Page 18 - DIY Investor Magazine | Issue 41

RIDING THE SUPERCYCLE
· August 2024 18
DIY Investor Magazine
WITH COMMODITIES POISED TO PLAY A KEY ROLE IN THE TRANSITION TO NET ZERO, BRWM DEMONSTRATES THE BENEFIT OF ACTIVE MANAGEMENT IN THIS SECTOR... BY JO GROVES
Rightly or wrongly, investors love a catchy buzzword
(or two) though admittedly some have more longevity than others. The Magnificent Seven polished off the FAANGs, the BRICS imploded when they admitted four new (vowel-starting) countries and let’s not dwell on
the GRANOLAS.
But it’s time for the acronyms to
‘ONE OF THE MOST step aside as there’s a new kid on
FAR-REACHING OF the block: the mega-trend. For the
THE CURRENT uninitiated, mega-trends have a
MEGA-TRENDS IS sustained (and often irreversible)
UNDOUBTEDLY THE T impact on a global scale and, as
RANSITION TO a result, are a hot topic among
CLEAN ENERGY’ investors seeking to leverage long-term, structural tailwinds to drive superior returns.
One of the most far-reaching of the current mega-trends is undoubtedly the transition to clean energy, which may be more akin to a revolution than an evolution. More than 200 countries attended the recent COP28 summit in Dubai with the ambitious target of phasing out the use of fossil fuels to achieve net-zero emissions by 2050.
With commodities set to play a central role in this decarbonisation process, soaring demand for critical minerals could fuel a supercycle into the next decade and beyond.
UP, UP, UP AND AWAY
To be fair, commodities haven’t always enjoyed universal popularity among investors, mainly due to their historic cyclicality but this might be about to change.
‘PRIMARY GROWTH DRIVERS ARE
The structural BATTERY STORAGE SYSTEMS AND
growth drivers ELECTRIC VEHICLES,
underpinning the IN ADDITION TO LOW-EMISSION
transition to green POWER GENERATION AND
energy are ELECTRICITY NETWORKS’
expected to support commodity prices throughout the cycle, rather than being subject to the ebbs and flows of the global economy.
Rattling through some of the headline numbers, the International Energy Agency (IEA) forecasts that demand for critical minerals will rise by more than 350% by 2030 to meet net-zero targets. The primary growth drivers are
battery storage systems and electric vehicles, in addition to low-emission power generation and electricity networks.
As we know, commodity prices are a function of supply and demand. On the supply side, there has been a decade or more of underinvestment, with the proportion of expansionary capex falling from 76% in 2012 to as little as 14% in 2019, according to RBC. There’s also a considerable time lag
to open new mines, with S&P Global reporting that the average mine takes 16 years from discovery to production, which will prevent a meaningful increase in supply over the next few years.
Factoring in the historic low in global inventories, supply constraints are therefore likely to support commodity prices over the longer-term. As shown in the chart below, the IEA is currently forecasting significant deficits tin the supply of critical minerals by 2030 under its net-zero emissions by 2050 scenario.