“Future Minerals” could be a savvy play for your present-day portfolio

“Future minerals” could be a stone-cold brilliant idea for your present-day portfolio. They’re the critically in-demand mined commodities that AI and the green energy transition depend on. And they’re facing a huge supply constraint. That makes for an interesting investment proposition. Let’s take a look.

What are future minerals and why are they important?

Future minerals are mined commodities that are essential to the development of economies. They generally align with the commodities that are essential to the green energy transition as the world moves away from fossil fuels and toward electrification. You can expect demand for a lot of these commodities to rise significantly in the years to come.

Okay, so what are a few examples?

Future minerals include copper, lithium, aluminum, platinum, and nickel. For example, copper is a metal that is very widely used because of its qualities as a good conductor – it's essential for most electronic and electrical applications out there. But its future demand will also be driven by its usefulness in electricity grids and electrification, and for its significant use in EVs.

Meanwhile, lithium is important because of the lithium-ion rechargeable batteries that power EVs (and a lot of other tech). It’s estimated that by 2040, we’ll need 42 times more lithium than we needed in 2020.

Does this mean we’re at the start of another commodities “supercycle”, as some people say?

A ‘supercycle’ is a period when demand for something increases significantly, and for a long time, because of a structural change. This leads to sustained price increases. And I think we may be at the start of a new supercycle for future minerals.

The demand is being driven by necessity and by government policy. The need to move away from fossil fuels and into electrification is clear, and this move is well-supported by new regulations. It’s likely that demand will remain robust throughout multiple economic cycles over at least the next 20 years or so.

On the other hand, supply will also be constrained. Mining companies haven’t invested in developing new resources over the past decade. That means there hasn't been much more production capacity coming online. Where you do have capacity, you're seeing production volumes and quality decline.

Where should you look for opportunities?

The investing opportunities here are diverse and located at all points along the value chain – the range of activities needed to create a product or service. Investors may be wise to invest in the companies associated with each future mineral (rather than the minerals themselves). History shows us this is a better way to take advantage of higher commodity prices.

In addition to the mining companies themselves, look up the value chain to those firms supplying the equipment needed to extract minerals from the ground. Also, look down the value chain to those products – such as EVs – that are manufactured using one or more of these future minerals.

Additional areas of interest may include firms that are enabling decarbonization in transport, buildings, and industry – things like battery-makers, and permanent magnet motor manufacturing.

How do you know if it’s the right time to invest?

It’s an exciting moment in this sector, and everything is aligning for the start of a supercycle that could end up being a multi-decade opportunity. As an investor, you want to get in at the point where things are going slowly, and then inflects up, and starts to rise rapidly.

If you look at China now, it’s very quickly gone from around 2% of car sales being EVs back in 2020, to around 40% last year. Adoption is occurring very quickly there.

In developed markets, EV penetration is less deep but will accelerate as restrictions on the sale of internal combustion engine cars begin, and as EVs become less expensive.

For example, the UK’s National Grid has published its capital investment plans for the next decade, and it’s clear that investment in infrastructure to support the green transition is a top priority. So, there’s all this demand and, as we’ve already mentioned, supply will struggle to keep up for some time. This will likely support prices.

Is it better to take an active, or passive, approach to this theme?

There are plenty of ETFs out there that that will help you invest in the future minerals if you prefer the passive route. The SPDR S&P Metals & Mining ETF (ticker: XME; expense ratio: 0.39%) is one of the biggest in mining, with broad access to US companies that extract metals and minerals. For non-US investors, the VanEck Global Mining UCITS ETF (GDIG; 0.5%) takes a global approach to the same idea. To invest in the price of copper more directly, consider the Global X Copper Miners ETF (COPX; 0.65%) or, outside of the US, the WisdomTree Copper (COPA; 0.49%).

That said, an active approach would let you focus just on what matters. It allows you to hold higher quality companies – which should do better over the long term. And it allows you to be flexible through what will be a structural change.

But you’re likely to see short-term commodity cycles through that period. Active management enables investors to seek value when many others are piling into the most popular investments.

An active approach also helps investors to better manage environmental, social, and governance (ESG) risks – an important consideration when dealing with mining companies that are often operating in emerging markets.

–Iain Pyle is senior investment director of UK stocks at abrdn.