Commodity Watch: Straits, Squeezes and the Price of Stability

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>The Influence of Sea Power upon History, written in 1890, laid the intellectual foundations for the US naval and Pacific expansion (for example, building the Panama Canal). The author, Alfred Mahan, a lecturer at the US Naval War College, regularly corresponded with both Teddy and Franklin Roosevelt, until his death in 1914. Mahan acutely understood the impact of trade disruptions and chokepoints. &nbsp;In 1907, at a time of heightened globalization, Mahan observed that trade disruption impacts “the producer, the transporter, the handler, the broker, the merchant, [and] the banker”. He concluded “we shall by no means have exhausted the far-reaching influence of this intermeddling with transportation”.</p><p>We are increasingly impacted by interrupted trade. Four years ago, we experienced the economic impact of trade disruption in the Black Sea (war and sanctions), which accelerated inflationary pressures from COVID’s fiscal spending and supply shocks (how did the stock market do?). Today, we are witnessing trade halt at the Strait of Hormuz (a major chokepoint) with ripple effects not yet felt, even as tariff uncertainty looms in the background.</p><p>The Strait of Hormuz disruption is not only about oil and gas. Yes, restricted hydrocarbon supplies negatively impact economies and consumers globally, increasing the cost of industrial output, electricity and driving. Yet, the Gulf is also a hub for plastics, aluminium, urea and sulphur among other commodities. Each of these commodities has significant downstream effects. The Gulf region is a major exporter of urea (50%) and global fertilizer (30%). That means higher costs for farmers (fertilizer typically represents 25% of total costs). Sulphur from the Gulf is also key for nickel production from Indonesia, which imports 70% of its sulphur through the Strait. Miners also depend on the same sulphur to produce copper and lithium batteries, EVs and data centers just became more expensive. The US is not immune. The New Orleans price of March urea barges were up 17% last week. UBS estimates that headline CPI increases by 40 bps for every $10 increase in the price of oil (as the US imports 40% of its refinery needs).</p><p>For over a decade after the global financial crisis, US markets outpaced every other asset class as investors flocked into “disruptive” startups and levered up asset-light businesses (Amazon aggregators?). Throughout, those same investors ignored (or were blissfully unaware) that this high-wire act of startups and leverage was harnessed to a benign macro environment: zero interest rates, dollar dominance and low inflation. Trade flowed and inputs were cheap (especially after commodity overinvestment in the prior decade). In the 2020s, we have experienced multiple breakdowns in supply chains that have caused short-term pain. Underinvestment in commodities coupled with macro jolts are now having recurring and visibly negative impact on economies.&nbsp;</p><p>If prices go up, will interest rates follow? Last time AI saved the market. What will now? Again, diversification remains the only free lunch. Investing across regions, asset classes and strategies could inoculate portfolios against a changing investment landscape and the increasing chaos out there.</p><p><br></p>