The fund industry, which has been underweight metals for over a decade, is now eyeing up the opportunities offered by the energy transition. — 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 (EV) 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 tonnes 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.
Fund allocations to the commodity sector have declined from around 10% to 2% over the last decade, according to Aline Carnizelo, managing partner at Frontier Commodities, who spoke on the investment panel at the LME’s Monday seminar.
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 carbon-intensive economy today.
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 rushed into copper amid much hype about limited supply at a time of accelerating demand from new energy applications such as solar, wind and EVs.
Investors’ fear of missing out drove LME copper to a new nominal high of US$11,104.50 per tonne in May.
Funds sold out their long positions just as quickly as they had bought them and copper fell below the US$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 prophecy.
But that was how things looked in the 2000s as well. The reality proved very different. — Reuters
Andy Home is a columnist for Reuters. The views expressed here are the writer’s own.
