Natural resources have been seen as vulnerable to economic weakness, but there are structural reasons why demand for commodities – and the companies that produce them – can thrive, says Mark Hume, manager on the BlackRock Energy and Resources Income Trust plc (LON:BERI).
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
After a buoyant year in 2022, commodity markets face a tougher environment in 2023. Demand for natural resources has historically ebbed and flowed with economic growth, which is creaking under the weight of higher interest rates, higher inflation and geopolitical tensions. However, while commodities cannot be immune to falls in global demand, there are a number of reasons why they may not be as fragile in the current cycle.
A series of factors drove commodity prices higher in 2022. Most important was the war in Ukraine, which took supply out of the market and pushed prices up. There was a legacy of supply chain difficulties from the pandemic, which collided with rising demand as economies across the world reopened. These circumstances were unique, but there are still a number of factors in place that support commodities prices.
Demand and supply
Many of the supply problems that have pushed prices higher are still in place. Inventories for many commodities are at historic lows,1 while long-term underinvestment in new commodities supply means that there is still a mismatch with demand. Many energy companies are still choosing to return cash flow to shareholders via dividends and buybacks rather than investing in new production.
Demand is likely to fall if the economic environment weakens. While the US, Eurozone and UK economies have proved more robust than many thought at the start of the year, there are signs that higher interest rates are hurting growth. The most recent US GDP data showed growth slowing to 1.1% in the first quarter of the year2 and growth in the Eurozone remains anaemic.3
However, it is important to balance this weakness against a reviving China. China remains the most important economy for mining, and is moving in the opposite direction to the rest of the world following a year of lockdowns and a strict zero-covid policy. The most recent round of services data, for example, showed the strongest levels in more than a decade suggesting the recovery is on track.4
Energy transition
The energy transition remains a source of structural demand for a number of key commodities. Decarbonisation is building momentum across the globe, with investment programmes such as the Inflation Reduction Act in the US and RePower EU in Europe accelerating growth. Energy security has become a top priority for many governments, driving investment into sustainable options. The IEA’s World Energy Report 2022 suggests annual clean energy investment will need to more than double by 2030 to US $4trillion to achieve net zero targets.
There is a financial incentive as well. Renewable energy costs for onshore wind and solar have fallen and it now represents the most economic technology choice for power generation in many markets, which is driving rapid adoption. We see similar cost competitiveness trends in other areas such as energy storage solutions.5
While 2022 saw some exuberance in the prices for key energy transition metals such as lithium, these have fallen back as demand has slowed and now look more realistic. Overall, there is growing recognition of the role mining companies will need to play in supplying the materials required for lower carbon technologies such as wind turbines, solar panels and electric vehicles.
Geopolitics
The bounce in many commodity prices in 2022 was driven by Russia’s invasion of Ukraine. This forced a reappraisal of the way countries source and use energy. This reappraisal is still ongoing, with policymakers keen to ensure that energy supplies are not at risk next winter. This will continue to drive demand for specific commodities.
OPEC has also showed itself to be more reactive on oil prices. It announced plans to reduce production targets (on 5 October 2022 and 2 April 2023). It is keen to put a floor under the oil price, ensuring that the oil price is high enough to make profits, but not so high that it kills off economic activity.
Energy and natural resources markets will remain an exciting area to invest even if the global economy weakens. Structural shifts in the global economy mean they will not simply ebb and flow with global growth as they have done in previous cycles. For us as investors, the key is to retain a flexible approach, ready to respond to long-term social and economic shifts.
Sources:
1 BlackRock World Mining Trust Fund manager commentary, 16 May 2023 – https://www.blackrock.com/uk/solutions/investment-trusts/our-range/blackrock-world-mining-investment-trust/trust-information?cid=ppc%3Ainvestment-trusts_uk%3Agoogle%3Abrand%3Aen&gclid=CjwKCAjw9pGjBhB-EiwAa5jl3Nu9XlDMtLZ6RPKXHOEpPBpsnaCv6pKmc-hb394lWizrDLFuuMNg0xoCgSIQAvD_BwE&gclsrc=aw.ds#fund-manager-commentary:~:text=many%20commodities%20at-,historic%20lows,-.%20At%20the%20same
2 US growth slowed sharply in first quarter as Fed pushed rates higher, FT, 27 April 2023 – https://www.ft.com/content/3f222f39-f40d-4a6f-92c8-a74a022e11e3
3 Eurozone returns to weak growth in first quarter, FT, 28 April 2023 – https://www.ft.com/content/dcfa4163-2e36-43a8-a0a0-70a35818f98a
4 China’s services activity jumps to decade high as economic recovery gets back on track, CNN, 31 March 2023 https://edition.cnn.com/2023/03/31/economy/china-pmi-decade-high-economic-recovery-intl-hnk/index.html
5 World Energy Report, IEA, January 2023 https://www.iea.org/reports/world-energy-investment-2022/overview-and-key-findings
Trust-specific risks
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk
BlackRock Energy and Resources Income Trust invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets
Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater ‘Liquidity Risk’, restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Investments in Mining Securities
Investments in mining securities are subject to sector-specific risks which include environmental concerns, government policy, supply concerns and taxation. The variation in returns from mining securities is typically above average compared to other equity securities.
BlackRock Energy and Resources Income Trust
Mining and energy companies lie at the heart of the global economy, helping fuel economic activity. Mining companies provide the resources to build new infrastructure, while energy companies drive growth. Our carefully selected portfolio, targeting income and capital growth, also invests in companies supporting the transition to low carbon energy.
Important Information
In the UK and Non-European Economic Area (EEA) countries: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
The investment trusts listed in this document currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
