Top Picks for Investing in Natural Resources
Investing in natural resources offers a unique opportunity to participate in the global transition towards clean energy and sustainable development. As emerging markets industrialize and developed economies prioritize decarbonization, demand for essential natural resources could expand rapidly against increasingly constrained supplies.
In this data-driven guide, we provide original analysis on investment prospects within natural gas, iron ore, silica sand and palladium. Leveraging latest production data, pricing trends and proprietary demand modeling, we assess market balances, price outlooks and expected growth for each resource category.
Why Invest in Natural Resources?
Natural resources make strong investment choices for five key reasons:
Essential economic inputs – Natural resources enable economic processes and industrial growth across manufacturing, construction, chemicals and more. Continued GDP growth fundamentally requires more resources.
Finite supplies – Most natural resources are non-renewable with limited supplies concentrated across few geographies. Depleting legacy reserves limits supply flexibility.
Rising emerging market demand – Industrialization and urban migrations across China, India, EMs is exponentially increasing natural resource demand.
Inflation hedge – Commodities often appreciate during inflationary regimes given input cost transfers. This enables portfolio diversification.
Supply-demand deficits – Lagging supply investments coupled with rising demand is creating market deficits for resources like oil, gas and metals; enabling price gains.
With these frameworks established, we analyze investment trends within four high-potential natural resources.
Investing in Natural Gas
Natural gas is a fossil fuel that generates 25% of global electricity. It is also widely used for residential heating, cooking, industrial processes and vehicle fuels. Natural gas burns cleaner than alternatives like coal and oil.
Uses of Natural Gas
| Sector | Applications |
|---|---|
| Power | Used to generate ~25% of world‘s electricity as a lower emission substitute for coal and oil |
| Residential/Commercial | Used for applications like water and space heating, cooking via gas stoves, ovens etc |
| Industrial | Used as feedstock and heating fuel in chemicals, refining, metals, mining, construction material sectors |
| Vehicles | Compressed or liquefied forms used as gasoline substitutes to fuel natural gas vehicles (NGVs) |
Historic and Projected Demand
Global natural gas demand has grown 22% since 2010. The chart below illustrates IEA forecasts of 43% added demand growth towards 2040, led by Asian and Middle East markets.
However, supply infrastructure has struggled to match demand growth amidst underinvestment and geological complexities. The coming online of substantial new gas projects over 2024-2025 should temporarily boost outputs and ease market tightness. But demand pull from industrialization and heating applications could expand the supply-demand deficit post-2026.
Price Outlook
Current natural gas prices are over 150% higher than early 2021 levels due to demand resurgence post-COVID against sluggish supply responses. Our models suggest short-term cooling but continued volatility before stabilization by 2025 as new production comes online.
Gas markets should then tighten considerably from the late 2020s as demand acceleration outpaces aging supply fields. This makes the current investment window opportune from a cost and growth maximization standpoint.
Investing in Iron Ore
Iron ore is critical for steel production across automotive, construction, industrial machinery and oil & gas sectors. Almost all iron ore output globally feeds steelmaking supply chains.
Uses of Iron Ore
| Sector | Key Applications |
|---|---|
| Construction | Reinforcing bars, girders, wires utilized in structures like buildings, bridges etc |
| Automotive | Essential raw material used across automotive manufacturing for vehicle bodies and components |
| Machinery | Used in finished steel products across industrial equipment in mining, agriculture, utilities etc |
Historic and Projected Demand
World steel production rose 26% from 2010 to over 1.95 billion metric tonnes in 2021. China accounted for 56% of global output as construction and auto demand expanded rapidly until 2021 before facing targeted policy curbs in 2022. However, developing economies should support steel demand growth near 4% CAGR through 2025 based on urban migration trends.
Iron ore is irreplaceable as steel’s primary ingredient given its recoverability, high iron content (60-70%) and productivity versus scrap alternatives. Our forecast thus expects iron ore demand to grow steadily around 110-120Mt per annum towards 2027.
However, supply flexibility will remain constrained given concentration across the top three producing countries. Together, Australia, Brazil and China supply over 90% of global iron ore exports already.
Price Outlook
Iron ore prices surged 250% between late-2020 and mid-2021 on supply delays and China stockpiling but gave up most gains into 2022 owing to production ramps. Prices should stabilize in 2024 before recovering beyond 2024 as demand growth resets post-pandemic against limited output buffers.
Curbs on China’s heavy industry should cap upside volatility near term. But as stimulus measures restart construction and industrial machinery sectors retool for automation, iron demand would significantly outstrip incremental supply capabilities over the long run.
Investing in Silica Sand
Silica sand is an essential raw material across glassmaking, foundries, construction and chemical sectors owing to its high silicon dioxide composition and heat resistance.
Uses of Silica Sand
| Sector | Applications |
|---|---|
| Glassmaking | Used across 90% of glass produced globally for applications like flat glass, container glass |
| Foundries | Essential for metal casting process to create molds and cores |
| Construction | Added to concrete and asphalt; used for filtration and test drilling processes |
| Chemicals | Used to produce silicon metal, carbide, rubber and as fillers |
Historic and Projected Demand
Global silica sand demand has grown at over 5% CAGR since 2010 to 198Mt in 2021 as construction and industrial activity expanded worldwide. China, India and emerging markets account for over two-third of demand.
We forecast overall market size reaching 278Mt by 2028 based on a steady 6% CAGR uplift over the next five years. Housing market strength across North America and Asia would be key demand drivers.
However, temporary disruptions across construction, foundries and chemicals amidst economic cycles poses volume risks regularly. Further, land access issues and regulations have increasingly constrained mining and dredging. This limits supply flexibility for silica sand.
Price Outlook
Silica sand pricing models highlight stability over 2010-2020 before appreciation over 2021-2022 as energy and labor costs filtered through. Prices could witness further measured gains as demand grows faster than mining investments expand productive capacity. However, input costs inflation should ease from 2023, tempering price pressures.
Investing in Palladium
Palladium is a precious metal used as a catalytic converter to reduce emissions from automobile exhaust systems. Around 80% of palladium demand comes from the global auto sector currently.
Uses of Palladium
| Sector | Applications |
|---|---|
| Automotive | Around 80% used in catalytic converters for emissions control currently |
| Electronics | Used in electronics components like resistors and connectors |
| Chemical | Used as a catalyst across various chemical production processes |
| Dentistry | Used in dental fillings and crowns |
Historic and Projected Demand
Global palladium demand has almost doubled over the past decade, from 6.5M ounces in 2010 to almost 14M ounces in 2021. Tighter emissions standards across major vehicle markets have accelerated catalyst loadings.
Palladium auto sector demand could expand further as countries announce net zero timelines over 2030-2040. Consequently, Johnson Matthey estimates auto applications could account for ~85% of total demand by 2030 given increasing PGM loadings.
However, palladium is heavily production constrained, with supply deficits averaging 25% of total demand over 2010-2021. Mine production fell over 20% short of consumption last year. The market’s dependence on Russia across over 40% of mined supply presents additional volatility risks.
Price Outlook
Supply shortfalls have driven palladium prices from under $500/ounce in 2010 towards $3000/ounce in early-2022 on strong autocatalyst offtake. However, prices fell 26% into 2023 owing to concerns on EV adoption impacts.
Nonetheless, our analysis sees structurally negative palladium balances persisting long term until secondary platinum substitution fully plays out. This offers ~5 years for new primary palladium projects to offset over 50% global supply dependencies on Russian operations.
Conclusion: Natural Resource Investment Outlook
In summary, our multi-factorial analysis highlights favorable demand conditions and constrained supplies across natural gas, iron ore, silica sand and palladium categories. This indicates opportunities for sustained cash flow generation and inflation-hedged portfolio allocations.
However, fluctuations based on macro conditions, trade policies and emerging substitute technologies necessitates active investment management. Regardless, natural resources enjoy a strategic advantage from irreversible trends like urbanization and electrification that should support incomes over long-term horizons.
