Persistent Inflation and Electrification Drive Natural Resources

Natural Resources Update and Outlook, Q2 2024

Hi, I'm Shawn Reynolds, the portfolio manager of the Global Natural Resources Strategy here at VanEck. Here's what we're seeing in the natural resources world today.

Positive Outlook for Natural Resource Equities

We're seeing a pretty constructive outlook for natural resource equities right now. We really see quite a lot of tailwinds behind the sector, really offsetting a number of headwinds that we've suffered for a few years here. When we really think about natural resource equities, we think about three things.

We think about the major reason to own natural resource equities. They do what they're supposed to do, when they're supposed to do it. They are an inflation hedge. They are leveraged to global growth and a diversification measure. And they're doing what they're supposed to do. The sector right now is one of the best sectors in the market. Energy is particularly doing well, but mining is coming up quickly. So overall, natural resources are doing well.

The second reason to really look at natural resources is because as we see relative to the last 10 years, there's a real difference between the supply-demand imbalance. In 2010 to 2020, we saw huge growth in supply, particularly of oil. And that impacted the decade overall and really put a downer on the entire sector. As we look forward right now, supply and demand is in balance. And that's really supporting very strong commodity prices and therefore profitability for the sector. So we really see a lot of change in behavior as well as in the dynamics of commodity resources.

And the third reason is really to think about those tailwinds that I mentioned earlier. There are a number of tailwinds coming in after the sector right now that are really helping from AI to electrification to power build out, EVs [electric vehicles], and also LNG [liquified natural gas]. And those things together are really pushing on the demand side and are really supportive of natural resource equities right now.

Factors Driving Natural Gas Demand

When we think about natural gas demand for the rest of the decade, really, really think about LNG build out as the major driver for the source of that new demand. Roughly speaking right now, we produce around 100 BCF a day, billion cubic feet a day of natural gas in this country. Over the rest of this decade, we see that growing by 20 BCF a day due to LNG build out. That's a huge, huge improvement or expansion of natural gas, 20% in the overall market is going to make a big, big difference. But then we layer on top of that, electrification and power build out and things like AI really pulling on power demand very, very strong. There's another seven or eight BCF a day of demand for natural gas for those sources. So when we put that together, we think about roughly 30 BCF a day for the rest of the decade and believe that that's going to be very supportive of natural gas prices for the rest of the decade.

Supply and Demand Dynamics of Copper

When we think about another tailwind that's really driving the natural resource sector, we think about the demand for copper. The demand for copper is going up dramatically, exponentially over the rest of the decade, really coming from things like electrification, grid build out, power use, power use by AI, data centers, and many, many other industrial and manufacturing situations that we see happen here in the United States.

And really over the rest of the decade, we see somewhere between 5 to 10 tons of extra copper needed. This is a 24-ton market and we're seeing 5 to 10 coming from just the US in terms of building out all those things. So the demand for copper is going to be very, very strong. The supply for copper has been fairly abundant over the last decade, but we see in front of us a real dearth of activity. We see several new mines being built over the next couple years, but after that it's coming to a halt. And so that demand and supply imbalance is going to be very tight as we see a huge build out of technology, particularly with regards to artificial intelligence and data centers.