Factors driving long-term demand for commodities

Acorn Capital Investment Fund (ASX:ACQ) Portfolio Manager Rick Squire discusses key factors behind commodity demand and which commodities to keep an eye on.

Melissa Darmawan: Thanks for tuning in to Finance News. I’m Melissa Darmawan. Here to talk to us today is Portfolio Manager of Acorn Capital Rick Squire, Rick. Nice to meet you

Rick Squire: Likewise, Mel. Thanks for having me.

Melissa Darmawan: You’re welcome. It’s great to have you part of the network.

The resources and energy sectors have had a strong run in the last 18 months. Do you think this rally can continue?

Rick Squire: Yes, I do. In fact, at Acorn Capital, we think the resources and energy sectors have got the potential for a prolonged upswing. Now, the reason for saying that is we see four key factors that are driving the long-term demand for a range of commodities. The first one is the growing demand for the metals that facilitate the global transition to the low-carbon economy. Those commodities include lithium, copper, cobalt, nickel, the rare earth elements and graphite. Now, the second factor that we’ve talked about in the past is the increasing need for a diversified supply chain. One thing about the COVID pandemic is that it’s taught us that we can’t rely on a single region or country for important commodities. Probably the most acute example of this is the rare earth elements. Now, rare earth elements are used in the drive mechanism in wind turbines and electric vehicles. And what we know is that, of all the rare earth magnets that are produced today, about 90 per cent of them at some point in their manufacturing cycle have had to pass through China before their completion. Now, that reliance on China for such a vital commodity is an unacceptable risk to industries and governments around the world. Now, the third and the fourth points that I want to emphasise today, the third one is the growing importance of environmental, social, and governance issues, and how they pertain to the sourcing of commodities, and the final one is the impact of sanctions on Russia following its invasion of Ukraine.

Melissa Darmawan: So, Rick, how are ESG issues impacting the way you invest in commodities?

Rick Squire: A simple example is just to think of a car or a phone manufacturer 10 or 15 years ago. Back then, they didn’t really care too much about where their commodities like copper or nickel came from. So, what was important to them was just a large and reliable source of metal at the lowest possible price. However, today, customers, investors and governments are paying more attention, not just to the fact that the products that they’re buying are being ethically manufactured, but the materials that are used in their constructions have also been responsibly sourced. So, there’s a really positive benefit that’s coming out particularly for companies that have really good reputations and are working in stable jurisdictions.

Melissa Darmawan: So, one of the points you mentioned was around the war in Ukraine. When it does end, could it stall the momentum in the resources and energy sectors?

Rick Squire: Look, that’s a concern for some people. But we don’t think that that’s going to be the case. Now, if you look at Russia, it’s actually a major supplier of resources to the global economy. Many of the viewers would know that the EU, for example, is obtaining about 40 per cent of their gas from Russia. Russia also supplies the world with 10 per cent of the oil exports. And it’s also a major producer of coal, of nickel, of aluminium and wheat. And so there’s a really strong reliance on Russia for a lot of its commodities. Now, what we know from historic examples, once these sanctions go on to countries like Russia for these invasions, even when the war stops, and we genuinely hope it ends very soon, but even when it stops, those sanctions remain in place for many years and in some cases more than a decade afterwards. So, the other factor is it really shone the spotlight on Europe and their reliance on Russia for so many commodities. So, right now they’ll be working quickly, regardless of when the war ends, to take that reliance back as much as they can, and so reduce their exposure to energy, whether that’s finding alternate sources of gas or to fast-track that transition to the low-carbon economy in terms of energy sources.

Melissa Darmawan: Last question from me. The resources and energy complex appear to be an exciting place to invest at the moment. Are there any commodities you particularly like?

Rick Squire: There’s actually a range of commodities that we like. So, lithium has got a fantastic long-term outlook. So, lithium is used in those batteries for energy storage. The problem is a lot of those lithium stocks, the valuations are getting a little bit lofty at the moment. So, where we see great opportunities is actually in the rare earth elements. As I mentioned before, they’re used in wind turbines and electric vehicles. So, we think there’s some exciting opportunities opening up in that space. With the rising debt levels and ongoing uncertainty around inflation, we still see good value in gold, but also, you know, copper and the other energy storage metals. Now, the last one I just wanted to touch on is energy. Now, energy has had a great run. We’ve seen oil, coal and uranium running really strongly in the last six to 12 months. But if we just come back to Australia, the East Coast domestic gas market is really starting to open up. We’ve had two years of lockdowns, which has curtailed the demand, but all those shackles of lockdown are coming off. And it’s important that investors remember that this is a transition to the low-carbon economy. And while renewable energy is going to be at the core of the future, that it’s important to manage that transition. And that’s why things like domestic gas will still be important going forward, and there’s still great opportunities in that space.

Melissa Darmawan: Rick, it was great to speak with you, and it was very insightful. I look forward to speaking with you again.

Rick Squire: Pleasure, Mel. Thanks for your time.

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