Commodity Watch: The Cost of Concentration

<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.<br><a href="/about-us/investment-team/ahmad-al-sati" data-channel-guid="bf0f72af-7483-48d9-90ec-b2f04a7cd593"><u>Read more</u>&nbsp;</a></p></div></span></div><hr><p>The Helium Act of 1925 attempted to preserve the US monopoly over helium by banning its export. Blimp operators had to substitute helium with hydrogen to fly their airships. Hydrogen is highly flammable and ultimately led to the Hindenburg disaster. Commodity supply chain disruptions have second and third order knock on effects.</p><p>Helium is the second most abundant element in the universe but is rare on Earth. Today, it is primarily a byproduct of natural gas and 90% of it is produced in seven gas fields. Although the market is small, helium plays an essential role, with no substitutes, in manufacturing including for chip fabrication. Qatar provides around 35% of global supply and manufacturers have limited inventory. Shortages thus seem imminent. Cost is not the issue here. Helium is only 0.25% of a chip’s cost. But if you can’t etch a chip, you can’t deliver it. Remember that US companies mainly design chips, they don’t make them.</p><p>Helium is one example of the consequences from a continued shutdown of the Strait of Hormuz. Oil is the marquee player. But a plethora of oil byproducts, like helium, must be refined, delivered and consumed for the world to function. And many of those byproducts depend on flows through the Strait of Hormuz. We already see the effects. Diesel, used in trucking, agriculture and construction, is at its highest price since 2022. Higher urea prices will cause global food insecurity. Jet fuel and gasoline prices are up adding to inflationary pressures. Over 60% of Asia’s naphtha (an essential feedstock for plastics and refining other fuels) is imported from the Gulf. Constricted feedstock will impact the petrochemical supply chain. Companies and consumers will feel it.</p><p>Over the last six years, we have had five trade disruptions that adversely impacted global trade contributing to inflation and market volatility. Existing supply chains didn’t help. Today’s supply chains were created during the globalization era and gravitated towards the lowest price jurisdiction. Resilience took a back seat. That resulted in uneven investments, increased concentration and fragility.</p><p>Going forward, resilience will be key. Changing trade flows, when possible (remember you can’t onshore a copper mine), will not be quick or easy. They may also mean more volatility that bleeds into currencies, inflation and GDP growth. For investors, tactical allocations may matter more (harder to set it and forget it). A longer-term strategy is also needed. Long term, the demand for the essential materials of the physical economy will continue. Understanding shifting trade flows and increased mercantilism allows lenders to finance the relentless demand for essential commodities better. It may mean more participants looking for more working capital to bear the costs of a changing economic regime. Those who provide requisite capital solutions at the appropriate risk premia may benefit most from the increasing volatility.</p><p><br></p>