#55 Weekly Charts — Commodity Equities & Coal Production


Topics of the day:

  • Commodity Equities
  • Coal Production

Commodity Equities

GMO has always great topics to focus on markets, and with this piece below, they focus on commodity equities, and then we will focus with other papers about it.

We’ll now turn to commodity equities. We suspect they did much better than the underlying commodities as a store of value because they were cheap — something that today may well be true once again. During the high inflation era they were only three categories of commodity equities — oil, mines, and coal. All of them did well, with coal the clear winner. We’ve included the value group as well in Exhibit 11 for comparison.

Credit Suisse

We look at three sectors highlighted by our Investment Committee that are traditionally correlated with inflation: mining, banking and oil. When we compare the MSCI World Metals and Mining Index performance relative to the MSCI World vs. the US Treasury Inflation-protected Security (TIPS) 10-year breakeven inflation, we can observe that it seems to demonstrate a positive correlation, especially in times of relatively high inflation in the past 20 years. This is also the case for US banks and the MSCI World Energy (majority of which are oil companies). This entails that these sectors tend to outperform the MSCI World in times of relatively high inflation.

Within the mining sector, we like the big diversified miners, as the underlying commodity exposure is well-diversified and assets are located in stable mining jurisdictions. Within the financial sector, we would highlight banks as typically more sensitive to inflation (and interest rates) than insurance companies, diversified financials and asset managers. Hence, we include the banks among our financial top picks, acknowledging the fact that other drivers also significantly affect share price performance.

Commodities, which are real assets with a cyclical tilt, offer some protection against inflation. A well-diversified portfolio of commodities provides the best results as it diversifies idiosyncratic risks away.

We look into the ability of the asset class to protect against inflation. The link between the two variables can be quite volatile, but is positive in the medium to long term. Commodities, which are sources of inflation (energy, agriculture), provide a better hedge than the ones which do not enter directly into households’ consumption baskets (precious metals). However, we find that a diversified portfolio of commodities yields the best results.

JP Morgan

Despite a late-November setback, commodities are set for a strong year ahead. While energy stands out as the major outperformer, tight balances across industrial metals and agriculture have also propelled those sectors higher, as supply this year has struggled to keep pace with resurgent demand.

“Commodities are on pace to deliver the strongest year of returns since the early 2000s. A constructive economic outlook, depleted inventory levels and supply still struggling to respond to resurgent demand point to a second consecutive year of positive double-digit commodity returns in 2022,” said Natasha Kaneva, Head of the Global Commodities Strategy at J.P. Morgan.

Looking at the year ahead, the global economic expansion is still in the midst of its first genuine resiliency test, made even more challenging by the emerging, heavily mutated Omicron variant. Barring a material backslide on the COVID-19 front, J.P. Morgan Research economists see strong underlying fundamentals sustaining above-potential global GDP growth in both 2022 and 2023 with pro-growth fiscal policies continuing to support the ongoing recovery. This is the backdrop for three major commodities themes in 2022:

1) Inventories are at depleted levels across nearly all commodity sectors, including oil, natural gas, base metals and agricultural commodities.

2) A constructive economic outlook is feeding through demand numbers across commodities, resulting in record or near-record demand outlooks in the coming years.

3) Supply is still struggling to respond to resurgent demand and will likely remain constrained through next year.

“Looking across the sector, we believe that oil is set to remain a major beneficiary of a continued economic reopening over the course of 2022. The last time consumption was as high as we forecast next year, U.S. shale drillers were pumping flat out and the Organization of the Petroleum Exporting Countries (OPEC) and its allies were locked in a battle for market share,” said Kaneva.

The fundamental outlook also remains constructive across the agricultural complex, as world and major exporter balances show a sustained tightness in inventories through 2021/22 and 2022/23, on low carry-in stocks and strong demand. Industrial metals will still take time to find balance next year, keeping prices supportive over the first half of 2022, however, with relatively middling Chinese demand growth expected, prices could come under more sustained pressure later in the year. An unwinding in ultra-accommodative central bank policy will be most outright bearish for gold and silver over the course of 2022.

Coal Production


EIA projects that trends in coal production in the United States could range from flat to continuing declines through 2040. Electric power generation accounts for more than 92% of U.S. coal demand, and domestic coal production has declined significantly over the past decade as coal has been displaced by natural gas and renewables in electric generation.

Coal generation and production are significantly higher in the No CPP case, which otherwise applies the Reference case resource and technology assumptions, as the existing fleet of coal-fired generators can be more fully utilized and fewer coal-fired generators are retired. As a result, in the No CPP case, coal production stabilizes at about 900 MMst from 2025 through 2040.

Coal Market Module

The CMM generates different supply curves for each year of the projection period. Combinations of 14 supply regions, nine coal types (unique groupings of thermal grade and sulfur content), and two mine types (underground and surface) result in 41 different supply curves. EIA constructs supply curves by using an econometric formulation that relates the minemouth prices of coal for each supply curve to a set of independent variables. The independent variables include capacity utilization of mines, mining capacity, labor productivity, the capital cost of mining equipment, the cost of factor inputs (labor and fuel), and other mine supply costs.


Coal imports and exports are modeled as part of the CMM’s linear program that provides an annual projection of U.S. steam and metallurgical coal exports in the context of world coal trade. The CMM projects steam and metallurgical coal trade flows from 17 coal-exporting regions of the world to 20 import regions for two coal types (steam and metallurgical), including 5 U.S. export regions and 4 U.S. import regions. The linear program determines the pattern of world coal trade flows that minimizes the production and transportation costs of meeting U.S.-import demand and a predetermined set of regional coal import demands, subject to constraints on export capacity and trade flows.

Demand for coal to produce electricity dropped by 3.3% in 2019 reflecting weak electricity demand growth, stronger contributions from renewables and lower natural gas prices. This pushed total coal demand down 1.8% to 7 627 million tonnes (Mt). Coal demand in non-power sectors rose slightly.

Looking ahead to 2025, coal demand is expected to flatten even though three factors exert downward pressure on demand.

First, coal-fired power plant retirements in developed countries accelerate. This reflects lower electricity demand related to the pandemic and economic slowdown and lower natural gas prices.

Second, low-carbon generation technologies, e.g. wind and solar, gain momentum as costs continue to fall and policy support is sustained. This dims the prospects for coal-fired generation.

Third, the perception that coal is the cheapest source of dispatchable electricity has been shaken by low gas prices. This mindset change is evident even in some Asian countries where coal’s primary position in power generation has been undisputed. For example, in 2020, Vietnam, Bangladesh, the Philippines and Egypt downgraded their plans for coal reflecting lower cost renewables and cheaper natural gas, amid increasing concerns about CO2 emissions and building anti-coal pressure on many fronts. Korea and Japan continue to take steps to reduce reliance on coal.

My conclusions and considerations

Commodity Equities

  • We come back always to inflation, and how inflation impact on markets, and more importantly how long could stay around us.
  • Meanwhile is important to know what you can do for trying to make you find ready, regardless if it stay for a short time ahead or years.
  • During the high inflation era they were only three categories of commodity equities — oil, mines, and coal. All of them did well, with coal the clear winner.
  • Committee that are traditionally correlated with inflation: mining, banking and oil.

Here you can find other articles about it:

  1. Global Energy Transition
  2. Natural Gas
  3. Copper Demand

Coal Production

  • Sincerely my focus is went away from coal, and I prefer to focus on ESG topics and how renewables could transform all this transition over the years.
  • EIA projects that trends in coal production in the United States could range from flat to continuing declines through 2040.
  • Second, low-carbon generation technologies, e.g. wind and solar, gain momentum as costs continue to fall and policy support is sustained.

Here you can find some articles:

  1. ESG Goal
  2. ESG as long-term overview
  3. ESG opportunities

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics and in doing so he shares with you the most interesting charts and comments.


This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.