As the world braces for a seemingly inevitable recession, commodities have taken a hit. The prices of oil, copper and iron ore are all sharply down from their peaks earlier this year. That’s not surprising, as demand for raw materials tends to move up and down with economic activity. But another factor is the capital cycle: the amount of investment entering or exiting an industry. Given the severe lack of money that has flowed into conventional energy and raw materials in recent years, it’s possible that commodities will deliver positive returns even as the economy contracts.
Despite the energy crisis triggered by Russia’s invasion of Ukraine, many investors fear that demand for hydrocarbons will vaporise over the coming years. Oil giant BP says that if governments are to realise their pledges to reduce net carbon emissions to zero by 2050, the share of fossil fuels in final energy consumption must fall to 20%, from the current level of around 65%. The prospect of such a dramatic decline makes energy companies reluctant to invest in big-ticket projects with multi-decade payoffs.
