Commodities: The Top Asset Class of 2018 So Far
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Commodities: The Top Asset Class of 2018 So Far

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Commodities: The Top Asset Class of 2018 So Far

Commodities: The Top Asset Class of 2018 So Far

Is the commodity supercycle coming back from the dead?

For now, such a claim could perhaps be considered both bold and premature – but there does seem to be some compelling evidence that is mounting to back it up.

The Asset Quilt

According to the most recent “Asset Quilt of Total Returns” put together by Bank of America Merrill Lynch, commodities are the top returning asset class of 2018 so far. The chart, which shows the total returns of asset classes over the years, has commodities at an annualized return of 22.7% year-to-date.

Right behind it is gold, which sits at 11.6% on an annualized basis:

RankAsset ClassTotal Returns (2018*)
#1Commodities22.7%
#2Gold11.6%
#3Equities (Emerging Markets)6.5%
#4Equities (S&P 500)6.3%
#5Equities (Europe, Australasia, Far East)5.9%
#6Global Bonds (High Yield)3.4%
#7Cash1.4%
#8Global Bonds (Investment Grade)-2.0%
#9U.S. Treasuries-5.7%
#10Real Estate-14.6%

*These returns are annualized in order to compare them with past years

Interestingly, commodities haven’t been on top of BAML’s chart since the years 2000 and 2002, which were at the beginning of the last commodity supercycle.

A Deeper Dive

Here is how commodities have fared from 2000 to 2018, based on annual returns. If the commodity sector keeps the pace for the rest of 2018, this will be the best year for the asset class since 2003.

Commodity performance 2000-2018

For various reasons, commodities have bounced back in the last three years.

The return of oil prices have helped to resurrect the sector. Ironically, the anticipated metal demand from renewable energy – which will be used to wean society off of fossil fuel consumption – is also a massive driver behind commodities right now.

Not only are base metals like copper, aluminum, and nickel essential for the “electrification of everything”, but lesser-known materials like lithium, cobalt, rare earths, vanadium, uranium, and graphite all play essential roles as well. They do everything from enabling lithium-ion batteries and vanadium flow batteries, to making possible the permanent magnets that generate electricity from wind turbines.

The environment for investing in commodities is the best since 2004-2008.

– Goldman Sachs, February 2018

Not surprisingly, here are how metal and energy commodities have performed since January 1, 2016:

CommodityPrice Change (Since Jan 1, 2016)
Vanadium459%
Cobalt277%
Palladium88%
Oil (WTI)86%
Nickel72%
Aluminum70%
Copper46%
Gold26%
Silver24%
Natural Gas21%
Platinum7%
Coal-8%
Uranium-40%

Some minor metals, like vanadium, have increased by over 400% in price in the last two years. That begs the question: how much room could there possibly be for price appreciation left?

Supercycle Potential

As Frank Holmes of U.S. Global Investors described in a recent post, the last boom was so prolific that investing in an index tracking commodities (such as the S&P GSCI) in 2000 would have resulted in the equivalent of 10% annual returns for ten years.

He also shared this chart, which shows the ratio in value between commodities and the S&P 500:

Commodities vs. Equities

In other words, commodities seem to be more undervalued than any time in the past 20 years, at least relative to equity indices such as the S&P 500.

Even if the above ratio comes back up to the median of 3.5, it’s clear that there could still be vast amounts of opportunity available in the sector for investors.

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Energy

Visualizing the New Era of Energy

This infographic explores the exponential growth of the technologies that are shaping the new era of energy.

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The following content is sponsored by Surge Battery Metals
new era of energy

The New Era of Energy

Energy is the pulse of our daily lives, powering everything from our homes to our cars and electronic gadgets. 

Over the last two decades, there’s been an ongoing shift in how we produce and consume energy, largely due to rising climate awareness among both governments and consumers.

The above infographic from Surge Battery Metals highlights the increasing uptake of clean energy technologies and explains the need for the raw materials that power them. This is part two of three infographics in the Energy Independence Series.

The Growth of Clean Energy

Government policies, falling production costs, and climate consciousness have all contributed to the exponential adoption of green energy technologies. 

For example, only a few countries were actively encouraging EV adoption a decade ago, but today, millions of consumers can take advantage of EV tax concessions and purchase subsidies with governments committed to phasing out internal combustion engines. Partly as a result, electric vehicles (EVs) are well on their way to mainstream adoption. 

Here’s a look at how the number of electric cars on the road has grown since 2011, including both battery EVs and plug-in hybrids:

Country/Region2011 Electric Car Stock2021 Electric Car Stock
China10,0007,800,000
Europe20,0005,500,000
U.S.20,0002,000,000
Other20,0001,100,000
Total70,00016,400,000

In 2021, the global electric car stock stood at around 16.4 million cars, up by around 60% from 2020. EV sales also more than doubled to reach 6.8 million units.

Alongside electric cars, renewable energy technologies are also on the road to dominating the global energy mix. In 2021, renewables accounted for 16% of global energy consumption—up from just 8% in 2000. This growth is largely down to solar and wind energy, which made up the majority of new renewable capacity additions:

YearNet Renewable Capacity Additions
(gigawatts)
Solar PV
% Share
Wind
% Share
2011109.428%36%
2012116.425%40%
2013122.930%27%
2014135.130%37%
2015159.731%42%
2016171.344%30%
2017174.855%27%
2018179.354%28%
2019193.856%31%
2020280.248%40%
2021288.954%31%

Every year since 2018, solar and wind have accounted for more than 80% of new renewable capacity additions, contributing to the record-breaking growth of clean energy. 

Despite this growth, the IEA projects that both EVs and renewables need to expand their reach significantly if the world is to achieve net-zero emissions by 2050. Electric car sales need to hit 56 million units by 2030—more than eight times the 6.6 million cars sold in 2021. Similarly, solar PV and wind additions need to quadruple by 2030 from 2021 levels. 

This new era of clean energy will require an increase in the supply of EVs, solar panels, wind turbines, and batteries, which translates into more demand for the unnoticed raw materials behind these technologies.

The Metals Behind Clean Energy

From copper in cables to lithium in batteries, some metals are key to building and growing clean energy capacity. 

In fact, for every megawatt of capacity, solar photovoltaic farms use more than 2,800 kg of copper according to the IEA. Offshore wind farms, which are connected to land by massive undersea cables, use even more copper at 8,000 kg per megawatt. Similarly, electric cars use lithium-ion batteries, which are composed of a variety of minerals, including graphite, copper, nickel, and lithium.

While the demand for these clean energy minerals is skyrocketing, their supply remains a concern, with China dominating the supply chains. In the new era of energy, domestic supplies of these materials will be key to ensuring energy independence and lower reliance on foreign imports.

In the next part of the Energy Independence Series sponsored by Surge Battery Metals, we will explore how the U.S. can build an Energy-Independent Future by developing domestic raw material and battery supply chains.

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Visualizing U.S. Greenhouse Gas Emissions by Sector

The U.S. emits about 6 billion metric tons of greenhouse gases a year. Here’s how these emissions rank by sector.

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The following content is sponsored by National Public Utilities Council.


Visualizing U.S. Emissions by Sector

Decarbonization efforts in the U.S. are ramping up, and in 2020, greenhouse gas (GHG) emissions were lower than at any point during the previous 30 years.

However there’s still work to be done before various organizations, states, and nationwide targets are met. And when looking at GHG emissions by sector, the data suggests that some groups have more work cut out for them than others.

This graphic from the National Public Utilities Council provides the key data and trends on the total emissions by U.S. sector since 1990.

The Highest Emitting Sectors

Collectively, the U.S. emitted 5,981 million metric tons (MMT) of CO2-equivalent (CO2e) emissions in 2020, which rose 6.1% in 2021.

Here’s how the various sectors in the U.S. compare.

Sector2020 GHG emissions, MMT CO2ePercentage of Total
Transportation1,627.627%
Electricity generation1,482.625%
Industry1,426.224%
Agriculture635.111%
Commercial425.37%
Residential362.06%
U.S. territories23.0<1%

The transportation sector ranks highest by emissions and has been notably impacted by the COVID-19 pandemic, which is still affecting travel and supply chains. This has led to whipsawing figures during the last two years.

For instance, in 2020, the transportation sector’s emissions fell 15%, the steepest fall of any sector. But the largest increase in emissions in 2021 also came from transportation, which is largely credited to the economic and tourism recovery last year.

Following transportation, electricity generation accounted for a quarter of U.S. GHG emissions in 2020, with fossil fuel combustion making up nearly 99% of the sector’s emissions. The other 1% includes waste incineration and other power generation technologies like renewables and nuclear power, which produce emissions during the initial stages of raw material extraction and construction.

Decarbonizing the Power Sector

The Biden Administration has set a goal to make the U.S. power grid run on 100% clean energy by 2035—a key factor in achieving the country’s goal of net zero emissions by 2050.

Industrial factories, commercial buildings, and homes all consume electricity to power their machinery and appliances. Therefore, the power sector can help reduce their carbon footprint by supplying more clean electricity, although this largely depends on the availability of infrastructure for transmission.

Here’s how sectors would look if their respective electricity end-use is taken into account

SectorEmissions by Sector % of Total
Agriculture11%
Transportation27%
Industry30%
Residential & Commercial30%

Percentages may not add up to 100% due to independent rounding

With these adjustments, the industrial, commercial, and residential sectors experience a notable jump, and lead ahead of other categories

Today, the bulk of electricity generation, 60%, comes from natural gas and coal-fired power plants, with nuclear, renewables, and other sources making up 40% of the total.

Energy Source2020 Electric generation, billion kWhShare of total
Natural Gas1,57538.3%
Coal89921.8%
Nuclear77818.9%
Wind3809.2%
Hydropower2606.3%

However, progress and notable strides have been made towards sustainable energy. In 2021, renewables accounted for one-fifth of U.S. electricity generation, roughly doubling their share since 2010.

Coal’s share as a source of electric power has dropped dramatically in recent years. And partially as a result, electricity generation has seen its portion of emissions successfully decrease by 21% , with overall emissions falling from 1,880 million metric tons of CO2 to 1,482 million metric tons.

How Utilities Can Lead the Way

Should these trends persist, the electricity generation sector has a chance to play a pivotal role in the broader decarbonization initiative. And with the bulk of electricity generation in the U.S. coming from investor-owned utilities (IOUs), this is a unique opportunity for IOUs to lead the transition toward cleaner energy.

The National Public Utilities Council is the go-to resource to learn how utilities can lead in the path towards decarbonization.

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