New index tracks performance of up and comers, including carbon credits
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By David Rosenberg and Marius Jongstra
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The surge in commodity prices has been impressive since mid-2020, predictably resulting in calls that a new “supercycle” is underway. We have questioned that narrative, given the apparent supply-demand imbalances plaguing the globe and boosting prices in the process. But one theme we do agree with is the long-term secular tailwinds behind a number of commodities required in the transition to a green economy in order to address climate change.
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To better visualize commodity performance and gauge investor sentiment to the “greening of the world” thematic, we created an index tracking those we believe will be relied upon in this transition. This is not an exhaustive list, however, as reliable pricing and data sources are hard to come by for some commodities. That said, we feel it best captures the most relevant ones for a low carbon/greener world. The components are mentioned below along with a brief summary of their outlook.
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On the metals/mining front, the World Bank estimates more than three billion tons of metals and minerals will be needed for renewable energy infrastructure by 2050 in order to achieve the goals from the Paris Agreement. We include copper, graphite, nickel, lithium and cobalt, since all are essential in the electrification process, the transition from internal combustion engines to electric vehicles, and the building of energy storage technologies — a requirement in the widespread adoption of renewable sources as energy demand and energy supply do not match as easily compared to fossil fuel sources.
A recent International Monetary Fund report sums up the demand picture nicely. Consumption of lithium and cobalt are expected to rise by a factor of six in order to reach the net-zero-by-2050 scenario; copper demand will increase twofold; and nickel will rise by a factor of four (all are front-loaded with the majority happening between now and 2030 due to the large initial requirements). To a lesser degree, aluminum and silver will also have a role to play and have also been included in our composite.
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Until the supply and demand balance concerns of renewable energy sources can be resolved with reliable storage technology, the world will require the help of traditional power generation along the way. As we are seeing in real time, extended periods where renewable generation falls (due to drought, low wind speeds, etc.) mean fossil fuel sources must fill in the gap.
The reality is the world will need the help of “cleaner” natural gas and nuclear power (that is, uranium) for the foreseeable future. Indeed, the International Energy Agency stated in its road map to net zero by 2050 that nuclear energy will be a significant contributor and is an essential foundation for the transition, while a recent Columbia University study found that more domestic investment in natural gas could help the United States reach its net-zero goals more quickly.
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Last, but not least, many economists and experts tend to agree on the need to have some form of carbon-pricing scheme in order to meet climate goals. While not a physical commodity, carbon credits are certainly going to become a financial commodity and are included in our index (we used European Union prices).
Our resulting index shows there has been a tremendous run-up in prices for commodities involved in the transition to a green economy. Indeed, on a year-over-year basis, the acceleration has even surpassed the best 12-month period in the China-led commodity boom at the start of the century. To be sure, the short-term picture has been juiced by many of the pandemic-induced supply/demand imbalances (for example, aluminum, natural gas prices, etc.), likely exaggerating some of the moves in the underlying commodities in our index.
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A pullback may not be surprising (which our technical analyst Keith Edwards agrees with, especially when it comes to the metals space), but the medium- and long-term outlooks remain very favourable. For investors who want exposure to this growing thematic and have longer time frames, we expect these assets (and their related derivatives — that is, producers/miners) will flourish thanks to the secular tailwinds behind them.
Financial Post
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Marius Jongstra is an economist there. You can sign up for a free, one-month trial on Rosenberg’s website.
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David Rosenberg: These green economy commodities are beating the best runs of the China supercycle - Financial Post
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