As the prospects of a recession loom large, stock markets across the globe have been taking a tumble. The recent sell-off in tech stocks remains no great surprise to me. However, we have also begun to see market jitters in commodity stocks too.
The mantra of retail investors is often to ‘buy the dip’. But if I’m looking for deep value opportunities, then investing in tech stocks still looks risky to me. Instead, I’m bargain hunting in the commodities space, and believe that Glencore (LSE: GLEN) shares represent excellent value for money.
A commodities powerhouse
When it comes to mining, Glencore is one of the industry’s giants. From its roots as a small commodities trader, today it owns a portfolio of world-class industrial assets spanning six continents.
Glencore has a very simple business model. It’s split into two divisions. Its industrial segment, which produces over 60 commodities, accounts for 80% of adjusted EBITDA. The rest comes from its thriving marketing business that sells what it produces across the globe.
The dislocation to global supply chains brought on in the aftermath of the pandemic, transformed Glencore’s fortunes. Having booked a loss of $4bn the previous year, in 2021 it reported a profit of $4.3bn.
Key market drivers
The long-term prospects of Glencore are inextricably linked to increasing momentum to decarbonise the global economy. Many of the metals that it produces, including copper, cobalt, nickel and zinc will be at the heart of this revolution. These metals have several primary uses including renewable power generation, electric vehicles and energy storage.
But here’s the conundrum. Many of these metals are in short supply. Not only is this being caused by the after-effects of Covid affecting mining capacity, but also because of a dearth of new mines expected to come on-line in the years ahead.
Historical underinvestment across huge swathes of the natural resources industry is likely to ensure that demand will outstrip supply for many years to come.
The inherent cyclicality of the mining industry means that approval for new mines only happens when commodity prices are high. And even then, it takes years to find new sources, let alone obtain the necessary licences.
However, the events of the last two years have taken the industry by surprise. After all, no one wants to flood the market when demand is suppressed, least of all shareholders.
Risks
One of the primary risks for Glencore is that it remains one of the largest producers of coal. Indeed, in 2021, it accounted for 20% of total revenues. In stark contrast to many of its competitors that have been offloading coal assets, in January 2022 it acquired the remaining two-thirds interest in Cerrejón, a coal mine in Colombia.
At a time of elevated coal prices, this is obviously good news for its bottom line. But with the drive for net zero, the imposition of levies on emissions is likely to see a downward trend in demand. This is likely to be exacerbated by the fact that technological advances will bring greater price parity between fossil fuels and renewables.
Despite this risk, the sell-off in Glencore has presented me with a buying opportunity and I will be adding more to my portfolio.
