Natural Resources Investing: Resourcefulness Needed
Executive Summary:
The Natural Resources Landscape Is Changing
- Interest in energy transition materials has changed natural resources investing in the private markets, but niche commodities warrant caution.
- The supply/demand dynamic of natural resources that are produced as by- or co-products of more common commodities should be evaluated as investors diligence opportunities.
- Resource nationalism may be the saving grace for natural resources.
Natural Resources Commodities Vary Based on Supply and Demand
You have all heard an energy transition will require multiples of our current supply of mined materials. What is less obvious is that so many of the markets for these metals are tiny, which limits the scope for investment. Even though lithium is less than 5% the size of the copper market, the prices are about the same. And, prior to government mandates and subsidies, many of these materials were orphaned as elemental curiosities, rather than the purported backbone of our energy industries. So, what is driving the change now?
The Rise and Fall of Energy Transition Metals
There has been a global slowdown in mining capex but, in many energy transition metals, supply has outpaced current demand, leading prices to fall recently. According to Goldman Sachs, Chinese lithium production is up nearly 20x from 2020 to 2023. No matter how fast demand grows, it is difficult to absorb that much supply. As a result, commodity cycles are particularly pronounced in these low volume materials.
Other commodities with hot markets, like cobalt, are by- or co-products in the search for other materials. For example, cobalt is a byproduct of copper. This dynamic muddies the supply/demand relationship and causes volatile prices. Rare earth metals are anything but rare, geologically speaking. Some are as or more common than copper and have tiny markets with limited use cases. This creates a weak case for long-term private investment in substantially increasing their supply.
The Return of Natural Resources
The saving grace of these more esoteric commodities is resource nationalism. Covid laid bare the vulnerabilities in supply chains. Developed nations want to ensure supply and undeveloped nations want to move up the value chain. Each commodity demands specific consideration under this lens, as some have concentrated on processing and others have shifted to primary production.
Mining
Processing
This is why we continue to favor investments in the larger, more liquid mined commodities like copper, which benefits from an energy transition story and a much less volatile supply demand picture. Private funds are able to step in where projects demand structured solutions or are, for some reason or another, overlooked by the public markets. Mining investors are a mercurial lot, so good projects often undergo an orphan period where private investors have a substantial edge. While the outlook for natural resources is limited, its saving grace may be resource nationalism. Most importantly, a rising tide lifts all boats, so ongoing commodity price increases may substantially boost new and existing investments.
We provide further insights and observations across real estate in our 2024 Real Assets Market Overview. Please complete the form below to receive an emailed copy of the report.
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As of June 5, 2024