Energy transition story rekindles fund interest in metals: Andy Home
Repeats Monday's column with no changes to text
By Andy Home
LONDON, Oct 7 (Reuters) -The global energy transition was the dominant theme at this year's London Metal Exchange (LME) Week, the annual gathering of the world's metals producers, users and traders.
True, the metallic path to net zero is proving much bumpier than expected. Prices of battery metals such as lithium, cobalt and nickel have bombed over the last year. Too much supply has been brought on too quickly just as electric vehicle sales have hit a slow patch.
But the promise of a future boom is undiminished.
Many key energy transition metals are expected to face supply shortfalls this decade, some as soon as this year, according to BloombergNEF.
The research house predicts the world will need three billion metric tons of metals between 2024 and 2050 to meet global emissions targets. The figure doubles to six billion in a net zero scenario.
It's an enticing bull narrative, particularly when the current reality is one of weak metals demand as China's growth engine misfires and Europe's manufacturing sector contracts.
And it's one that is starting to attract much broader interest. The fund industry, which has been underweight metals for over a decade, is now eyeing up the opportunities offered by the energy transition.
A potential return of heavyweight investment flows to the sector could be as powerful a price driver as physical supply shortages.
LOST DECADE
Fund allocations to the commodity sector have declined from around 10% to 2% over the last decade, according to Aline Carnizelo, managing partner at fund manager Frontier Commodities, who spoke on the investment panel at the LME's Monday seminar.
The last great money surge came in the late 2000s, when investment funds, including giants such as The California Public Employees' Retirement System, bought into the idea that commodities could serve as an effective inflation hedge.
The strategic allure was overlaid by the bull narrative surrounding China's rise as an industrial powerhouse and the accompanying explosion in demand for industrial metals.
Things didn't work out as expected.
The global financial crisis caused metals demand and prices to slump. A massive Chinese stimulus program fed one last bull surge but this was followed by years of decline.
LME copper CMCU3 hit what was then an all-time high of $10,190 per ton in February 2011. The ensuing downtrend played out for five years before the price finally bottomed out at $4,318 per ton in January 2016.
Meanwhile, successive rounds of quantitative easing by central banks during this period crushed interest rates, undermining the case for commodities as an inflation offset.
METALS REVISITED
Inflation expectations have changed significantly in recent years and fund managers are once again looking at commodities as a way of generating an inflation-adjusted return.
The ideal ratio of hard assets in an investment portfolio should be between 4% and 9%, according to Jigna Gibb, head of commodity index products at Bloomberg, who also spoke on the LME Monday seminar panel.
That's at least double current allocations in a sector that is valued in the trillions of dollars.
Metals are the clear stand-out in the commodities sector thanks to their pivotal role in decarbonisation.
Funds have so far sought exposure to the energy transition theme by buying equities in the mining and industrial technology sectors rather than the raw inputs, according to Michael Stewart at Legal & General Investment Management, one of Europe's largest asset managers.
However, that's changing, he told the seminar.
"We're having conversations with our investors that we would not have had three or four years ago about considering energy transition commodities," he said.
The opportunity for more investment in metals is "tremendous" and spans a wide spectrum of players from sophisticated pension and insurance funds to mass market retail investors, he added.
And the energy metals story dovetails neatly with the renewed interest in inflation-proofing fund returns.
In a greener economy metals such as copper, aluminium and lithium have the potential to be just as powerful future drivers of inflation as oil and gas are in today's carbon-intensive economy.
DOUBLE-EDGED SWORD
A major reallocation of pension fund money to commodities in general and metals in particular might be welcome news for producers, traders and exchanges.
But the scale of potential global fund flows risks swamping what are small markets relative to equities or bonds.
Copper's turbo-charged rally earlier this year may be a harbinger of the volatility to come.
Funds stampeded into copper amid much hype about limited supply at a time of accelerating demand from new energy applications such as solar, wind and electric vehicles.
Investors' fear of missing out drove LME copper to a new nominal high of $11,104.50 per ton in May.
What followed was a buyers strike and aggressive de-stocking, including unprecedented exports of refined copper from China, normally the world's largest importer of the red metal.
Funds sold out their long positions just as quickly as they had bought them and copper fell below the $9,000 level in early August.
The bull narrative, however, hasn't lost any of its resonance. Copper was the top pick for attendees at last week's LME seminar for the third year running.
If enough investors agree, copper's potential for further price gains will become a self-fulfilling prophesy.
But that was how things looked in the 2000s as well. The reality proved very different.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Kirsten Donovan
Gerelateerde activa
Laatste nieuws
Disclaimer: De entiteiten van de XM Group bieden diensten en toegang tot ons online handelsplatform op basis van uitsluitend-uitvoering, waardoor een persoon de beschikbare content op of via de website kan bekijken en/of gebruiken, zonder dat dit is bedoeld voor wijziging of uitbreiding. Dergelijk(e) toegang en gebruik vallen onder: (i) de algemene voorwaarden; (ii) risicowaarschuwingen; en de (iii) volledige disclaimer. Dergelijke content wordt daarom alleen aangeboden als algemene informatie. Wees u er daarnaast vooral van bewust dat de inhoud op ons online handelsplatform geen verzoek of aanbieding omvat om transacties op de financiële markten uit te voeren. Het beleggen op welke financiële markt dan ook vormt een aanzienlijk risico voor uw vermogen.
Alle materialen die op ons online handelsplatform worden gepubliceerd zijn bedoeld voor educatieve/informatieve doeleinden en omvatten geen – en moeten niet worden beschouwd als het bevatten van – financieel, vermogensbelastings- of handelsadvies en aanbevelingen, of een overzicht van onze handelsprijzen, of een aanbod of aanvraag van een transactie in financiële instrumenten of ongevraagde financiële promoties voor u.
Alle content van derden, alsmede content die is voorbereid door XM, zoals opinies, nieuws, onderzoeken, analyses, prijzen en andere informatie of koppelingen naar externe websites op deze website worden aangeboden op een 'zoals-ze-zijn'-basis, als algemene marktcommentaren, en vormen geen beleggingsadvies. Voor zover dat content wordt beschouwd als beleggingsonderzoek, moet u zich ervan bewust zijn en accepteren dat de content niet bedoeld was en niet is voorbereid in overeenstemming met de wettelijke vereisten die zijn opgesteld om de onafhankelijkheid van beleggingsonderzoek te bevorderen en als zodanig onder de geldende wetgeving en richtlijnen moet worden beschouwd als marketingcommunicatie. Zorg ervoor dat u onze Mededeling over niet-onafhankelijk beleggingsonderzoek en risicowaarschuwing in verband met de voorgaande informatie doorneemt en begrijpt; die kunt u hier lezen.
