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:
|Rank||Asset Class||Total Returns (2018*)|
|#3||Equities (Emerging Markets)||6.5%|
|#4||Equities (S&P 500)||6.3%|
|#5||Equities (Europe, Australasia, Far East)||5.9%|
|#6||Global Bonds (High Yield)||3.4%|
|#8||Global Bonds (Investment Grade)||-2.0%|
*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.
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:
|Commodity||Price Change (Since Jan 1, 2016)|
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?
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:
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.
The Critical Minerals to China, EU, and U.S. National Security
Ten materials, including cobalt, lithium, graphite, and rare earths, are deemed critical by all three.
The Critical Minerals to China, EU, and U.S. Security
Governments formulate lists of critical minerals according to their industrial requirements and strategic evaluations of supply risks.
Over the last decade, minerals like nickel, copper, and lithium have been on these lists and deemed essential for clean technologies like EV batteries and solar and wind power.
What are Critical Minerals?
There is no universally accepted definition of critical minerals. Countries and regions maintain lists that mirror current technology requirements and supply and demand dynamics, among other factors.
These lists are also constantly changing. For example, the EU’s first critical minerals list in 2011 featured only 14 raw materials. In contrast, the 2023 version identified 34 raw materials as critical.
One thing countries share, however, is the concern that a lack of minerals could slow down the energy transition.
With most countries committed to reducing greenhouse gas emissions, the total mineral demand from clean energy technologies is expected to double by 2040.
U.S. and EU Seek to Reduce Import Reliance on Critical Minerals
Ten materials feature on critical material lists of both the U.S., the EU, and China, including cobalt, lithium, graphite, and rare earths.
|Mineral / Considered Critical||🇺🇸 U.S.||🇪🇺 EU||🇨🇳 China|
Despite having most of the same materials found in the U.S. or China’s list, the European list is the only one to include phosphate rock. The region has limited phosphate resources (only produced in Finland) and largely depends on imports of the material essential for manufacturing fertilizers.
Coking coal is also only on the EU list. The material is used in the manufacture of pig iron and steel. Production is currently dominated by China (58%), followed by Australia (17%), Russia (7%), and the U.S. (7%).
The U.S. has also sought to reduce its reliance on imports. Today, the country is 100% import-dependent on manganese and graphite and 76% on cobalt.
After decades of sourcing materials from other countries, the U.S. local production of raw materials has become extremely limited. For instance, there is only one operating nickel mine (primary) in the country, the Eagle Mine in Michigan. Likewise, the country only hosts one lithium source in Nevada, the Silver Peak Mine.
Despite being the world’s biggest carbon polluter, China is the largest producer of most of the world’s critical minerals for the green revolution.
China produces 60% of all rare earth elements used as components in high-technology devices, including smartphones and computers. The country also has a 13% share of the lithium production market. In addition, it refines around 35% of the world’s nickel, 58% of lithium, and 70% of cobalt.
Among some of the unique materials on China’s list is gold. Although gold is used on a smaller scale in technology, China has sought gold for economic and geopolitical factors, mainly to diversify its foreign exchange reserves, which rely heavily on the U.S. dollar.
Analysts estimate China has bought a record 400 tonnes of gold in recent years.
China has also slated uranium as a critical mineral. The Chinese government has stated it intends to become self-sufficient in nuclear power plant capacity and fuel production for those plants.
According to the World Nuclear Association, China aims to produce one-third of its uranium domestically.
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