Strategic Insights | Commodities

Strategic Insights | Commodities

Published January 11, 2021

There is solid ground beneath the ether

So much of our time nowadays is spent scrutinising pixels on screens as we Zoom, WhatsApp and Skype our way through modern life that it’s easy to forget that we still actually make things. Indeed, we are sometimes so focused on gigabytes, bandwidth and data speeds that we overlook the fact that everything underpinning those utterly intangible concepts is made up of tangible constructs: server farms made up of computers, the motherboards of which are crammed full of copper wiring and teeming with lithium, aluminium and cadmium. Those computers are on racks made from steel beams smelted from iron ore. And those steel beams form buildings with aluminium and zinc roofs, which have roads leading up to them topped with tarmac or asphalt, both derived from petroleum. We still make things alright.
Commodities fall into several broad categories: base metals, precious metals and energy. Over the next few weeks, we’re going to be taking a closer look at how investing in commodities can provide investors with diversification, a good hedge against inflation and even excess positive returns.

A sound wealth generation proposition?

For investing in base metals to constitute a sound wealth generation proposition, the world needs to be a happy place. The global economy needs to be motoring along smoothly and the world’s order books need to be full of infrastructure projects. Currently, we are battling lockdowns and school closures, and doing everything we can to stave off the threat of a double-dip recession. People are downing tools the world over and hunkering down as turnover, profits and dividends dwindle. But if there is one thing of which we can be certain, it is that this is time-limited: we will recover. The pandemic will have a cost – in the form of economic and personal suffering – but the global economy will most definitely pick up soon. And as this period of stagflation gives way to a more inflationary economy and governments start spending their way out of debt – building roads, repairing bridges and creating jobs in the process – commodities will be a very good offsetter against equities and bonds… a sound alternative investment as we put the 2008 financial crisis, Brexit and the pandemic behind us.

Building back better

A number of emerging markets in Asia are significantly ahead of the curve, having bought up huge quantities of base metals. So prices are already on the move as some countries start to build back better. China, for example, remains the world’s biggest buyer of industrial commodities, and recent indicators of construction activity suggest buoyant demand. Iron ore alone saw a 73% increase in value over the course of 2020, while copper was up by nearly 25%.

Stuff is still made of… stuff

The analysis that we have conducted strongly suggests that commodities will have a major role to play as the post-Covid global economy starts to reflate. And the best thing about base metal booms is that they tend to last for some time – at least six months. Once we start having a little more to spend, you can bet we will start buying stuff again – everything from bicycles and electrical equipment to soaps and paints. And as the energy transition picks up pace, copper, lithium and cobalt will become increasingly valuable for use in electric vehicles, energy storage solutions and charging infrastructure. All of a sudden, we’ll remember just how important building materials and base metals are.

Accessing commodities

There are numerous ETFs out there for accessing commodities. But the due diligence that we are currently conducting is focused on investment trusts that look right across the globe to build diversified portfolios of mining stocks that are exposed to a range of compelling long-term themes, such as decarbonisation, digitalisation and the development of renewable energy sources.
There are, needless to say, caveats. The commodities markets are greatly affected by exchange rates, and emerging market investments are usually associated with higher investment risk than developed market investments, meaning that their value may be unpredictable and subject to greater variation. And recent years have shown that mining shares typically experience above-average volatility compared to other investments.
Nevertheless, commodity demand should continue to be buoyed by increased global infrastructure spend as governments seek to kickstart their economies and spend their way out of the Covid crisis.

The future

One of the many realities that characterise the 21st century is the depletion of the planet’s natural resources. As we extract increasingly large quantities of stuff from the ground, it inevitably becomes scarcer, and mining it becomes more expensive.
Step forward the people who are crazy enough to think that they can change the world. And not necessarily just this world.
As a world-class wealth management company with a highly experienced investment research arm, it would be remiss of us not to consider what the future might hold. Terrestrial mining may currently be the only means of raw mineral acquisition, but as space exploration becomes more developed and as resources on Earth become increasingly scarce compared to demand and the full potentials of asteroid mining, this situation could well change. There are numerous challenges to overcome, but if there is one thing that the history of human endeavour has shown us, it is that the limitations that govern us today are by no means an indicator of what we might accomplish tomorrow.
Over the next two years, Elon Musk’s Falcon Heavy launch vehicle will be visiting the Psyche asteroid with a view to studying its iron-nickel composition… and perhaps eventually mining it.
For a certain kind of investor, asteroid mining could be a path to untold riches. And a number environmental impact assessments suggest that extracting resources such as platinum from asteroids might actually be cleaner than doing so on Earth, confirming asteroid mining’s compatibility with our green agenda. That, together with NASA’s recent discovery of significant quantities of water on the moon, is providing numerous opportunities to fund companies that have set their sights on various nearby rocks. It is only a matter of time before we start looking to the stars in search of what we need to charge our electric cars, kit out our computers and build our bridges.