Investing in commodities is a niche area that most people in the financial world would be less familiar with, compared to the usual stocks, bonds and properties. That’s because the trading of commodities tends to be more complex, and is commonly associated with higher risk features such as high volatility and leverage.
In recent years, some investors have started taking more notice towards commodities around us. Commodities such as gold and silver tend are popular and have started gaining attention in mainstream media, as investors look to diversify their portfolios outside of the usual asset classes of stocks and bonds.
Another commodity that most people in our part of the world would be familiar with is rubber. From the tyres of cars and buses that bring you around, to the shoes that you run and walk in, rubber exists everywhere around us, not just in rubber plantations.
Historically, rubber has been an invaluable commodity for the world and particularly, an important one for Southeast Asia. Among the 11 countries within the Association of Natural Rubber Producing Countries, Singapore, Malaysia, Thailand, Indonesia, Vietnam, Cambodia and Philippines are all in it. In Singapore, we even study about how latex is collected from rubber trees during our geography classes in school.
How Do People Actually Invest Into Rubber?
Similar to many of the world’s most important commodities, you can “invest” into rubber through trading its price on commodity exchanges. These include exchanges such as the Singapore Commodity Exchange. For the most part however, you are betting on rubber prices, both current and future, through either Contract For Differences (CFDs) or Future Contracts.
While these are methods that can make you some money if you speculate correctly on the price movements, they are not really strategies to employ to invest into rubber in the long run.
Not only would you be subjected to the volatility of commodity prices, which could be a function of external, uncontrollable factors such as natural disaster, political issues, or demand and supply shock, you would also need to consider other transaction related fees such as interest rates payable for holding your stocks for an extended period of time, since leverage is used.
Investing Into The Right Rubber Companies
As retail investors, we can’t realistically invest long-term into rubber by buying it in bulk since we have nowhere to store, nor anyone that we know that would buy so much rubber from us. Neither should we just purely speculate on the price of rubber through CFDs or future contract if what we want is a long-term investment, rather than a short-term trade.
When it comes to commodity, one strategy that we suggest for investors to consider would be to do it through the listed companies that are operating in the industry.
For example, if you want to invest in palm oil, you can consider companies like Golden Agri and Wilmar. If it’s in Phosphorous, you can consider AsiaPhos, the only listed company in Singapore that specialises in mining Phosphorous.
When the commodities do well, these companies naturally do better. When the prices of these commodities fall, the companies have the management expertise to mitigate as much of the downside as they possibly can. You get the idea.
Halcyon Agri Corporation Limited – A Leader In The Rubber Supply Chain
For the rubber industry, Halcyon Agri Corporation Limited, one of the world’s largest natural rubber supply chain managers, would be a company to naturally consider if you want to invest in the future of rubber.
Halcyon Agri has 120,000 hectares of plantation land in Cameroon, Ivory Coast and Malaysia, and owns 33 natural rubber-processing factories across all the major natural rubber producing areas to process the raw rubber into finished rubber. It also distributes the finished rubber, comprising both its own processed rubber and those from third-party sources, to customers all around the world, including global tyre majors such as Goodyear, Michelin and Pirelli, PRC tyre majors, and non-tyre producing rubber customers such as manufacturers of latex-based products.
When you choose to invest in the stock of a company such as Halcyon Agri that produces, processes and distributes rubber – essentially the entire value chain of rubber – you are also investing in the management expertise that comes with running such a company; expertise that can have a far greater impact on your investment than just rubber prices itself.
What To Consider When Investing In Commodity Companies
Of course, you should also look at key metrics of the company including its price-to-book value, its balance sheet, profitability and the overall revenue it’s able to generate. A good company may not always need to show the best numbers in any specific category within its industry, but by and large, their numbers should be healthy enough to not send alarm bells running through your head. For example, Noble Group will be one such company that investors would have wanted to avoid over the past few years.
Last but not least, consider the capability and experience of the management team. Anyone that trades commodities would know that commodity prices are particularly susceptible to wild price swings depending on market conditions. A company with good management would be able to manage these risks, and help steer the company through both good and bad times, giving investors sustainable returns and growth over time.
FSM INVEST Expo 2020
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