Beyond China: What’s driving commodity super cycle 2.0

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Dwarfing the previous commodity supercycle, the decarbonisation thematic is driving long-term demand not only for iron ore but also copper, lithium, manganese, cobalt and other materials needed in batteries, solar-power, wind-power and carbon capture technologies.

Far from simply being a China story this time around, it’s now a global theme that is driven by demand and also regulations, as countries around the world implement clean-energy targets into 2050 and beyond, explains Janus Henderson global natural resources portfolio manager, Darko Kuzmanovic.

“What we’re seeing is a demand-driven, structurally-driven scenario,” he says.

“There will be economic upcycles and down cycles, but the trend will more likely be up.”

In the following video, Kuzmanovic explains the implications for investors and discusses one commodity with an exciting outlook.

What are the pillars that underpin Janus Henderson’s concept of a new “commodity supercycle”?

If you just compare what’s happening now to the last supercycle, previously it was a China-driven, commodity-driven, demand-driven, structural cycle that lasted, from an equity point of view, throughout the 2000s. It peaked in 2008, but it was running since the very late 1990s, and it became hugely important because China was so big and so influential in the global commodity markets. And through the 1990s, China shifted from being self-sufficient in most things, to becoming a significant importer. This was a major catalyst for various things including investment prices.

If we look at what's happening today, it’s a similar kind of thesis, but it's not just China. This is different because it’s not simply about industrialisation and urbanisation. This will continue because other countries are now going through those stages, but this has to be driven by a different thematic, and it's that decarbonisation thematic.

And what is that? Climate change and the dynamics related to that have all become increasingly important over the last 10 to 15 years. Of course, it's not all resolved, but there is a lot more debate and much broader awareness.

Now we're starting to see governments, regions and specific companies articulate their decarbonisation goals. What is decarbonisation? Basically, it's looking to reduce the world’s carbon footprint, whether at a company level, the country level, and the product level.

The implications of that are quite significant. It will be driven by technology, processes and materials because we will need materials to execute this broad strategy. What does that mean? Well, decarbonisation means reducing the footprint.

By reducing your footprint, a couple of things have to happen. One, the percentage of fossil fuel generation will fall. It won't go to zero, because it can't, that's why it's called “net carbon neutral”. There'll still be carbon emissions from fossil fuels, but it will be compensated by new things, clean technology, renewables and other offsets.

To achieve that, we need to go through the transition in mobility, and this will be electric vehicle (EV) generated. And we're just on the cusp of that.

This has been happening now for quite a few years, but it's all about scale. It’s growing at a fast rate, and all of a sudden it seems, that rate is now significant. This is just what happened to, for example, to broad commodities when Chinese growth was 10% per annum and GDP was growing from a very small base.

Now it’s reached such a base that this 10% figure is seriously impactful. We're kind of getting to that with EVs, we're seeing that with renewables – but it's a start, not the finish. When you look at the sort of 2050 target, it's a multi-decade story. And it needs investment, year-in and year- out.

EVs and renewable energy thematics all need materials. Whether that's battery raw materials for the lithium-ion battery and for other types of battery. There are other technologies, other chemistries, that will be applied over time. As other examples, wind power and solar power also need raw materials, such as copper, nickel, manganese and cobalt.

We're seeing a structural-driven, demand-driven scenario that will last for quite a few years. Obviously there will be risks to that. Nothing goes up in a straight line, and there will be economic uncertainty, but the trend will generally be up.

We've already starting to see evidence of that, and commodity prices are rising. Inflationary expectations are mounting, from a low base. Commodity prices are now getting to a point where there are levels to incentivise new development because we will need new development.

And the other positive is that the continuing rise in commodity prices doesn’t necessarily mean equities can continue to rise. They will rise if they create value, and they'll create value through growth and by developing new projects. And the world will need new projects, because the industry, from the last peak cycle to about 2015, went through a bear market.

Companies have either stopped spending capital or have reduced their capital spend to generate free cash and to improve balance sheets. But if you don't invest at a certain level, your project pipeline depletes and you run the risk that production might meet demand – and we're already starting to see a decline in the inventories of various base metals.

Iron ore is a great example. While participating in a different way, it's supply-constrained, and demand is very good. And in these sort of markets, prices go up and remain stronger for longer, which is what has happened.

We think the supercycle is a multi-year demand structural driver. But the industry's not set for that. The industry has been spending less capital than it was, repairing balance sheets and all those things, but now it has to start reinvesting.

Up until very recently, copper at $3 a pound was just not sufficient enough to justify developing a new big porphyry copper mine, because you'll just get a very, very low return. And the market certainly wouldn't reward companies doing that. But at $3.80 or something like that, the incentive is right.

But we're now starting to see various investment banks and brokerage firms starting to talk about the commodity supercycle, and increasing medium- to long-term prices for some of their commodities. When brokerage firm Citi increased its copper price to more than $5 a pound for some time in 2022, which is quite a significant number, the industry starts to look seriously profitable.

No, in an equity cycle, things can go up and down, and we've seen that in the past, but we think the general direction is going to be positive.

What are some of the most important regulatory terms driving this, and what are the stand-out statistics?

I need to emphasise that it will be demand-driven, but it will be partly regulated demand. That is, the EU and the US, who are committing to these decarbonisation targets, will regulate what happens, to ensure it happens.

Even if there's an economic slump, there will be support for it. And we've already seen significant investment indications in the EU. I think they're talking about nearly Euro1 trillion stimulus to get the ball rolling. If you add private equity, it's kind of being considered that up to Euro10 trillion will be spent between now and then.

And in the US, the government is tipping maybe US$1 trillion into its first phase of renewable energy strategy. We've already seen governments provide fiscal stimulus, just to keep economic activity proceeding, obviously impacted by COVID, so that's underpinning this.

To put this into perspective, while there might only have been 5 million EVs manufactured this year, this number could push past 1 billion annually by 2050. Fossil fuels go from 80% to less than 50%.

And carbon capture, which is an interesting concept but only used at the margins, could be rolled out across thousands of facilities, that will be capturing carbon in various forms. These are the sort of things that we see taking off.

What's the impact on commodities?

Let’s say by 2040 40% of all new vehicles are EVs.

In base metals, such as copper, you have to produce an additional 3 million or 4 million tonnes of copper in a 25-, 26-million tonne market.

That doesn't sound big, but it's huge. To build that much new capacity, commodity prices need to be high enough to incentivise new exploration, new discovery and development.

And in nickel, which is used in lithium-ion batteries, that market could double in scale over that period. But again, it’s a significant undertaking.

They’re just some of the metrics that are out there, that people are now starting to think about and appreciate in understanding the potential impact of carbonisation. It's quite significant, quite challenging and quite exciting.

Learn more about the future of resources

Darko invests in high quality mining, energy and agriculture companies with flexibility to invest across the supply chain, taking advantage of price shifts between upstream and downstream sectors and across industries. To learn more, visit the Janus Henderson website


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