From decarbonization to renewable energy, there are a number of structural trends unfolding that should provide a supportive backdrop for natural resources going forward.
The outlook for global resources—a broad sector comprising materials ranging from copper and steel to natural gas and sustainable agriculture—continues to improve. In addition to benefitting from traditional end-uses such as infrastructure, the sector is supported by long-term structural drivers including growing demand for renewable energy, ongoing decarbonization and the shift toward sustainable agriculture.
Historically, China has been the primary driver of demand for natural resources. However, demand drivers such as decarbonization and climate mitigation measures have become increasingly global—and, importantly, these drivers are resource intensive. For example, the amount of steel required for an offshore wind farm is roughly four to five times greater than that required by an onshore facility with the same gigawatt generation capacity. Electric vehicles are another example, requiring significantly more copper relative to an internal combustion engine vehicle.
Pivoting to oil, attention tends to be fixated on the long-term decline in demand as the energy industry makes supply greener. However, we remain focused on the transition underway at integrated energy companies, which we believe is creating a number of potential opportunities. For instance, many companies are utilizing their strong free cash flow from oil production to build out larger renewable energy businesses—a compelling example of resource companies being part of the solution rather than the problem.
Looking to infrastructure, we believe the sector will also be an important component in the fight against climate change, potentially benefiting steel and cement demand as well as traditional commodities like copper. Specifically, U.S. President Biden’s stimulus plan, if enacted as he envisages, will likely benefit the global resources asset class along with similar plans we are seeing across the world.
More broadly, while the demand outlook is increasingly positive, subject to the normal cycles we see in commodity prices, a supply response remains constrained in many commodities due to environmental, regulatory and geographical headwinds. While this is particularly acute in commodities such as aluminum, copper and oil, it has an impact across the global resources asset class.
In our view, the developing structural supply/demand drivers are likely to benefit renewable energy, copper, aluminum, industrial gases and sustainable agriculture (Figure 1). While the unlocking and subsequent recovery of the global economy will likely drive demand for oil and its derivative products in the near term, we believe the need to decarbonize the global economy will translate into more renewable and less conventional energy power supply longer-term.
FIGURE 1: RESOURCES EXPOSURE TO STRUCTURAL TRENDS
Source: Barings. As of March 2021.
At Barings, many of the resources companies that we focus on, and invest in, have fully embraced the rapidly evolving ESG and sustainable thematic in areas such as climate change, carbon emissions reduction, and waste reduction and safety. In our view, this represents an untapped area of value that will become increasingly evident in the years ahead. In fact, we see rapid year-on-year change that isn’t always reflected in investors’ thinking in the resources sector—specifically, in many cases, the positive outlook for equities and commodities is not being reflected in the valuations of the companies we like. We also believe that the trends we’re seeing today could continue to gain momentum in the coming years, driving earnings upside and creating long-term growth opportunities in commodity and resources companies most exposed to these positive structural shifts.