One year into the latest supercycle … Eric Fry explains why this one could be a monster … how to play it in your portfolio
Please, give your portfolio exposure to battery metals.
They’ve been making investors lots of money over the last year. More importantly, the tailwinds behind their gains are nowhere close to being exhausted.
For greater context, let’s begin by traveling back in time one year.
Here’s our macro specialist, Eric Fry, from his September 2020 issue of Investment Report:
A new commodity supercycle is underway… and it has the power to produce sizable investment gains over the next few years.
During the last supercycle, which kicked off in 1999, the Thomson Reuters CRB Commodity Index soared 300%. This recent history may not repeat itself exactly, but don’t be surprised if it rhymes.
Unlike stocks, which tend to move higher over time, commodity prices cycle through powerful multiyear booms, followed by spectacular multiyear busts.
These are called “supercycles” …
Thanks to a newly hatched commodity supercycle, many resource stocks possess considerable profit potential… perhaps their greatest potential in 20 years.
As part of his analysis, Eric presented a chart of the TR/CC CRB Commodity Index (CRB). This index tracks futures prices for a basket of 19 commodities. Everything from aluminum, to coffee, to cattle, to nickel, to silver.
Below is how it looked one year ago. It was spiking off multi-decade lows.
Below, I’ve updated the chart to today. The green circle highlights the last 12 months.
The index has climbed nearly 65% in one year.
Of course, as an index, it contains a basket of different commodities, which have performed with varying degrees of success.
Specific metals and metal miners have produced enormous gains over the same period, dwarfing this index return.
For example, from September 2020 through this past May, copper mining giant, Freeport-McMoRan, climbed as high as 170% thanks to the commodity supercycle and surging demand for copper.
In late July, Eric’s Speculator subscribers closed out a trade on FCX for a return of greater than 1,400%. Eric’s long-dated call option on FCX produced the 14-bagger thanks to its inherent leverage.
***Though major gains have already piled up, there’s still plenty of life in this supercycle
In Eric’s most recent issue of Investment Report, he pointed this out by revisiting the beginning of the last supercycle that began in the late 90s.
Between December 1998 and December 2001, Eric recommended numerous resource stocks – from nickel and copper miners, to uranium producers and oil and gas companies. Specifically, there was Antofagasta, Freeport-McMoRan, Impala Platinum Holdings, Cameco, and Gazprom.
Here’s Eric with how those trades played out:
Those five stocks delivered an average five-year gain of 550%, and each of them would go on to produce a 10-year gain of more than 1,000%.
And it is important to remember that commodity cycles tend to run contrary to stock market cycles.
Between 1998 and 2008, for example, when commodity stocks like these were flying high, most other stocks were “dead money.
The S&P 500 produced a loss of 12% over those 10 years, while the Nasdaq Composite Index dropped 22%.
***This particular commodities supercycle could be one for the record books
In order to understand why this particular cycle could be a monster, we need to understand what’s behind a commodity cycle.
Basically, the sector follows a well-worn pattern of scarcity and excess.
Here’s Eric to explain:
Resource companies always underinvest in future production during difficult times.
When commodity prices are low and falling, resource companies lack either the conviction or the capital to expand production. Instead, most of them hunker down during those phases, and simply wait for better times…
If low prices persist for several years, some resource companies go out of business completely, which reduces supplies even more.
This sort of vicious cycle is exactly what vexed the resource sector from 2011 to 2018. And conditions in the industry did not improve decisively until just a few months ago.
So, this is the usual pattern.
But there’s a difference this time that will amplify the traditional dynamic, a bit like pouring gasoline on a fire…
Demand from technology.
From electric cars, to solar energy, to large-scale battery storage, to cutting-edge tech products…tomorrow’s technology requires battery metals. This is a heightened demand that didn’t exist to nearly the same degree decades ago.
Back to Eric:
Now that green technologies are powering a boom for certain battery metals, the mining industry finds itself ill-prepared to meet the rising demand…
I believe that future “battery metal” demand will exceed current forecasts by a large margin. An “unexpected” demand surge could emerge for several reasons:
- EV adoption growth could accelerate faster than current forecasts…
- “Non-factors” like electric bikes and scooters could advance from mere curiosities to household necessities…
- And utility-scale energy storage could embark on an explosive growth phase.
***Of the various battery metals, we’ve regularly highlighted the importance of copper
That’s because copper is used in just about all-things tech.
And that suggests one thing – enormous, decade-long demand.
Back to Eric:
According to research firm Fitch Solutions, annual global copper use will soar from 24 million tonnes to nearly 32 million tonnes over the coming decade, thanks mostly to surging demand from EV manufacturers and other renewable energy industries.
By 2030, Fitch predicts, copper demand from green technologies will more than triple to five million tonnes per year. For perspective, five tonnes of yearly copper demand would be greater than the combined yearly output from the world’s three largest copper mines!
Eric goes on to highlight a study from research firm, CRU Group. It found that the copper industry needs to invest more than $100 billion to have any chance of preventing major supply deficits during the upcoming decade.
If the industry fails to make this investment, the world may face a significant shortfall of the key “active ingredient” in most renewable energy technologies.
***Putting copper to work in your portfolio
There’s obviously Freeport-McMoRan, which led to Eric’s 1,400%+ return last month.
In past Digests, we’ve also highlighted the Global X Copper Miners ETF (COPX). Eric has recommended COPX as well – his official trades have profited to the tune of 100% and 85% respectively (he sold in tranches).
Toward the end of August, Eric highlighted a new name – Ivanhoe Mines (OTC: IVPAF).
These are all solid ways to give your portfolio copper exposure. Of course, if you’d like to get the latest on how Eric is playing it as an Investment Report subscriber, click here.
Before we close out, I’ll quote the CEO of Freeport-McMoRan, Richard Adkerson. Credit to Eric for finding this quote, which he presented to subscribers in his September issue.
Copper is critical in every aspect of achieving low-carbon goals for the global economy… This transition is now just beginning to unfold. It will add significantly to future demand for copper…
This recent pullback and copper pricing that we’ve seen has not altered in any way our conviction of the favorable long-term outlook for copper.
There are always actions that influence sentiment and short-term pricing at any point in time. But beyond that, indisputable facts support a positive fundamental outlook for copper…
Rising demand [and] scarcity of supplies point to large, impending structural [copper] deficits, supporting much higher future copper prices.
Again, please, give your portfolio exposure to battery metals.
Have a good evening,