Thoughts about Commodities, De-carbonization, and De-globalization
When I think about the demand of commodities, I think about the demand for real goods. Commodities are the raw materials of real goods.

Everyone has a capacity for how many real goods they can consume. Everyone can eat so much corn or wear so many coats. Among the wealthy and middle class, they all consume a similar amount of commodities. But for the lower class, they consume a lot less commodities because they can't afford the same amount of commodities as those that are wealthier than them.

As the world economy grows, at some times, the wealth gap increases. At other times, the wealth gap decreases. Usually, an overheating economy would have a declining wealth gap as nearly everyone would be working and making money.

One thing I've noticed is that whenever there are more people escaping poverty and entering the middle class, the demand for commodities increases. Along with the demand increase, we have commodities booms. Meanwhile, when poverty is rising, demand for commodities is decreasing.

The severity of a commodities boom varies in each cycle. Downcycles that consist of consistent capex spending makes the upcycles not as impactful to people's finances. But in these times, we came out of a severe downcycle that came with immense cuts to capex from the sector. Because of this, producers aren't able to produce more commodities while the world has an insatiable demand for them.

At the same time, with de-carbonization efforts like the ESG movement and tons of environmental regulations, it's harder for capital to reach the commodities sector. Regulations slow (and even prevent) the construction of new mines and oil rigs. Regulations also deter investors from pouring money into these old-economy industries because of their environmental impact.

Meanwhile, de-carbonization efforts require immense amounts of resources like metals, oil, etc. Because electric vehicle batteries are heavy, many automakers choose to build their vehicles out of plastic to reduce their weight. Petrochemicals are used in the construction of solar panels. Batteries require immense amounts of batteries (especially rare earth metals). The activities are done to extract the materials, and the activities done to build the green products are carbon-intensive.

An underrated aspect of the de-carbonization movement is that it plays a role in the de-globalization movement. Rather than source our oil from Saudi Arabia or Russia, we can produce our own energy at home thanks to the sun, the wind, and the Earth's inner heat. Also, protectionist policies that deter the importation of energy provide an incentive for firms to source their energy from domestic sources. While deterring more oil imports, nations are also encouraging more green energy production. Without protectionist policies, society would take longer to transition from fossil fuels to renewables because society would remain comfortable with importing cheap fossil fuels from overseas.

A lot of the trends we see today are more interconnected than we realize.
Scoreboard Investor's avatar
We're in one, big interconnected economy. Very few businesses can truly stand alone. Good perspective that often gets overlooked.