How to invest in the multi-decade boom in industrial metals
The price of key industrial metals has already begun to rise. The renewable energy transition will take them higher, says David Stevenson. Here's how to profit.
There’s a lot of excitement in the industrial metals market at the moment. Prices have gone up due to supply chain issues, which have been made worse by the war in Ukraine. However, there’s also a longer-term story playing out as we transition towards renewable energy.
The most commonly understood version of this is that we will all be buying lots more batteries to stick in our cars, hook up to at home, or place in containers which are then connected to the grid to provide stability because of intermittent renewable energy supplies.
But the energy transition will have a much wider impact than just batteries. The key driver is the electrification of lots of things, ranging from steel production through to aircraft, all of which will require more metals.
This will drive immense demand for the usual candidates of lithium, nickel and zinc. So it’s entirely plausible that we will run out of key supplies of strategic energy transition metals in the next few decades. And if we don’t, then it’s likely we’ll run into a surge in prices.
Westbeck Capital, one of the few active fund managers in the battery space, notes that a number of metals have jumped in price recently, such as the 75% leap in lithium carbonate in China this year. Electric vehicle (EV) manufacturers such as Lucid, Tesla, and Rivian have either cut production or announced delays. Chinese EV maker NIO says it will raise prices in May and Mercedes-Benz has become the first major manufacturer to acknowledge supply chain issues.
There are two ways of investing in the expected surge in demand and rising prices. The first is to buy into individual mining stocks exposed to this space, or into a diversified fund such as BlackRock World Mining (LSE: BRWM).
The managers of this trust are betting heavily on this strategic metals super cycle: for example, more than 20% of the portfolio is invested in copper miners. It may be a surprise to see that only just over 1% is in nickel, but this is slightly misleading because the big diversified miners – which make up 40% of the portfolio – are also the major nickel producers.
A direct play on prices
I’ve highlighted nickel here because while everybody seems to focus on other metals such as lithium, we seem to have ignored the crucial role of nickel. For a sense of how important it really is, look at two new exchange-traded commodity (ETC) funds from WisdomTree that invest in the metals that are likely to play a key role in the energy transition.
WisdomTree Energy Transition Metals (LSE: WENT) is the broader of the two: it has 25% in nickel, 20% in copper, 15% in aluminium, 13% in silver and 12% in zinc, plus smaller amounts in tin, platinum and gold. WisdomTree Battery Metals (LSE: WATT) is more focused and has 48% in nickel, 26% in aluminium, 16% in copper and 10% in zinc.
One could argue that a mining fund such as BlackRock World Mining is the safer way to invest into this long-term theme. Its focus on diversified miners with strong balance sheets and generous dividends should help dampen down some of the inevitable commodity volatility. However, these big companies are subject to lots of risks. Rio Tinto just announced a decline in earnings due to various operational issues, for instance. Investing in a basket of commodities is a direct way to play the cycle, stripping away corporate risk.
What’s more, if prices shoot up it’s not unreasonable to expect many governments to demand bigger royalties and taxes or even to threaten to nationalise key strategic metal assets. That might be bad news for equity investors but good news for investors in pure commodity markets. So a smarter course of action might be to invest in direct equities or a diversified fund, while also playing the direct commodity markets for these increasingly strategic metals through ETCs.