Natural Resources Might Be the Next Bull Market

Natural-resource sector investments look attractive in coming years.

Insufficient capital spending to grow new supplies over the past decade has created opportunities across a wide spectrum of natural resources. Investors should be looking at three broad areas: electrification, the shifting energy landscape and food security.

Geopolitics plays a central role in AMG’s assessment of investment potential as risks from global discord and resource competition are likely to create frictions in bringing new supplies to global markets. Besides companies that produce resources, the best opportunities will come from companies that facilitate their production.

Natural resources likely offering the best risk-reward within this framework include—but are not limited to—oil, natural gas, copper, grains and soybeans.

• Copper is arguably the most important natural resource in terms of the electrification theme because of its widespread use within the global economy. Copper is used in everything electric, and with continued electrification a primary policy goal of economies around the world, investors should expect to see sustained demand growth for copper for years. At the same time, the availability of high-grade ore is diminished. Miners must spend more to get the same amount of copper out of the ground. That dynamic raises the marginal cost of production and is likely to push the price that balances supply and demand higher over the long run.

• Traditional energy—oil and gas—will likely remain viable investments for years to come. Supply-side constraints are likely to remain in place while economies have not been able to make the jump to other energy sources. The primary supply constraints are a combination of policies from governments around the world aimed at cutting carbon emissions as well as the efforts of OPEC+ (traditional OPEC plus ten additional oil-producing countries, including Russia), which has been instrumental in managing global supply since 2020. While AMG expects technology and innovation to improve the replacement capabilities of other energy sources, it is unlikely that replacement can take place over the next couple of decades without significant societal cost. The policy direction to reduce carbon emissions does not appear to be changing, but it has not accelerated to a point requiring a significant societal cost. This policy dynamic sets up a favorable situation for oil and gas investors. They are unlikely to face a mandated end to their existence, nor encouraged to take substantial risk with shareholder capital.

• Food security is important for countries around the world. Grains and soybeans are key components of global food security. However, the availability of arable land and the means of generating efficient crop yields is relatively low for much of the world. At the same time, additional uses for crops like soybeans are being developed. You may find soybean inputs in tires or used as fuel over time. The Russia/Ukraine war illustrates how geopolitics plays a role here as well. Arguably a motivation for Russia to conquer Ukraine would be a roughly 25% share of the global wheat market—enough to influence prices and entire countries. Indeed, the fallout from Russia’s invasion has been to pressure North Africa, for which Ukraine serves as the primary producer of wheat. There will be more mouths to feed from this already constrained agricultural supply with the world population set to grow by 1.7 billion people in the next thirty years. Combining arable land, new uses of crops, geopolitical tensions, and demographics suggests agricultural supply will trail demand growth for years to come.