The entire market has been skewed for a decade and a half, during which lenders paid borrowers to borrow. Even now, many inflation-adjusted rates are still negative. There is a lot of readjustment to be done, and we won’t know how far that will go until normalized interest rates start to disrupt things. We’ll see whether the Fed, which controls the monetary policy, sticks to its guns or reverses course.
In the short term, Chinese construction is crucial for commodity prices. In the medium to long term, the energy revolution will be vital. There are signs that the phase of setting magic wand targets for electrification and fossil fuel replacement is fading. We have yet to see, or at any rate to hear, that rhetoric change to a technological and engineering debate about managing the transition. This includes recognizing that the transition will be highly energy-intensive; it takes a lot of energy to manufacture a windmill or a solar panel. It also takes many years before either has produced more energy than was consumed in its creation. And speaking of the grid needed to harness such energy…
I believe that phase is forthcoming, though. The USA is aggressively striving to become the world’s gas supplier and a net oil exporter. Only when the key to the electrical revolution is acknowledged as affordable fossil fuels, used as cleanly as possible, will electrification and electrical mineral demand truly take off. Copper might be in oversupply this year. It could be several years before there’s significant pressure on supply.
The eternal truths remain unchanged. The cost of energy is pivotal. When energy is cheap, economic activity and production soar. When it’s expensive, they slow down. The oil price shock of the 1970s applied the brakes. High energy prices will likely impede the massive renewable electrification project, lower commodity prices, raise production costs, and squeeze profits.
I believe commodities are the right sector to invest in (especially royalties, which are somewhat insulated from profit squeeze). However, the post-COVID price (and especially profit) surge has led people to expect too much, too soon.
As always in the commodities sector, real profits are amassed through judicious investments and stocks purchased during lean years. The Rio shares I acquired at the low £20s years ago have been a core holding in my portfolio since. Likewise, Franco Nevada. I also received dividends for my patience.
So, stock price weakness in this area doesn’t keep me awake at night. When I have funds to invest, I welcome it. Nonetheless, never forget that nothing – not even a cooked lunch – occurs without ENERGY. The price of energy is the key to timing and the timeframe we can anticipate for the great electrification and substantial demand for electrical and other minerals.
