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Olivia Markham, BlackRock
Updated 29 Apr 2022
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

2021 was a good year for the mining sector, with high earnings and rising dividends driving improving share price performance for many companies. Many investors are asking whether the cycle may be drawing to a close. Far from it, at BlackRock we believe we are only partially through a material multi-decade investment cycle linked to net zero.

The drive by global governments to move to net zero is changing the landscape in the mining sector. Around 80% of the world’s GDP (Gross domestic product) is now under a net zero commitment1. To achieve these ambitious goals, countries will need to significantly change their energy infrastructure. This forms an important part of President Joe Biden’s US $1.2 trillion infrastructure bill and the European ‘Green Deal’, which, in turn, drives demand for commodities in particular.

The commodity market is supplying the necessary ingredients for society to achieve net zero. This is largely focused on the key metals needed for the electrification of the economy - copper, cobalt, lithium, nickel and rare earths. These are going to be vitally important in building the necessary solar, wind, grid improvements and electric vehicles required for society to move towards a lower carbon future.

Supply constraints

Supply in many of these areas is constrained. This is partly due to short-term considerations such as bottle necks and supply chain problems caused by Covid. Russia’s invasion of Ukraine is also leading to supply disruption, pushing commodity prices higher. here are also more fundamental and longer lasting problems at work – the increasing maturity of certain mines, declining grades, plus environmental, social and governance considerations affecting the way mines operate. Water availability is also becoming increasingly problematic. This makes it increasingly challenging for the mining sector to bring on supply at a sufficient pace to meet demand.

Also, these supply problems come after a period of considerable discipline on the part of many mining companies. Capital has been withheld, which has also constrained supply over the last decade.

The recent trend in copper illustrates this supply dynamic. Copper supply has regularly underdelivered on expectations, often by as much as 5% of the global copper industry annually. Compounded over time, this creates a significant deficit. The world’s largest copper producer, Chile, has dedicated billions of dollars of investment, but has not been able to increase supply since 20162.

In our view, this means commodity prices need to stay sufficiently high to incentivise more supply. As demand for green infrastructure picks up, copper demand, related to solar, wind and electric vehicles, is set to double by the end of this decade. This is replicated across other commodities as well. Against this backdrop, the move to net zero is likely to create a significant investment cycle.

Carbon-heavy industries

There are other elements to the net zero progression that need to be considered. For example, it has changed the way we think about energy-intensive commodities such as steel and aluminium. Historically, the carbon impact of mining these commodities has not been incorporated into their pricing. As countries around the world start to impose carbon pricing, it could prompt a significant change. In the case of aluminium, an energy intensive commodity, we expect low carbon producers with access to renewable power to benefit as carbon prices increase the cost of production for thermal coal powered smelters and customers increasingly look to pay a premium for low carbon produced aluminium. In the BlackRock World Mining Trust, we have exposure to low carbon producers of aluminium and steel that we believe will benefit from this trend.

Valuations for mining companies still look attractive, even after a strong year for the sector. The shares trade at attractive valuations relative to global equity markets and relative to their own history. Dividends are strong, as are balance sheets. The changes brought about by net zero are not implied within valuations. As inflation expectations increase, commodity prices tend to move higher.

China is another consideration for the mining sector today. It has been a strong source of demand for commodities for the past two decades. It slowed significantly in the second half of 2021 and there was a pullback in some commodity prices as a result, notably iron ore. However, China appears to be moving towards stabilising the economy, increasing credit availability, and has resumed a number of infrastructure projects which should be supportive for demand in 2022.

The war in Ukraine has introduced a new dynamic into the commodities complex. Should we see a significant de-escalation in the present situation then prices for commodities are likely to ease in the short term. However, over the medium to long term we see countries reliant on Russian commodities, most notably energy, look to accelerate their renewable plans to secure and diversify their energy needs which in turn increases demand for the commodities that enable the transition.

We remain optimistic on the outlook for the sector in 2022. Commodity markets are tight today with very low levels of inventories and limited new supply growth on the horizon. Demand is set to benefit as the economy continues to recover post Covid and global infrastructure spending commences this year. The move towards net zero is a multi-decade investment cycle that will require a significant amount of commodities to enable it. When combined with the constraints on supply, we expect many of the commodity markets to remain tight for a number of years to come, which is supportive of prices.

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of March 2022 and may change as subsequent conditions vary.

Olivia Markham
Co-Manager, BlackRock World Mining Trust plc

Source:

1University of Oxford, November 2021

2Trading Economics, November 2021

Risk warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Trust Specific Risks

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.

Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments.

Therefore, the value of these investments may be unpredictable and subject to greater variation.

Gold/Mining funds risk: Mining shares typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important Information

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BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

This material is marketing material. Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

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ID: MKTGH0322E/S-2056771

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