Resources are key drivers of geopolitics. Access to resources defines a nation’s capability to survive, to keep, or to increase its living standards and limits its geopolitical sphere of influence. Resources and their pricing are inextricably linked to investing.
"The story of resources is the story of investing."
Global demand for the extraction of raw materials seems, if anything, to be growing over the century. Competition for resources leads to scarcity, and population growth is a key driver here. With scarcity comes pricing pressure which has the potential to radically affect the world’s investments.
Resources, and their pricing, are at the very core of investing. Future-proof investing therefore requires an understanding of the world we operate in today and will inherit tomorrow. Resources, quite literally, shape that world.
Resource scarcity will remain a key topic in geopolitics, substantially affecting financial markets and investing as geopolitical considerations disrupt economic principles of supply and demand. The availability of resources is key to investors across the globe as it has the potential to substantially affect the value of investments.
Geopolitical tensions may lead to countries restricing access to key resources and certain resources have critical dependencies. In the future, trade partners will likely pay more attention to trading with geopolitical allies, leading to economic inefficiencies and elevated underlying price pressure for resources.
Conflict. Trade wars. Climatic events. Where will future resource-related problems arise? Investors should be aware of the implications as we move towards a multi-polar world, with two centers of gravity–China and the US.
Scarcity in the set of resources that a population needs to survive immediately triggers social unrest and geopolitical actions. This set usually includes air, water, food and (heated / cooled) shelter (including also some form of energy).
Scarcity in this second set of resources, those that help countries to keep their economies running and prosper, usually triggers social unrest and geopolitical actions by the government. Yet the response time ranges from immediately, in the case of an economic security emergency, to protracted, in the case of slowly withering economic prosperity.
Scarcity of resources that endanger the geopolitical aspirations of leaders and populations can trigger social unrest and harsh government actions but the response time varies from national security emergencies to slowly evolving long-term strategic power plays, where the response time tends to be gradual.
In assessing resources (both natural and material) and their complex relationship with geopolitics, several clusters of consideration for investors become apparent:
Such a world order looks set to emerge in the decades ahead and would revolve around two centers of gravity: China and the US.
Virtually all nations appear quite dependent on other non-allied countries from a resource point of view. Shifting alliances and new partnerships will impact resource pricing and thus have the potential to radically impact the value of investments.
Though China is continuing to catch up in terms of geopolitical power relative to western nations, it appears more vulnerable in many resource dimensions than is usually considered.
The current US-EU-NATO bloc still appears well equipped, particularly when it comes to the all-important resource know-how. Yet, the US, and more so Japan or the EU, following the decision to reverse energy dependence on Russia and move towards renewable energies, are confronted with another dependence in the form of minerals and metals.
Geopolitical multi-polarity affecting resource access and trade can lead to distortion in the economic models usually used by investors to price resources and linked assets. Capturing and harnessing the opportunities presented in such a complex, geopolitically driven environment is ideal ground for the expertise and flexibility of active investing.
Within our investment boutiques we see the fight for resources taking place across the globe as part of our work. Here, we share some examples of the realpolitik of resources and investing, and how investors should be thinking about resources to maximize their investment success.
The case of battery electric vehicle (BEV) value chain: From a global market back to a divided one. The world has changed. Over the next 10 years the emerging battery economy will see EVs become vastly superior in cost and capability to combustion engines. It is expected that the EV penetration rate will be around 50 % by 2030 compared to 12 % in 2022.
Human ingenuity could initiate several transitions towards more efficient and / or cheaper sources of energy. The most prominent ones are the transitions from wood to coal, coal to oil, coal to natural gas, or coal to nuclear power.
The inefficient use of resources is apparent at various stages of the food supply chain, from growing crops to food processing and final distribution. Water and agricultural chemicals such as fertilizers and pesticides are essential but often wasteful and detrimental to the environment. Precision agriculture has the potential to transform the sector.
Globally, solar installations were dominated by European countries. In 2014, China surpassed European solar installations due to significant investments in leading-edge production capacities and now dominates the world’s energy transition supply chains. Such changes in fortune illustrate how investments in subsidy-driven businesses can benefit from an active management approach as rationales may change abruptly once rules change.
