2020 will go down as one of the most challenging years on record for societies, economies and financial markets around the world. The COVID-19 crisis brought business activity to a standstill, forced seismic changes across many sectors, and prompted unprecedented action by governments, at a time when rapid technological and societal change is already transforming whole industries.
While the natural resources sector faced difficulties during 2020, precious metals delivered strong performance and many industrial metals have recovered after the initial pressure. Mining companies have largely demonstrated operational resilience during the crisis, enabling them to emerge well positioned to take advantage of the key themes that are developing out of this extraordinary year.
In particular, the green revolution is progressing even faster than we could have anticipated at the start of the year and is likely to be boosted by targeted stimulus spending. At the same time, the economic and political environment is proving very supportive for gold as real interest rates are set to remain low, monetary policy builds inflationary pressure and political tensions remain.
As the global economy begins to emerge from the COVID-19 crisis, which sparked sharp recessions and a historic response by policymakers, the outlook for metals and mining is shifting rapidly, with several sub-sectors poised for significant potential growth in the months and years ahead. The mining sector remains undervalued relative to broader equity markets and relative to its historic levels. Prior to the onset of COVID-19, the natural resources sector was already under pressure from the US-China trade war and its associated geopolitical and economic uncertainty. Yet the world has changed dramatically over the past year, the decline in economic activity during 2020 has set the stage for a global economic recovery, aided by the emergence of a number of potential vaccines which will be rolled out by governments in the months ahead.
For commodity prices, the level and focus of economic stimulus packages being implemented in response to the COVID-19 crisis is highly significant. Policymakers are implementing historic levels of economic stimulus, amid strong political support for higher levels of government spending and intervention. The focus on low carbon industry and green technology, particularly in Europe and China, is a major theme for miners. As specialists in this sector, we aim to identify the commodities most likely to benefit from various ‘new green deals’, such as vanadium, certain grades of graphite, and high purity alumina. We believe a period of growth lies ahead for certain sub-sectors of the mining industry.
Our team identifies two key long-term trends which will drive the mining sector in the months and years ahead and which inform our investment decision making. The first positive trend for miners is the global movement towards sustainability and the development of green technology. Demand for speciality metals is forecast to surge amid potential supply shortages, as factors such as rising electric car production, increasing renewable energy usage, and the development and expansion of battery capacity require a significant increase in demand for a number of strategic raw materials.
Tesla Battery Day in September drew attention to the huge demand potential in focused ‘battery metals’ such as lithium, nickel and graphite. Tesla’s planned 3TWH of battery capacity could require 10x the current lithium market, 6x the current cobalt market and 2x the current nickel market, over the next ten years. Manufacturers’ valuations have reflected the growth potential for the sector, yet the underlying commodity prices have remained subdued so far. It is increasingly clear that the market is underestimating the future demand implications.