One of the characteristic features of the global economy and markets in recent years has been the gradual end of the commodities supercycle. Commodity prices surged ahead over the past decade, but they have now established an unmistakeable downtrend.
The question is, what constitutes a commodity? Well, clearly oil is a commodity. So is gas and coal. So are minerals and metals such as iron ore, copper, aluminium, uranium and precious metals. Commodities is actually a very broad term; and all the resources, minerals and metals I have mentioned are now trending downwards.
Oil producers will suffer…
Amongst all these commodities, oil has the most economic impact. Although many have been surprised by the falls taking place in the oil price, no one can now deny the dramatic move taking place in the markets. I suspect the oil price will be a lot lower in the next decade than it was in the past decade. The question is: who are the winners, and who are the losers, from the falling oil price?
Well firstly, and most obviously, oil producers will find their profits sharply reduced. I fear oil majors such as BP (LSE: BP) will suffer particularly badly. BP has to find oil from places such as the depths of the ocean, or the furthest reaches of the Arctic. This means that it has high break-even costs, and-so some of its current production may no longer be profitable, and both production and investment are likely to reduce.
State oil companies, including those of OPEC nations such as Saudi Arabia, will find they are also making a lot less money, though as the extraction costs are lower, they will still be able to make a profit, and their production is less likely to fall.
What of the oil services companies, such as Petrofac (LSE: PFC)? Well, much of the investment of companies such as Saudi Aramco and BP is spent with oil services companies. What’s more, companies such as Petrofac often work with oil companies on projects with a high degree of technical difficulty, and thus a high break-even cost. How many of these projects will now be cancelled?
…but airlines and manufacturers will gain
If this is all sounding very negative so far, there will also be many companies which will win from the falling oil price. Until recently, the airlines have spent a large proportion of revenues on fuel. The oil price falls will boost their profitability and their share prices. I expect the share prices of companies such as International Airlines Group (LSE: IAG), the owner of British Airways and Iberia, and easyjet (LSE: EZJ) to rise substantially.
What’s more, while oil-producing countries will suffer, the many more oil-consuming countries will benefit. The biggest beneficiaries will be manufacturing-intensive countries such as China, India and Japan, though many other countries from Europe to the States will also gain. I think investment funds such as Fidelity China Special Situations are worth buying into now.
Other companies to benefit include carmakers such as Volkswagen, consumer goods companies such as Unilever and Reckitt Benckiser, and luxury goods manufacturers such as Burberry.
As the tectonic plates of the global economy shift, the world’s stock markets will also move, as old trends end and new begin. As with any trend, it is better to invest early than to invest late.