Global trends put industrial metals and agriculture in the spotlight

Key takeaways

It wasn’t a good summer for commodities as recession fears pressured the sector. But on the other hand, supply/demand imbalances and rising prices can be bullish drivers — that’s why we see potential upside for industrial metals and agricultural commodities in the medium to longer term.

Here are three key reasons why investors may want to consider commodities now.

1. Heightened geopolitical tensions and rising energy costs

Europe is in a desperate scramble for alternative supplies due to Russia’s halting of natural gas through the key Nord Stream 1 pipeline. Natural gas prices have soared globally; European prices nearly quadrupled in late August and US prices more than doubled since the invasion. And the Russian/Ukrainian war is not over.

This devastating energy crisis has spilled over into industrial metals, as rising power costs have sparked a wave of smelter closures. Europe has already lost around 50% of its zinc and aluminum smelting capacity,¹ with business leaders recently warning that the region’s worsening energy crisis poses an “existential threat to the future of Europe’s metal smelters.”² The European Union (EU) has reached its 80% gas storage target and has urged member states to cut gas usage, but additional production cutbacks are expected to prevent an all-out crisis this winter.

In agriculture, rising energy prices have made farming more expensive as natural gas accounts for 80% of nitrogen fertilizer operating costs.³ That means future grain crops are in limbo as expensive fertilizers eat into profit margins and reduce plantings. Ukrainian grains also remain largely landlocked. Despite the initial success of the Black Sea Grains Initiative brokered in July, which established a shipping corridor for grains to leave the war-torn country, uncertainty around the normalization of flows remains. According to GrainCorp, a major Australian grains exporter, “shipments would likely continue to be disrupted for the next two or three years at least, due to extensive damage to critical infrastructure wrought by Russia’s invasion of Ukraine.”⁴

2. Renewed focus on climate initiatives

The Inflation Reduction Act (IRA) of 2022 earmarked $374 billion to climate and energy measures. It’s the biggest climate investment in US history,⁵ according to the Atlantic Council.

Among the highlights, the IRA is extending consumer tax credits for electric vehicles (EV) to help make them more affordable. This is expected to accelerate consumer demand for EVs and, in turn, their metal components. Tighter restrictions on the sourcing of materials could also incentivize EV manufacturers to invest in and secure alternative supply chains. Plus, the resulting increased competition could boost the availability of low-cost EVs, making them more affordable for consumers.

3. Climate change

Climate change has impacted agricultural commodities with extreme weather events causing supply constraints and price volatility. Extreme heatwaves, the warmest Northern Hemisphere summer on record, and subsequent droughts are jeopardizing crop yields, leading to food inflation and threatening food security. Europe is currently experiencing its worst drought in 500 years, with 47% of the region in “warning” status and droughts expected to last into at least November.⁶

Changing weather patterns would have a significant impact on agricultural production over the coming decades. More so than any other sector, even small changes in climate conditions can result in large gains or losses in crop yields and production quantities, according to Sustainable Fitch.⁷

Demand for electric vehicles is expected to soar across the globe

Footnotes
1. Source: Bloomberg L.P., “Europe’s Power Crunch Cuts Zinc and Aluminum Capacity in Half,” July 20, 2022
2. Source: Reuters, “Energy crisis an 'existential threat' to EU metal production - Eurometaux,” Sept. 7, 2022
3. Source: Bloomberg L.P., “Fertilizer Prices Are Getting More Expensive in Europe, Adding to Food-Inflation Concerns,” Oct. 29, 2021
4. Source: Bloomberg L.P., “GrainCorp Sees Demand Nearly Everywhere Amid Black Sea Turmoil,” Aug. 10, 2022
5. Source: Atlantic Council, “The Inflation Reduction Act places a big bet on alternative mineral supply chains,” Aug. 8, 2022
6. Source: CNBC, “‘There’s no sign of any rain coming to us’: Europe’s extreme weather risks smaller harvests and higher prices,” Aug. 31, 2022
7. Source: World-Grain.com, “Climate change weighing on agriculture,” Sept. 5, 2022