Vale SA (ADR) (VALE), United States Oil Fund LP (ETF) (USO) – Commodities: Long/Short

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The suggested trade: Go long United States Natural Gas Fund, LP (NYSEMKT:UNG) ETF, which is designed to follow the movements of the price of natural gas as delivered at the Henry Hub, Louisiana. The ETF, which trades at a 5.5% discount to NAV and has a 0.60% expense ratio, is a good way to go long on short- and medium-term natural gas prices. I would buy it now having in mind a price target of $22.5.
Iron ore: Near-term downward revision

Reasons to go short: As expected by everyone in the market, a huge supply of iron ore is coming to the market in 2014. All miners – Rio Tinto plc (ADR) (NYSE:RIO), Fortescue Metals Group Limited (ASX:FMG), BHP Billiton Limited (ADR) (NYSE:BHP) and Vale SA (ADR) (NYSE:VALE) – are poised to deliver significant volume growth over the next year and a half. On top of this, China’s steel production is likely to slow in the second half of the year as credit, construction and infrastructure cycles all appear to be turning down.

Reasons to go long: Everyone is expecting supply to go up and demand to go down so a lot of those dynamics are already embedded into current prices. From the second quarter of next year, iron ore should head back towards $95 to $100 per tonne and stabilize around those levels.
The suggested trade: Buy Vale SA (ADR) (NYSE:VALE). The Brazilian mining giant is trading at a very cheap level (even when taking into account the current iron ore price dynamics). Moreover, the depreciation of the Brazilian currency (the real, which is down by 8% year-to-date) should defend the company’s profitability level since the company has most of its costs denominated in the local currency and its revenues entirely denominated in US dollars. Trading at 2013 6.2 times P/E, 4.8 times EV/EBITDA and paying a 3% cash dividend yield I think its moment to buy into this iron ore champion.
Bottom line
The commodity market is adjusting to a new world: higher interest rates, somewhat higher growth in developed markets (the US and Japan) and lower growth in emerging economies. That said, every commodity should be treated differently and, as I depicted above, the market always offers opportunities. You just need to keep your eyes wide open!


Federico Zaldua has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads.
Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Commodities: Long/Short originally appeared on Fool.com is written by Federico Zaldua.

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