The rally in commodity prices has only just started and has much further to go, according to Phillippe Gijsels, head strategist of BNP Paribas Fortis. This is due to a powerful combination of increasing demand and supply constraints due to years of underinvestment in the sector.
‘The demand side of the economy is recovering very strongly, by about 6% in the US. China is putting on the brakes a bit but continues to grow strongly. Because of the huge boom in electric cars, there is strong demand for copper, zinc and nickel, to name only a few commodities. You cannot transport electricity without copper, and in batteries you simply need these raw materials. Copper stocks are at an all-time low too.’
Underinvestment
This is because of chronic underinvestment in most industrial commodities. This has caused a scramble for secure supplies. ‘Think, for example, of Elon Musk saying he absolutely must have lithium. You have to have sufficient supply, and the location of those resources is important. Look at uranium, for example, where 50% of the supply comes from Kazakhstan. The US does not even have enough uranium to keep one nuclear power plant open for a year. Uranium is increasingly becoming a strategic resource.’
Sustainability
A major stumbling block to investing in commodities is the ESG aspect, which is of course becoming increasingly important in institutional portfolios. ‘But these raw materials are now a once-in-a-lifetime necessity for electric cars, you can’t ignore it,’ is Gijsels’ rebuttal. ‘I recently attended the online mining conference in Vancouver. I have never heard so much talk about green energy and sustainability.’
Gijsels looks at the CRB index (broad commodity index) and sees that the CRB doubled between 2001 and 2008. During that period, when the index rose from 150 to 450 points, China became a member of the World Trade Organisation and started to catch up on a large scale. At that time, the country had huge demand for raw materials, but there was plenty of supply too.’
The last time there was both a high demand and a shortage of supply was in 1973-1974, says Gijsels. Then the CRB increased tenfold. ‘We may well be in a similar period again. At least, I think so, which is why I say we are in the first inning.’
Investment opportunities
Gijsels advises his clients not to invest directly in commodities: ‘You often have a compliance problem and, moreover, many commodities are quoted heavily in contango, so you have to keep rolling over the contracts. That weighs heavily on returns.’
Many institutional portfolios are heavily underweight in commodity companies, also because they are predominantly value companies, of course, while in the previous period it was only growth that ran the show.’
Gijsels says he is particularly bullish on nickel, cobalt and copper. ‘I think mining companies will go up a lot. Not much money has yet flowed into the mining sector and you will also see a wave of consolidation in the sector. Uranium went x20 during the last bull market, it is quite possible to do that again now.’
Gijsels advises to go for ‘a diversified investment in a specialised fund or tracker that also pays sufficient attention to sustainability characteristics. All the big houses offer these funds or trackers.’