When Matthias Rüth looks at his raw materials, he first has to unlock an old World War II bunker. Past two meter thick reinforced concrete walls, through the middle of a massive vault door. 50 centimeters thick, 4.5 tons in weight. “As in Fort Knox,” says Rüth when television is a guest. Because behind Rüth’s doors there are metals worth millions – gallium, iridium, neodymium. The raw materials trader actually built his bunker as a storage facility for companies, but then more and more individual investors asked.
In the meantime, commodities have long been considered deregistered by private investors, but for a few months now many have been looking enthusiastically for interesting metals apart from the ubiquitous gold: Only one year after the first corona shock, many quotations have finally not only recovered from the first price decline, but have gone into a kind of intoxication. The price for copper has risen by 44 percent since the beginning of 2020, the price for shiny white lithium has even increased by 77 percent. “A new super cycle could have started for industrial metals,” says capital market strategist Ludwig Kemper from Berenberg Bank.
Perhaps it is only one man who is currently jazzing up commodity prices: US President Joe Biden has made investors prick up his ears with his trillion investments. Once scolded as “Sleepy Joe”, the Democrat has now become the “Trillion Biden” for many investors. Roads, bridges, rails, the new man in the White House wants to renew all of this. Many investors know that without commodities it should not be possible to master this.
But Biden is not only planning to rebuild the infrastructure, but also the entire economy. He explicitly wants to spend billions of dollars on green infrastructure, for example on new power grids and charging stations. Lithium is required for e-car batteries, silicon for solar panels – and no power line can do without the fiery red copper. While energy resources such as coal or oil are likely to be increasingly out, industrial metals in particular could be in demand in the future, according to the idea of many investors.
Copper is also in demand again
The shiny silver lithium, for example, is an integral part of many e-car batteries. Ten kilograms of the lightest metal in the world are in a standard car battery and drive demand. 65 percent of the lithium supply is already in batteries, and this proportion has tripled in the past ten years. “In Europe, the demand for lithium is expected to increase eighteen-fold by 2030,” says asset manager Manfred Rath from KSW Vermögensverwaltung in Nuremberg.
A hitherto unknown euphoria can also be felt on the copper market, with some even referring to the metal as “red gold”. Since the inconspicuous copper conducts extremely well, it can be found in almost every cable or circuit board. While a classic mid-range combustion engine only contains around 25 kilograms of copper, an electric car can easily contain 83 kilograms, and solar power also requires up to twelve times more copper than fossil electricity. It is such statistics that literally electrify investors.
New wind power plants and solar panels, charging stations and power grids could make copper a key element of the energy transition. The EU Commission estimates that solar and wind companies alone are likely to more than double their copper demand by 2035. While only five million tons of copper were ordered a year ten years ago, by 2020 it will have been 25 million tons. By the end of the current decade, three million tons are expected to be added every year. “That speaks in favor of high copper prices,” says investment expert Stefan Breintner from the fund company DJE.
Many bankers are already talking about a “super cycle”: prices could not only rise for four or five years, as in a normal economic upswing, but for 20, 30 or 40 years, spiraling upwards. After all, the demand for the raw materials of the future is growing rapidly at the moment – and on top of that, there is often a lack of supply. Since raw material prices have been bobbing in the past few years, many mining companies have been noticeably reluctant to invest. It can take years, sometimes up to a decade, for new mines to actually produce metals such as copper. “The result is supply deficits and raw material prices that have risen steadily over the years,” says Berenberg banker Kemper.
The fact that the miracle stories of raw material records and supercycles are not inevitable shows nothing as well as the history of the “rare earths”. Behind the tempting name are metals with unpronounceable names such as praseodymium, terbium or neodymium, which is extremely magnetic and is therefore used in wind turbines.
When prices shot up around ten years ago, many banks launched investment products and advertised the soaring prices. But many of the rare earths are less rare than the name suggests. The only reason for the price rush was an export stop by the Chinese, who have a dominant market share in some of the rare earths. When the Beijing leadership later relaxed its export rules again, prices collapsed, and a few years later many banks stomped on their investment products – and occasionally brought investors heavy losses.
So far, skepticism has been appropriate with this type of investment
Consumer advocates do not think much of special raw materials anyway, in their opinion investors should invest at most five to ten percent of their portfolio in raw materials. The figures support their skepticism: Financial advisor Gerd Kommer has calculated that investors with a basket of 28 raw materials after deducting inflation would have lost around 1.1 percent every year over the past 51 years.
Anyone who wants to invest in the supposed raw materials of the future despite such warnings has several options. So-called exchange traded commodities (ETCs) should follow the price of a commodity almost one to one. Suppliers such as Wisdom Tree, Xtrackers, BNP Paribas and iShares now offer some of these products on raw materials such as copper, nickel, palladium or platinum.
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Even if the principle sounds simple, ETCs hold two pitfalls. Most providers do not actually buy tons of raw materials, but instead purchase so-called raw material futures. These financial papers give them the right to theoretically have the raw material delivered later. The problem: Every future has a limited term. If, for example, the copper bonds of the ETC expire in December, the provider must buy new copper futures for a later date. If the price of the new future is higher, however, the provider makes a certain loss, which can add up over time. In addition, ETCs are legally so-called bearer bonds. If the provider goes bankrupt, the investors’ money may be gone.
If you want, you can instead rely on promising companies that deal with the raw materials of the future. The provider L&G has summarized the entire production chain of e-car batteries in its product “Battery Value Chain ETF”: In addition to mining companies, there are battery cell manufacturers here, but also the corresponding car manufacturers. The largest positions include, for example, the lithium producer Pilbara Minerals, the Chinese battery manufacturer BYD, but also the electric car pioneer Tesla.
As an actively managed fund, investors can think about the “Robeco Sam Smart Materials”. This fund primarily wants to invest in companies that come up with clever ideas in view of the scarcity of raw materials. Intelligent robots can make processes in factories more efficient so that fewer raw materials are wasted. Other companies not only recycle PET bottles, but metals themselves. And proven pioneers are already working on the circular economy, which should process materials and reuse them many times.