Commodities setback, investment drought in mining, and EM elections

The investment crisis in mining and changing electricity markets

What is remarkable about industrial metals and energy which are the two most important segments of the global commodity market is that level of capital expenditures (CAPEX) deployed in those two sectors is very low. Adjusted for inflation the CAPEX into mining and energy is still below the levels prior to the pandemic suggesting no appetite for investments despite broad energy prices being up 34% and industrial metals up 62% from levels prior to the pandemic. The signal we are getting from commodity markets is that we need higher prices for commodity companies to invest in more supply suggesting that the long-run “super-cycle” in commodities might still find itself in its early years.

Almost regularly headlines are popping up in another non-classical part of the commodity market which is the electricity market and how AI is causing a lot of pressure on electricity markets due to the surging demand from datacentres. We recently wrote about electrification and how investors could position themselves towards this trend. To understand the challenge facing US electricity markets today’s WSJ article on the subject is a good read. Here Goldman Sachs is quoted for predicting a 160% increase in datacentres power demand by 2030. In Europe other challenges exist with the largest amount of negative electricity prices recorded in a single year up until the end of May. This Electricity Insights note explains the dynamics behind the rise of negative power prices in Europe and hints that energy storage is the only solution to alleviate the problems.

Emerging markets: China’s export dilemma, Modi’s victory, and left-wing currents in Mexico

More and more policymakers are joining our thesis on Chinese exports that it might supress goods inflation in the short-run, but longer term it will be higher because of this “pushing on a string” trade policy. Two things are happening as China is pursuing its export strategy through heavy subsidies:

1. It is investing heavily in countries such as Mexico and Vietnam to manufacture final goods that are then shipped to the US consumer market. Using satellite countries to avoid US import restrictions will only backfire and show that China is not listening to concerns expressed in the US with the likely outcome of broadening US trade policies to indirect export channels of Chinese goods.
2. Europe is increasingly getting frustrated with China as China’s one-way trade policy is becoming a national security issue for the EU across key industrial components, renewable energy technology, and critical raw materials. In electric vehicles, China’s policy is an employment issue and thereby a political issue. We expect the EU to increase protectionism polices in the future and the Carbon Border Adjustment Mechanism will also begin to impact global supply chains.

The harder China pushes on exports to backstop its economy, the more global manufacturing will be reshored pushing up inflation on goods longer term.

It seems likely that Modi’s has been re-elected in India and so far the market reaction has been overwhelmingly positive adding to the strong momentum Indian equities have enjoyed for so long. Our main thesis on emerging market equities is that it is not a homogenous asset class and the countries where there are “compounding effects” from a growing middle class combined with positive demographics are the most interesting. Emerging market countries that fit these characteristics are Mexico, Brazil, India, Vietnam, and Indonesia. For more insights into India and the things to consider before getting exposure to India read our note India: Investing for the Next Decade by Charu Chanana.

In Mexico, the general election has given the left-wing ruling party a resounding victory set to win both houses of congress and close to have a two-thirds majority with its two allied parties which is what it needs to pursue constitutional changes. The initial reaction from markets has been less positive than what was seen in India.

Previous notes on asset allocation and macro

• The inflation conundrum and private equity party (27 May 2024)