The buy low, sell high strategy to investing sounds great in theory but it’s not always easy to apply in practice. But with so many bargains in the FTSE 100 at present, investors are simply spoilt for choice. One stock that’s been falling throughout 2023 is mining giant Anglo American (LSE: AAL).
Demand for commodities
At present, the slower than expected re-opening of China’s economy together with on-going inflationary pressures is weighing on global commodities demand. Little wonder, therefore, it saw EBITDA (earnings before income tax, depreciation and amortisation) fall 40% in H1 2023 compared to the same period in 2022.
But long-term demand for commodities including copper, iron ore and platinum group metals is underpinned by major global trends.
Decarbonisation and the green transition are pretty well understood. Not so much appreciated are the improvements in living standards brought about by a growing and urbanising global population.
By 2030, the consuming middle classes will grow by 1.3bn. People have everyday needs including homes, infrastructure, energy, appliances and mobility. None of this is possible without minerals and metals.
And a growing world population is leading to greater thought around food security. Anglo’s polyhalite project, Woodsmith, has the potential to increase crop yields significantly. This project will generate significant cash flows for several decades.
Geopolitical shifts
The economic growth in China seen over the last 20 years has shifted the balance of political influence eastwards. However, supply chain disruptions together with the Russian invasion of Ukraine are resulting in the emergence of new trends. These include de-globalisation and the growth of regional trade agreements.
The BRICS summit last month hit the headlines when it was announced that six countries were set to join in 2024. The ramifications of such an expansion are unknown but have the potential to lead to greater socio-political complexity. This has the potential to shift centres of demand for raw materials.
In the West, we’re beginning to see the emergence of an onshoring of manufacturing capability as companies move to beef up supply chain security.
In the US, the likes of the CHIPS Act and Inflation Reduction Act will, I believe, fuel a fiscal-stimulus-driven secular demand boom for commodities throughout the 2020s.
Risks
Share price performance of commodities businesses tend to ebb and flow with the general health of the global economy. As recession indicators continue to stack up, it’s little wonder that prices of Anglo’s key products have declined. But I’d argue that the extent of its share price decline has been overdone.
In its August meeting, the Federal Reserve stated that one major risk to the global economy is the potential for inflation to remain above its 2% target longer than expected. One reason it cited for this relate to the potential for supply shocks.
The last 10 years have been characterised by underinvestment throughout the industry. Today, the consequence of this underinvestment is becoming all too obvious.
The last business cycle was dominated by technology businesses. I believe this next cycle will be a commodities-led one. As the Anglo American share price languishes in the doldrums I listened to Warren Buffett’s advice: be greedy while others are fearful.
