Industrial Metals Shine in Decarbonization Transition Pensions & InvestmentsIndustrial Metals Shine in Decarbonization Transition Pensions & InvestmentsIndustrial Metals Shine in Decarbonization Transition Pensions & Investments
Impact Investing Forum 2023
London. May 04-05, 2023.
Many institutional investors are realizing the benefits of allocating to commodities for diversification and access to the opportunities offered by the global energy transition towards a green economy. Robert (Bob) Minter is the director of abrdn’s investment strategy for exchange-traded funds. He said that institutional investors are looking for ways to invest in low-carbon economies and are discovering compelling opportunities in the industrial metals sector. ESG policies have slowed investment in the metals and mining sectors, but industrial metals are essential for decarbonization. Minter stated that with limited supplies, it will be difficult for metals like copper, aluminum, and nickel to meet future demand. “Historically, commodity prices respond to disruption. We live in highly disruptive times.” Abrdn has just launched the abrdn Bloomberg Industrial Metals Strategies K-1 Free ETF (Ticker : BCIM:US), which is an exchange-traded fund. It seeks to provide investment results that closely match the performance of Bloomberg Industrial Metals Total Return SubindexSM. The fund holds futures contracts for copper, aluminum and zinc. It allows institutional investors, whose investment policies do not permit them to directly hold futures, to gain access to the industrial metals sector and to incorporate wider decarbonization trends and ESG trends into their portfolios. Minter stated that BCIM leverages the important roles that industrial metals have in renewable energy. This aligns with our bullish view on this investment subsector. Intertwined support
Minter stated that the commodities sector and its sub-sector of industrial minerals are underpinned by five key investment themes abrdn identified at start of year: supportive monetary policy, expansionary fiscal, deglobalization capital constraints on future oil production and decarbonization. He said that “when you combine [the themes], it is clear that we will not only see higher [structural] inflation but a much greater disruption supply-demand environment than what we’ve ever known,” noting that these indicate a period of sustained inflation rather that the current temporary inflation numbers. Minter explained how each of the five themes could be used to help investors. One, the U.S. monetary policies remain supportive and the expected tapering by the Federal Reserve of asset purchases doesn’t necessarily indicate a rise in interest rate. He said that real interest rates are expected to remain negative, which supports investment in risk assets such as commodities. Second, the generous U.S. fiscal policy continues to be supported by both parties, particularly for infrastructure development and job growth. Third, deglobalization leads to higher material costs, inflation, and trade protectionist policies in many countries, including the U.S., China, and other countries. Fourth, ESG policies have put restrictions on capital allocation for oil and gas production. He said that $14 trillion of assets have been committed to decarbonizing fossil fuels. This has serious implications for energy supply, both short- and long-term, before renewable goals can be met. Minter stated that the decarbonization shift represents $51 trillion in total gross domestic product in the U.S. and Western Europe, and $51 trillion in China. Recognize the inflection points
Investors must recognize that industrial metals are an important resource as the world adapts to climate change. Minter stated that “we also need to update and repair the infrastructure already in use.” “As the economy transitions and the use renewables becomes more visible, there’s an increasing recognition that the economy is at an inflection. We often forget that policies that support decarbonization or address climate change have broad implications across the entire commodity spectrum. Incentives will drive demand for renewables and the economic models that enable them. Minter explained that before someone orders a Tesla on an app, someone has to pull 300,000.lb of raw material from the ground to make it. “We have become accustomed to sustainable products appearing by magic, but we don’t consider the complicated supply chain that goes behind them.” Investigate supply issues
Copper is an excellent example of supply-chain problems. An electric vehicle can contain 200 pounds of copper, which is four times the amount as a regular car. He said that an average wind turbine and a grid-scale battery of one-gigawatt can each contain more than four tonnes of copper. “When we add these together, there could easily be 15% more demand in just a few years.” However, the supply is extremely limited. It takes five to ten to bring a copper mine online. Increased ESG scrutiny has extended the availability of new supply for all kinds of well-meaning reasons. Minter quoted a chief executive of a mining company who stated that even if copper prices doubled, suppliers would still not be able to increase production until new mines were developed. Aluminum is another example. Its use in combustion and electric vehicles can be reduced by weight, which can save 20% on energy consumption and 17% on carbon emissions. These demand-side factors are crucial. To meet its energy-reduction goals, China has, for example, set a 45 million ton limit on aluminum smelting in order to reduce its production. He explained that additional supply will be required from countries with higher energy costs. If aluminum producers have to pay carbon offsets for their production costs, they could see rising production costs. Copper and aluminum, as well as other metals, are attractive to us from an investment perspective. Minter stated that these are not short-term issues that can be traded, but multiyear themes that could be incorporated into long-term investment plans. Commodity exchange traded funds are a simple and easy way to express your short- and long-term views. The abrdn Bloomberg All Commodity Longer dated Strategy K-1 Free ETF, Ticker: BCD, seeks to provide investment results that closely match the performance of Bloomberg Commodity Index 3 month Forward Total ReturnSM. abrdn also offers exchange-traded funds that have high conviction exposure to certain subsectors or one commodity. These include physical gold, silver and platinum. Incentivizing demand
Minter stated that he sees significant changes in government policy moving forward. So far, the government’s policies and social attitudes regarding renewables have been quite simplistic. Renewables are good and fossil fuels are not. He cited the natural gas market as an example of how he tried to discourage fossil fuel investment. “The U.S. has made great progress in reducing carbon emissions over the past 10 to 15 years. This is because we have shifted from coal to natural gases to produce electricity. This has driven up demand. Minter stated that storage has not changed, which means there is less buffer to meet rising demand, which causes much higher price volatility. This means that policies must change to encourage renewable energy demand, rather than restricting fossil fuel supply. Electric vehicles are another example of how we need to encourage demand. Minter pointed out that while there are 1.3 billion cars worldwide, only 0.7% of them are electric. “We have not even begun to make this transition, according to any statistical measure. Subsidies have always been a constraint on electric vehicle sales in China and Germany. Future incentives will encourage people to switch over to renewable resources. While it will be costly, it will encourage the right part of an equation — a focus on demand rather than the supply. This is why we believe that the best days are ahead for renewables policies to make positive change. ? Important Risks
Before investing, an investor should carefully consider the investment objectives, risks and charges of ETFs. For more information and to obtain a prospectus, call 1-844-383-7299. Before you invest, make sure to read the prospectus.
Fund Risk Investing can be risky, including the possibility of losing your principal. Commodities are generally volatile and not suitable for all investors. The Fund’s investment objective cannot be guaranteed at any given time. There are many factors that can cause commodities markets and prices to fluctuate. The Fund’s performance is tied to the performance of highly volatile commodities. Investors should not consider purchasing shares of this Fund as part of a diversified portfolio. They should also be prepared to accept the risk of significant fluctuations in its value.
The Fund uses a passive management – or indexing- investment strategy to track the performance. The Fund will aim to hold similar interests as those in the Index. It will also seek exposure to many commodities under the same futures rolling plan as the Index. The Fund will also hold fixed-income securities that are short-term. These securities can be used to collateralize its commodities futures holdings and to generate interest income on the cash balances arising out of its use of futures (thereby providing a “total returns” investment in the underlying commodities). The Fund could be exposed to losses from margin deposits in case of bankruptcy of the broker involved and to the risk that the relevant position cannot close out when it is essential at its fundamental value. The Fund may trade its portfolio of securities frequently to pursue its investment strategy, especially when rolling futures contracts are involved. This can lead to a high portfolio turnover rate.
The Fund may have fewer portfolio securities than other funds because it is not diversified. The Fund invests in a small number of issuers so a decrease in the market value of a security may have a greater impact on its value than if it invested more. The value of Shares can be more volatile than shares of more diverse funds.
To qualify for the U.S. income tax treatment granted to regulated investment companies (“RIC”), the Fund must have at least 90% of its gross income from certain income categories (“qualifying income”) and meet certain asset diversification requirements. Certain Fund investments will not produce income that is qualified income. These commodity-related investments will be held indirectly by the Fund through the Subsidiary. The Fund believes that income from Subsidiary income will be qualified income as it expects that the Subsidiary would make annual distributions of its earnings or profits. The Fund has not received an opinion from counsel to confirm that the Subsidiary’s operations, and resulting distributions, would result in qualifying income. If the Fund fails to meet the asset diversification or qualifying income requirements and fails to qualify as a RIC it would be subject to the same tax treatment as an ordinary corporation. The Fund would not be able to deduct distributions to shareholders from its taxable income.
The Trust shares are not FDIC insured, may lose value, and do not have a bank guarantee. Investor shares can be bought and sold at the market price (not NAV), and cannot be individually redeemed from this Fund. You may be subject to ordinary brokerage commissions.
ALPS Distributors, Inc. distributes the abrdn ETFs. ALPS is not affiliated to abrdn. The abrdn Bloomberg Industrial Metals Strategy – K-1 Free ETF fund has a limited operating history.
“Bloomberg(R),” “Bloomberg Industrial Metals Total ReturnSM”, and “Bloomberg Commodity Index Three Month Forward Total ReturnSM”, are service marks of Bloomberg Finance L.P., its affiliates, and Bloomberg Index Services Limited (“BISL”) administrator of the indices. They have been licensed by Aberdeen Standard Investments ETFs Advisors LLC for use for specific purposes. Bloomberg is not affiliated to Aberdeen Standard Investments ETFs Advisors LLC. Bloomberg does not endorse, review, recommend, or approve abrdn Bloomberg Industrial Metals K-1 free ETF (BCIM), or abrdn Bloomberg Longer Dated Strategy K-1 free ETF (BCD). Bloomberg cannot guarantee the accuracy, timeliness, or completeness any data or information related to Bloomberg Industrial Metals Subindex total returnSM or the Bloomberg Commodity Index 3-Month Forward Total ReturnSM.
Read MoreIndustrial Metals Shine in Decarbonization Transition Pensions & Investments