Green Momentum Builds in Natural Resources

Accelerating Recovery for Commodities

The commodity price rally experienced throughout much of the third quarter accelerated significantly in the last quarter of 2020. Demand shock and optimism of a hastened recovery pushed several commodities to new highs while, in most cases, helping prices reach levels unseen since before the pandemic.

Though a number of factors underpinned this acceleration, China—the most commodity-intensive country on the demand side—continued to recover much faster than anticipated. In addition, hopes around various COVID-19 vaccines in the U.S., EU, China, U.K. and Japan allayed fears over a prolonged recovery while continued central bank easing and an array of fiscal stimulus packages supported the near-term growth outlook.

Red and Green for the Holidays

Industrial metals were perhaps the most positively impacted by an uptick in global economic activity during the quarter. Copper benefited not least from resulting strong demand—from China and renewable energy markets, broadly—but also due to global supply shortages of the red metal. Infrastructure projects in China were among the largest drivers of steel, too, where production of the commodity reached all-time highs.

Renewable energy markets received massive confidence boosts from advancements in “green” initiatives, including both a European Parliament endorsement in October of 2050 net carbon neutrality goals for member countries—outlining aggressive emissions reduction targets by 2030—and, in November, a pro-clean-energy Biden Administration victory in the 2020 U.S. presidential election.

Strength in these two markets were, once again, reflected in our top performing holdings, which included copper companies First Quantum Minerals Ltd. (5.1% of Fund net assets) and Freeport-McMoRan Inc. (4.7% of Fund net assets) and renewable energy project financer (i.e., “green bank”) Hannon Armstrong Sustainable Infrastructure Capital (5.3% of Fund net assets). While residential solar company Sunrun (6.0% of net assets) was also a detractor, along with gold companies Barrick Gold (2.6% of net assets) and Kirkland Lake Gold (2.5% of net assets), we view these losses as fueled predominately by profit taking following strong performance over the nine-month period leading up to then.

Top Contributors/Detractors

Source: FactSet; VanEck. Data as of December 31, 2020. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on NAV per share. Past performance is not indicative of future results. Portfolio holdings may change over time. These are not recommendations to buy or sell any security.

Oil Turning a Corner?

In a very welcome turnaround following a year marked by (generally speaking) lackluster performance, the oil and gas sector had an encouraging fourth quarter. The Dallas Fed Energy Survey for Q4 2020 noted positive quarter-over-quarter business activity for the first time since Q1 2019, with modest increases in capital expenditure from oil and gas exploration and production (E&P) companies as well as from oilfield servicers. According to E&P executives surveyed, oil production also appears to have stabilized in the region after three consecutive quarters of decline.

Heyday for Grains

Once again, grains (soybeans, corn and wheat) rallied during the quarter—perhaps not surprisingly given China’s ongoing purchase of U.S. agriculture goods. Although the country has done a great job ramping up its hog herd, China remains one to two years away from its pre-Asian Swine Flu supply levels. As it rebuilds its hog herd, production facilities are aiming to achieve higher, institutional-level standards of production with new hogs now being fed more corn and soybean rations than in prior years. This has translated to increased demand for U.S. grains, which, we believe, should continue to outpace prior years’ demand even after China has finished rebuilding their hog population given the country’s recently established trade agreement with the U.S. While related agriculture equities continued to lag during the quarter, we do believe this to be temporary in nature given the cost adjustments that typically follow such an increase in demand and associated input prices.

Hoping for More of the Same in 2021

Our positioning remains relatively unchanged. We anticipate a modest pick-up in global economic activity in the coming months as central banks target further global stimulus measures and as COVID-19 vaccines are disseminated more broadly. We also believe that commodity prices should continue to reflect the mounting inflationary pressures associated with such historic, unprecedented fiscal and monetary policy. Thus, we continue to maintain exposure to inflation-sensitive assets such as base and industrial metals and oil and gas (via the producers themselves). We also remain constructive on the gold mining sector as companies have exhibited an increasing propensity to return cash to shareholders with gold prices stabilizing well above average all-in sustaining cost and as companies still enjoy significant free cash flow. Finally, the European Union’s “Green Deal” and similarly anticipated sustainable initiatives in the U.S. have proved, we believe, to be both near- and long-term growth catalysts for the renewable/alternative energy sector moving forward.

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