The Qatar Economic Forum took place this past week and business and government leaders convened to share their perspectives on the challenges and opportunities in the global economy moving forward.

One of the interviews around the forum that I was able to catch was an interview with the often media shy CEO of Glencore Plc, Ivan Glasenberg. If you are not familiar with Glencore, it is one of the largest commodities trading firms in the world as well as an outright owner of global mines. The Swiss based Glencore is the market leader in a couple of key commodities, especially zinc where they are thought to control about 60% of the global zinc market, which is one of the commodities vital to green technology production. This gives Glencore and Glasenberg key insights into where commodities are headed and what to expect in terms of production, demand and prices.

Commodities and Politics

Glasenberg gave a brief overview of the forces behind the last boom and bust which started around 2002. That commodity supercycle was all about China and the urbanization of rural people into Chinese cities for work. Estimates at that time calculated that around 250 million Chinese people moved from rural areas into cities for work and vast amounts of housing and infrastructure were needed to accommodate these new workers. A broad basket of commodity crucial to construction such as copper saw their prices rise and commodity producing countries as well as mining companies saw their share prices boom.

This demand kept up even through the financial crisis when in 2009, China announced a new round of infrastructure spending which pushed mining companies to take on even more projects. Eventually this led to overproduction that saw commodity prices crash in 2015. Only now are we starting to see prices resurge, the price of copper illustrates these developments over the last 20 years pretty well.

The above is the reaction of copper to higher demand from China yet we have a unique situation developing for commodities right now that could potentially create a long term bull market for certain hard commodities which Glasenberg astutly pointed out.

That is because infrastructure investment is getting priority in both the US as well as China at the same time. The US has underinvested in infra for some time and with the bills being currently discussed by the Biden Administration, it may finally get the boost that it needs to update much of the aging and creaky infrastructure in the US. Just like in the case of China this will require vast amounts of commodities like copper, and iron ore (for steel).

Tied in with just infrastructure though is the pivot to green energy and that is where things may get interesting.

Green Gold

Glencore has been positioning itself for what it sees as a pivot brought on by the Paris climate accords as well as governments towards the use of less dirty fuel such as oil, gas and coal and more towards green energy sources such as solar and wind. Yet there will still be a place for this dirty energy for some time to come. Thermal coal prices in Australia and South Africa are at all time highs of $120 per ton given the closure of coal mines and the restriction of supply. Yet 38% of all the electricity generated in the world is still done by burning coal. Emerging countries will likely be turning to this cheap source of electricity to power their growing economies as they expand, despite ruling coal out, it will still have a place in the global economy for some time.

Yet putting the current demand for coal and other dirty fuels aside, the need to grow green sources of power over the next 30 years will need to expand by massive amounts. Glasenberg pointed out that the world currently produces 3,000 GW of renewable power that would need to increase to 26,500 GW by 2050 or 8.8x what is currently produced on a global scale. This will mean that we need to produce 20x the current global output of solar and 11x the current wind energy we produce. Couple that with a goal to be producing 55 million electric vehicles by 2030 from the current 3 million being produced now and you start to get a sense that the challenges that the the globe will be facing to try and achieve the green targets.

Let’s just assume we can meet these targets for the time being. If we do, the next question becomes do we have the materials to produce the electric vehicles, solar panels and wind turbines that are needed to produce the goods needed? Glasenberg thinks this will be a challenge given the current production levels and projects on the horizon. He gave some concrete examples as to why, which were quite eye opening.

• The world currently produces about 30 million tons of copper annually. Based on Glencore’s projections, 60 million tons would need to be produced annually by 2050 to meet the targets. This would mean copper production would need to increase by about 1 million tons annually until 2050. The industry has only managed to achieve production increases of about 500 thousand annually most recently which won’t be enough to meet that demand.
• Nickle is another example. Globally, 2.5 million tons of nickle are produced which would need to grow to 9.2 million tons annually under this scenario. This would mean that production would need to increase at about 250,000 tons annually to meet this need and we are currently only adding about 100,000 tons annually to production.
• The numbers were not given for cobalt but Glasenberg says it’s a similar story.

Add to all of this that the less tapped deposits of the commodities which are key to electric car and solar production are in places that lack their own infrastructure or are in politically difficult situations. Think the DRC and Guinea in Africa. Glencore has quietly managed mines and operations in these countries for some time so it’s not a mystery why Glasenberg has avoided the spotlight. China however, seems to have no qualms about dealing with shifty or corrupt regimes as long as it can get what it wants.

In this sense, China has been working to secure its own interest for commodities in places like those in Africa as well as places like Indonesia, where China has been helping to raise the local production of nickle.

Was 2015 a Breather?

All of this points to an interesting question, given the surge in global demand for commodities that we are expecting to see assuming all these goals can be achieved, was 2015 just a breather in a greater commodity supercycle that we have been in all along? Copper, cobalt, nickel and zinc in particular will be key commodities in the products needed for a greener and more environmentally sustainable world. Given the aspirations and production gaps, there is good reason to believe that prices for these commodities will continue to surge.

The knock on effect of this will not only be higher commodity prices but stronger currencies for those countries which produce these commodities. Australia, Russia, Indonesia, Canada, Brazil, Chile, Peru, South Africa and Mexico could all benefit from this surge in prices and could potentially see their currencies appreciate assuming other factors don’t dominate.

As Glasenberg pointed out as well, even dirty commodities will continue to have a place out of sheer momentum and needs of people globally. 600 million people globally still don’t have electricity, 2.6 billion people still don’t have access to clean cooking. Coal and oil will still have a place just to sustain and accommodate people like this, it’s hard to buy the argument that oil has peaked given the vast needs ahead of us.

From an investing point of view, given the needs and the developments, there is a strong argument to have some mining and green tech in your portfolio. BHP, Freeport McMoRan, Southern Copper and FCX are strong commodity plays for copper, which is a vital resource across the board and doesn’t look set to see demand fall off any time soon. Vale and Rio Tinto are also players which can ride the wave of iron ore as well as nickel price increases as infrastructure projects move into fruition.

A key factor going forward however will be to see if governments remain committed and accountable to both their infrastructure and green goals. High prices of inputs may start to disuade investment and provide fuel for excuses to abandon the targets of the Paris Climate Accords. Yet the momentum towards green energy and more environmentally friendly policies seems to have continued and sustained momentum. In the mean time, the commodity wave may provide investors a way to profit as well as fund the greening global economy.

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