Updated 29 Mar 2021
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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.

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After its initial shock, the mining sector benefitted from the rebound in global economic activity in 2020. The recovery has been led by China, but also by stimulus packages from governments and central banks. We believe the new mining cycle is still only in its infancy, with plenty to support it in the year ahead.

Supply for most commodities has remained tight, while demand has increased as stimulus programmes have favoured infrastructure spending leading to price increases for most commodities. It has also been a good period for mining companies, with low oil prices and wage pressures keeping costs low, allowing margins to expand as commodity prices rise.

We believe the mining cycle has further to run with four key elements likely to drive the performance of both commodities and the mining sector as a whole.

Underinvestment

Global capital expenditure for the mining sector peaked in 2012 and has almost halved in the intervening years. It takes a long time to reverse the tide – it takes time to find economic deposits, finance the project and finally develop them into producing mines. In addition, the increased permitting burden has only added time to the development process for new supply.

It is worth noting that COVID-19 didn’t just impact demand, but also impacted supply; mining assets couldn’t operate at full capacity. This has meant low inventories and tight supply for most mining companies.

Synchronised global infrastructure spending

Infrastructure spending is a priority across most of the major economies including China, the US, UK and Europe. That creates a good backdrop for commodity demand in general, but this particular round of infrastructure spending is very ‘green’ oriented, targeting areas such as renewables and investment into the grid. This creates demand for key commodities, particularly in the metals sector.

Inflation

While there remains a debate on whether we are entering a period of high inflation, in our view, the low interest rate environment and the willingness of the Fed to tolerate periods of higher average inflation makes it more likely than less. Inflation is a positive for commodities prices and mining equities more widely.

We have seen inflation expectations pick up since the end of May and commodity prices have largely matched them. We believe we are still early in this journey. Excess savings and low rates naturally create inflation.

Net zero targets

One of the key announcements in 2020 was China’s plan to become net zero by 20601. This is likely to drive a key part of its fixed asset investment over the next few years with capital directed towards renewables, solar, electric vehicle and grid investment. Copper is one of the commodities likely to see a material pickup from the demand this creates. A lot of battery materials, such as nickel, cobalt, lithium and rare earths will also have strong tailwinds. In our view, this is an exciting part of the market and investors haven’t paid much attention to date. Again, lack of supply growth is likely to drive up prices.

Of course, there are risks to this scenario. COVID-19 hasn’t gone away, and global recovery is dependent on the success of the vaccine rollout. However, we believe any setbacks should be temporary and the commodities sector should be resilient even if there are short-term problems.

Any escalation in the trade war between the US and China would be a problem. When tensions have been high, it has had a dampening effect on global growth. There seems to be progress on this, and it is not as dominant for markets as it was. However, it is still a risk we are watching closely.

Another problem would be the mining sector itself – could it go back to a period of poor capital allocation? Mining companies have low levels of debt compared to other sectors. They are still focused on shareholder returns, maximising free cash flow and avoiding destructive merger and acquisition activity, but again, we are alert to the risk.

With this in mind, we believe the sector is poised for an exciting run. Coordinated infrastructure spending, a recovering global economy, and favourable supply and demand dynamics are combining with low valuations, higher dividends and capital discipline for the mining sector. This is a compelling backdrop for investors.

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 February 2021 and may change as subsequent conditions vary.

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[1] Forbes, September 2020

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