Consumption vs commodities – where is your bias?

“People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons,” writes Morgan Housel in The Psychology of Money.

He extends the argument to imply that people brought up in poverty think about risk and rewards differently compared to wealthy bankers. Or, someone who has lived through the Great Depression will have a different set of expectations versus someone who sold a tech company in the nineties. And the list goes on.

Our experiences probably make up 0.00000001% of what has happened in the world, but they account for over 80% of how we think the world works. Often, our experiences get so ingrained in our thought process that we feel more comfortable challenging the data rather than revisiting our thought process.


Let us look at the previous two decades of the Sensex in two broad cycles. One during 2001 to 2007 when the metals index was up over 22 times, and one during 2013 to 2020 when the valuation multiples of FMCG businesses expanded materially.

Even if we are aware of this beforehand, how our personal portfolio reacted in each of these cycles would likely determine how we saw the investment world developing.

Let us consider this hypothesis: Consumer-facing businesses are a bad investment for an extended period because their earnings (E) could be under pressure on account of rising input cost inflation, and their valuation multiple (PE) could compress due to rising interest rates.

If you dismiss that hypothesis out of hand (what consumer businesses have built is permanent, it is only a matter of time before they bounce right back, right?), there are high chances that these opinions were heavily coloured by the 2013-2020 cycle.

Let us flip the argument. Yes, we all know that commodity prices are currently elevated. But most of us think along the lines: “Yeah, they are high… but that is because of the war, or this, or that or the other. It will soon pass, it is transitory, you know.”

If I presented an argument that higher commodity prices are likely to stay for an extended period (and they are not just transitory), what would you say?

In September 2021, I wrote this about the aluminium prices: “Last year, China accounted for over 56% of global aluminium production with a carbon footprint that is much larger than the rest of the world (given huge transportation costs for bauxite and coal, plus largely coal-fired power plants). As the Chinese government started clamping down on aluminium production to curtail emissions, aluminium prices hit a decadal high this week."

"Discussions, even now, revolve around how sustainable these prices are and a large section of investors choose to ignore this sector. Since 2000, however, whereas absolute aluminium prices are up 65%, adjusted for global inflation, they are down 25%. The three listed aluminium companies in India generated a single-digit ROCE last year. Two of them are integrated with captive bauxite, and the third one has the lowest conversion cost.”

If you haven’t experienced the 2001 to 2007 cycle personally, accepting the above could transpire is very difficult.

This might further surprise you. This year, the incremental (not total) EBITDA that Vedanta will generate from the change in aluminium prices (assuming spot prices for full-year) will be higher than the total EBITDA of two of the largest consumer-facing businesses (Hindustan Unilever and Asian Paints).

Put differently, one aluminium company’s incremental earnings due to the higher price of just one commodity is higher than the total earnings of two of the largest consumer-facing businesses.

Now let us add a few more commodities — zinc, oil, steel — and you catch my drift. How big does it get? In FY2022, close to half of Nifty’s incremental profit will likely be driven by higher profits from commodity companies (Tata Steel, JSW Steel, Hindalco and ONGC).

And what is their cumulative weight in the index? Just above 4%. If Vedanta was a part of Nifty, it would have been among the top five contributors to incremental profits this year across all of the Nifty companies.

There is obviously a recency bias to this. Because consumer-facing businesses have done well in more recent times, we are more inclined to believe that that is how it will always be.

However, the other point holds equally true in my book. A larger proportion of mutual fund (or alternatives) assets under management (AUM) has been amassed during the latter decade (2010-20) compared with the earlier one (2001-10).

And a vast majority of investors contributing to that AUM may not have personally experienced and invested in the roaring commodity bull markets. While it may not be the same as living it (as my current column suggests), it is still my hope that reading about it (for those who didn’t experience it first hand) would at least allow a generation to not dismiss an alternative viewpoint outright.

(The author, Jigar Mistry is co-founder of Buoyant Capital. Views are his own.)