The supply of many commodities is being constrained because mining companies have been highly disciplined about their capital investment in recent years, so little new supply has come on stream. Mining companies have instead opted to pay down debt, reduce costs and return capital to shareholders.
At the same time, demand for key commodities remains high. Infrastructure building – particularly related to the transition to lower carbon fuels – is set to drive the next wave of demand for a range of commodities.
Mined commodities and the future
This is particularly evident in areas such as copper. Copper is a high conductivity metal and demand is being driven by electrification. The International Energy Agency predicts that clean technology demand for copper will make up almost 40% of overall demand by 2030.
We see deficits emerging over the next three years and this driving higher-than-expected prices and stronger-than-expected earnings for the producers. The growth of artificial intelligence (AI) is also likely to be an important driver of demand in the year ahead. AI is energy intensive, with a single ChatGPT query requiring around 10x the electricity of a Google search. ChatGPT now has over 100 million users every week, with energy demands growing all the time.
Whether it is through the expansion of renewable energy sources, improving infrastructure or exploring new energy sources such as nuclear, investment in natural resources may be needed to meet these additional energy requirements and build the necessary infrastructure.
Data centres are reliant on mined resources: they require lithium and cobalt, for example, to make components such as processors and batteries. The AI revolution is reliant on mined commodities to thrive. This may support investment in mining companies in the longer-term.
Uncertainty for mining companies in 2025
Nevertheless, there are reasons for caution in the year ahead. The key point of uncertainty for mining companies in the year ahead is around the strength or otherwise of China. China remains the world’s most important consumer of a range of commodities, particularly metals and energy. That said, expectations around China are low so this uncertainty is priced into equity markets to some extent. Government stimulus was put in place in November, which may help boost the country’s economy and, by extension, demand for specific commodities.
How is gold performing?
The gold price has performed very strongly over the past two years. Central banks and Asian consumers have been investing in gold, which has helped support prices. It has performed well in spite of real interest rates rising and the US dollar strengthening, which usually create a difficult environment for gold.
We believe the relationship between gold and real interest rates has reset at a new level and our base case for gold for the next 12 months is that it continues to trade gradually higher.
Gold mining shares have not kept pace. Production costs rose significantly from 2021 to 2024 as inflationary pressure emerged, which held back share price performance. However, we are excited about the potential for an improvement in margins from here, given high gold prices and costs appearing to stabilise.
Merger and acquisition activity has also increased, with AngloGold Ashanti’s £1.9bn bid for Centamin the latest example. We believe this consolidation may continue in the year ahead.
Overall, the mining sector looks cheap relative to broader equity markets. However, it has been cheap for a while. Continued reporting of stronger-than-expected earnings, driven by higher-than-expected commodity prices over the medium to long term, could lead to a reassessment of valuations in the mining sector.
Olivia Markham is co-manager of the BlackRock World Mining Trust. The views expressed above should not be taken as investment advice.