From cobalt to the casino: speculating on the commodities of the future? – Company

“Raw materials of the future” series

When Matthias Rüth examines his raw materials, he must first unlock a former WWII bunker. Two meters thick reinforced concrete walls passed, in the middle of a massive arch door. 50 centimeters thick, 4.5 tons in weight. “Like in Fort Knox,” Rüth says when television is invited. Because behind the gates of Rüth there are metals that are worth millions – gallium, iridium, neodymium. The commodities trader actually built his bunker as a storage place for companies, but more and more individual investors have requested it.

In the meantime, commodities have long been viewed as delisted by private investors, but for a few months now, many have been enthusiastically searching for interesting metals outside of the ubiquitous gold: just a year after the first corona shock, many quotes eventually not only recovered from the first drop in prices, but went into a kind of intoxication. The price of copper has increased 44% since the start of 2020, the price of bright white lithium has even increased by 77%. “A new super cycle could have started for industrial metals,” says Ludwig Kemper, capital markets strategist at Berenberg Bank.

Perhaps there is only one man who is currently pushing commodity prices up: US President Joe Biden has raised investors’ ears with his trillions of investments. Once berated as “Sleepy Joe,” the Democrat has now become the “Trillion Biden” for many investors. Roads, bridges, rails, the new man of the White House wants to renew it all. Many investors know that without commodities it shouldn’t be possible to get this under control.

But Biden plans not only to rebuild the infrastructure, but the entire economy as well. He explicitly wants to spend billions of dollars on green infrastructure, for example for new power grids and charging stations. Lithium is needed for batteries in electric cars, silicon for solar panels – and no power line can do without fiery red copper. While energy resources such as coal or petroleum are likely to be increasingly depleted, industrial metals in particular could be in demand in the future, according to the idea of ​​many investors.

Copper is also in demand again

Shiny silver lithium, for example, is an integral part of many electric car batteries. Ten kilograms of the lightest metal in the world are found in a standard car battery and in a drive application. 65% of the lithium supply is already in batteries, and this proportion has tripled in the last ten years. “In Europe, demand for lithium is expected to increase eighteen-fold by 2030,” says asset manager Manfred Rath of KSW Vermögensverwaltung in Nuremberg.

A hitherto unknown euphoria is also being felt in the copper market, with some even calling the metal “red gold”. Since discrete copper conducts extremely well, it can be found in almost any cable or circuit board. While a typical midrange heat engine contains only about 25 kilograms of copper, an electric car can easily hold 83 kilograms, and solar power also requires up to twelve times more copper than electricity. fossil. It is these statistics that literally electrify investors.

New wind turbines and solar panels, charging stations and power grids could make copper a key part of the energy transition. The European Commission estimates that solar and wind companies alone should more than double their demand for copper by 2035. While ten years ago only five million tonnes of copper had been ordered, by 2020 they will be at 25 million tonnes. By the end of the current decade, three million tonnes are expected to be added each year. “This argues in favor of high copper prices,” says investment expert Stefan Breintner of fund firm DJE.

Many bankers are already talking about a “super cycle”: prices could not only rise for four or five years, as in a normal economic recovery, but for 20, 30 or 40 years, spiraling upwards. After all, the demand for the commodities of the future is increasing rapidly at the moment – and on top of that, there is often an insufficient supply. As commodity prices have skyrocketed in recent years, many mining companies have significantly curtailed their investments. It can take years, sometimes up to a decade, for new mines to actually produce metals such as copper. “The result is supply deficits and commodity prices which have steadily increased over the years”, explains Berenberg banker Kemper.

That the miraculous stories of raw material records and supercycles are not inevitable shows nothing quite as well as the story of “rare earths”. Behind the tempting name are metals with unpronounceable names like praseodymium, terbium or neodymium, which is extremely magnetic and is therefore used in wind turbines.

When prices went up a decade ago, many banks launched investment products and announced the spike in prices. But many rare earths are less rare than the name suggests. The only reason for the price rush was a halt in exports by the Chinese, who have a dominant market share in some of the rare earths. When Beijing’s rulers relaxed their export rules again, prices collapsed, and a few years later many banks stomped on their investment products – and sometimes caused serious losses for investors.

So far, skepticism has been rife with this type of investment

Consumer advocates don’t think much about special commodities anyway, they believe investors should invest no more than five to ten percent of their portfolio in commodities. The numbers support their skepticism: Financial adviser Gerd Kommer calculated that investors with a 28 commodity basket net of inflation would have lost around 1.1 percent each year over the past 51 years.

Anyone wishing to invest in the supposed commodities of the future despite such warnings has several options. Exchange Traded Commodities (ETCs) should follow the price of a commodity almost one to one. Suppliers like Wisdom Tree, Xtrackers, BNP Paribas and iShares now offer some of these products on commodities like copper, nickel, palladium or platinum.

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Even if the principle seems simple, ETC conceals two pitfalls. Most vendors don’t actually buy tons of commodities, but instead buy commodity futures. These financial papers give them the right to theoretically have the raw material delivered at a later date. The problem: every future has a finite duration. If, for example, ETC’s copper bonds expire in December, the supplier must buy new copper futures for a later date. If the price of the new future is higher, however, the supplier makes some loss, which can accumulate over time. In addition, ETCs are legally bearer bonds. If the supplier goes bankrupt, investor money may be gone.

If you want, you can instead rely on promising companies that deal with the commodities of the future. The supplier L&G has summarized the entire production chain of electric car batteries in its product “Battery Value Chain ETF”: in addition to mining companies, there are battery cell manufacturers here, but also the corresponding car manufacturers. The most important positions include, for example, lithium producer Pilbara Minerals, Chinese battery maker BYD, but also electric car pioneer Tesla.

As an actively managed fund, investors can think of “Robeco Sam Smart Materials”. This fund mainly wants to invest in companies that have smart ideas about the scarcity of raw materials. Intelligent robots can make the processes in factories more efficient in order to reduce the waste of raw materials. Other companies recycle not only PET bottles, but the metals themselves. And established pioneers are already working on the circular economy, which should process materials and reuse them multiple times.

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