Energy Transition, Inflation Drive Bullish Commodities Outlook

VanEck Commodity Strategist Roland Morris discusses his views on a potential long-term bull market for commodities. He explores the impact of short and long-term trends, including supply constraints, the transition to renewable energy, inflation and Fed tapering.

Video Transcript
Jenna Dagenhart: Joining us now to talk about the continued strength of commodities and how he thinks inflation and other trends will play out over time is VanEck Commodity Strategist Roland Morris. Roland, for starters, could you give us a general update on commodities markets?

Roland Morris: Sure. Thank you, Jenna. This has been a very, very good year for commodities. Really, all year long commodities have been strong. Several different commodities have led at different times. Currently, most commodity indexes are making new highs for the year or post-COVID highs. And some indexes, like the [CRB Raw Industrials Index] (CRB Rind Index) is making new all-time highs. So it's been a very, very strong year for commodities.

Roland Morris: There's a few things that have caused that. Obviously, aggressive monetary and fiscal stimulus coming out of the COVID crisis generated a very sharp rebound in global growth, which moderated slightly late in the middle of the summer this year with Delta and with a slight slowdown in China, but overall commodity demand has been very strong on the rebound. And there's been some supply constrictions, some of which will be transitory. Some of the supply constrictions are related really to some disruptions on production due to COVID directly, but also the supply chain and deliveries around the world have constricted some movement of commodities across the globe. And that's generated some of the backdrop and created these really strong moves in commodities all year long.

Roland Morris: It's been an interesting time, and I think it's likely to continue at least in the commodity sectors because we've underinvested in commodities for a very long time. And so we really are going to be constrained on the supply side as we move forward.

Jenna Dagenhart: Transitory or not, that seems to be the big debate. Now, Roland, what do some of these short-term trends mean for the long-term story?

Roland Morris: Well, there's several things that I think could lead to a really long-term bull market for commodities in general. And it's really this transition story as we as a globe try to move away from traditional energy, oil and gas, more to renewable energy, whether it's wind or solar for power generation, obviously electric vehicles. All of those things will create some tension in commodity markets. As investment draws down and we reduce investment in traditional oil and gas production, as that investment shifts towards more renewable sources of energy, there's going to be this conflict. Whereas we need oil and gas, we're going to be underinvesting in production. At the same time, we're going to be investing in new technologies that will require a lot more industrial metals really, and minerals for the electrification of the world.

Roland Morris: You need rare earths for electric engines. You need nickel and copper, all of these things for battery technology, copper wiring as we electrify the world. All of these demand drivers are going to create really huge demands for traditional industrial metals when we won't be able to meet that demand. The inflationary pressures both on metals, industrial metals, and as we underinvest in oil and gas as we still need that. So these conflicts, we believe, will lead to the higher prices for resource commodities and industrial metals and traditional energy in particular. And that's likely to be a very persistent trend that could last 10 to 20 years.

Jenna Dagenhart: Finally, Roland, even though fiscal and monetary policy have been extremely accommodative, we are expecting the [Federal Reserve] (Fed) to start tapering in 2021. What will be the impact on commodities if some of this support begins to fade?

Roland Morris: Well, that is going to be a short-term challenge. And I think the Fed's going to attempt to taper. They may have to back off on that simply because the world is very, very leveraged. But from a commodity standpoint, there is going to be the challenge that that tapering could slow growth in the short term and that could dampen commodity demand. Another risk really is that commodity prices, particularly energy prices this winter, that they actually get too high and start destroying demand. So if energy prices were to get really way ahead of themselves, let's say we had $100 oil and natural gas stayed at these levels through the winter, you could destroy some demand.

Roland Morris: So those are two risks really over the next six months to a year, which could dampen demand. But I think the most important factor is supply will continue to be constrained and investment will continue to move away from traditional energy sources to more renewable sources. And that transition is going to create some inflationary pressures from our point of view.

Jenna Dagenhart: Well, Roland, thank you very much for joining us.

Roland Morris: Happy to be here. Thank you.

Jenna Dagenhart: And thank you for watching. Once again, that was VanEck Commodity Strategist Roland Morris. And I'm Jenna Dagenhart with Asset TV.

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