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- Global natural resources companies lie at the epicenter of modern supply chains and have strategic importance that is magnified amid more frequent supply chain disruptions, geopolitical events, and international trade tensions.
- As inflationary considerations have returned to the global landscape, asset return sensitivity to price pressures has become increasingly important for investors and consumers alike. While commodity prices broadly have performed well in inflationary environments, the various individual commodities and related equities exhibit different fundamental characteristics that may result in divergent return behaviors through the economic cycle.
- While global natural resources equities generally benefit from rising prices in their underlying commodities, a company’s exposure to commodity prices will differ by commodity, regional exposure, cost structure, and position(s) in the commodity’s value chain. Operating leverage is not equivalent across commodity sectors nor within sectors for companies with different cost structures, which creates unique diversification and stock selection opportunities.
Global Natural Resources: the big picture
Global natural resources companies in the broadest sense extract and refine raw commodities that serve as the building blocks for goods and services consumption. In the investment landscape, one can gain exposure either directly via the commodities themselves, or indirectly via global natural resources businesses. Recent years have shined a spotlight on both asset classes thanks to the confluence of rising inflation, changes in international trade flows, evolving geopolitical relationships, remapping of supply chains, and decarbonization efforts among other factors.
Geopolitics also serve as an important risk factor in price discovery, at times driving volatility for both commodities and related natural resources equities.
Natural resources companies lie at the epicenter of the modern global supply chain, with human consumption of raw materials estimated to grow to 140bn tons of minerals, ores, fossil fuels, and biomass per year by 2050.[1] Commodities are an indispensable part of our goods consumption both through raw material input and through the manufacturing and delivery processes of the supply chain. They are often characterized by high degrees of supply-demand cyclicality and occasional scarcity as populations grow and consumption increases. As a growing global population puts demand pressure on finite reserves of commodities, humanity constantly seeks solutions to material constraints, including discovering substitutes, exploring for new reserves, recycling materials, and developing more efficient technologies. The constantly evolving nature of raw materials supply and demand creates a dynamic environment for global natural resources companies.
One noteworthy characteristic of commodities and related equities is the diversity among and even within different commodities categories. While some commodities such as industrial metals demonstrate a high degree of sensitivity to global consumption demand based on economic cyclicality, others such as corn or wheat tend to exhibit more inelastic demand. Elsewhere, energy consumption, while cyclical to an extent, generally demonstrates relatively inelastic demand outside of significant changes in the price of oil. Gold and other precious metals, in complete contrast, may demonstrate more currency-like sensitivity to variables such as interest rates and inflation. Even within the commodities complex, interdependencies between different commodities create complex supply and demand relationships (e.g. grain consumption by livestock, energy consumption for industrial metals processing).
Geopolitics also serve as an important risk factor in price discovery, at times driving volatility for both commodities and related natural resources equities. Risk premia related to global conflicts and supply chain disruptions can spur idiosyncratic price dislocations, drive demand for hedging of commodity prices, and materially impact natural resources equity valuations. The recent COVID-19 crisis and ongoing conflicts in the Middle East and Eastern Europe create an overhang of potential supply chain disruption that forces commodity producers and consumers to account for these considerable risks in a thoughtful manner.
