and volatile, the commodity markets have been difficult to predict during the past 12 months. For example, lumber prices increased to astounding levels early in 2021, reaching $1,556/1000 board feet in May. By June prices fell more than 40%, the biggest decline since 1978. Iron ore and copper prices also reached record high levels, before falling in May as China took steps to curb prices.
With all the talk of rapid global recovery, oil prices garnered a lot of attention thanks to large inflation figures, but prices remained below the average for the last decade. The surge in energy prices didn’t occur until Q3 2021. The price of WTI crude reached $83/bbl in late October 2021 and declined to $77/bbl by the first week of November.
Commodity prices are cyclical in nature, meaning they go through long periods when they are significantly above or below their long-term trends. Sharp price fluctuations create challenges for businesses, which impact just about everything, from the cost of production and product pricing to credit availability and earnings. This makes the task of dividend forecasting difficult.
Current State of the Commodities Market
In 2021 a strong rally was seen across key commodities, driven by huge consumer demand following the pandemic-led contraction. However, as government spending and hand-outs to consumers in countries like the US, China and Europe begin to decline, the market is expected to cool a bit. However, the overall trend was expected to be bullish for Q4 2021 as well, due to supply constraints that support prices, despite a weaker growth rate.
The Saga of the Semiconductor Chip Shortage
The world is experiencing the worst semiconductor chip shortage in decades. These chips are used in everything from automobiles to smartphones, computers and smart fridges. A few companies that manufacture chips have a severe shortage of silicon material supplies. While the industry has increased manufacturing capacity by 180% since 2000, the current high utilisation rate is causing demand-supply issues. Geopolitical tensions between the US and China have also contributed to the shortage.
An index of lithium prices from Benchmark Mineral Intelligence doubled between May and November and was up 240% YTD, as of December 13, 2021. Lithium prices are rising at a record pace, driven by continued scarcity and increased demand from electric vehicle makers like Tesla Inc. Lithium is a vital ingredient in the rechargeable batteries used in EVs as well as smartphones.
Despite the shortage of semiconductor chips, Tesla recorded its biggest quarterly profits yet, with a $1.6 billion profit in Q3 2021. In contrast, chip shortages and larger global supply strains have impacted companies like Ford and General Motors negatively. Ford’s Q3 sales were down 27.4% YoY, even with signs of improvement. Stocks that gained from semiconductor shortages were those that produce tools and machinery for chipmaking and semiconductor companies with their lab capacity.
- Applied Materials: 77% return YTD till October 12, 2021
- Micron Technology: 14% return YTD till October 12, 2021
The Mining Boom
One of the few sectors that fared well in the pandemic-led economic crisis is the mining industry. The world’s top 40 mining companies are in a strong financial position, with 2020 being a good year for the sector. Compared to 2019, there was a 15% increase in net profit, and a 40% increase in cash on hand, with the market cap increasing by approximately two-thirds.
Outlook for 2022
In 2022, the metals sector is expected to continue its recovery due to pent-up consumer spending, increased efforts by governments to ramp up energy transition and demand from EV manufacturers. This is expected to drive demand, budgets for exploration, and prices. According to S&P Global, the global exploration budget would be 5% to 15% above the 2021 levels, led by gold and key commodities. Iron ore price volatility will continue in 2022 due to supply-demand imbalance, underlying market tightness, project delays and power constraints.
Impact of the Commodities Market on Companies
Beyond the auto sector, other companies also suffered from the semiconductor shortage. For example, in Q3 2021, Apple announced that the chip shortage would lead to the company slashing its projected iPhone 13 targets for 2021 by 10 million pieces. When it missed its earnings expectations in October 2021, Microsoft overtook Apple as the most valuable publicly traded stock.
On October 29, 2021, Apple’s market cap stood at $2.46 trillion, compared to Microsoft’s $2.49 trillion. The former’s stock had risen to almost 13% YTD, while the latter’s increased by 48%. Microsoft has a wider consumer base to spread its risk.
Some other brands facing a similar predicament include Samsung Electronics, which announced in May 2021 that the manufacturing of certain appliances had been disrupted by the global chip shortage. Despite this, the global tech giant expected its quarterly profits to rise 53% in July 2021.
Impact of Commodity Fluctuations on Dividend Pay-Outs
In the first half of 2021, mining giants like Rio Tinto, BHP and Vale paid out record-breaking dividends due to the iron ore price surge. This trend has reversed and the price has halved. Vale paid a huge dividend in September 2021, which wasn’t expected in the second half of the year. Rio Tinto also paid an interim dividend of 270.84p, an increase from the 119.74p paid in the previous year. This was accompanied by a special dividend of 66.77p.
Huge price rises in commodities lead to extraordinary profits for companies due to their high operational gearing. Similarly, the price declines undermine these profits, meaning dividend levels are unlikely to be sustained in the mining sector in the coming months.
In contrast, the oil sector has held firm, although it has fallen from its peaks. Oil majors, such as Exxon, Conoco Phillips, Total Energies and Chevron have kept dividends steady through the oil price rally. BP and Shell are now rebuilding their dividends, after a reduction in 2020. Just like the mining sector, the pure oil exploration companies have seen a profitability rise and introduced the concept of variable dividends. This is a base dividend with a variable component. Devon Energy is an example of a company that has followed this strategy.
Best Commodity ETFs and Stocks for Q4 2021
While some investors are sceptical about buying individual commodities, Exchange Traded Funds (ETFs) can provide broader exposure to all types of investors. Commodities can be an inflationary hedge and help in portfolio diversification.
Some commodity ETFs to look out for:
| Name of ETF | Ex Date (E) | Pay Date (E) | Estimated Dividend |
| VanEck Vectors Gold Miners ETF | 19 Dec 2022 | 23 Dec 2022 | USD 0.46 |
| Global X Silver Miners ETF | 29 Jun 2022 | 08 Jul 2022 | USD 0.214 |
Some of the best commodity stocks to watch include:
| Name of Stock | Ex Date (E) | Pay Date (E) | Estimated Dividend |
| Vale SA ADR | 4 Mar 2022 | 22 Mar 2022 | USD 0.4505 |
| Rio Tinto ADR | 3 Mar 2022 | 21 Apr 2022 | USD 3.1217 |
| Southern Copper Corp | 14 Feb 2022 | 01 Mar 2022 | USD 0.90 |
| Exxon Mobil Corp | 10 Feb 2022 | 10 Mar 2022 | USD 0.88 |
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