Commodities

The smart way to profit from technology: commodity investing

Commodity investing is the clever way to profit from technological development. You see, it’s very hard to predict which player will succeed in developing a particular new technology. It’s a long way from R&D to marketing a product.

But you often do know which commodity will suddenly be in great demand as a new technology takes off. Just think of what the discovery of electricity did for copper demand. Or the nuclear arms race did for uranium mining.

We’re close to a variety of technological breakthroughs that could change what commodities are in demand. And you can use commodity investments to profit.

Producing the first economical and profitable electric cars, for example. They’ll need very good batteries and that means a great demand for lithium. As the world continues to go digital and all screens become touch-screens, the demand for rare earth metals is surging. And the commercialisation of graphene could revolutionise a very long list of Britain’s high-tech and high-value industries.

Let’s take a look at all three commodity investment stories and how they’re driven by technology.

Lithium is needed to unlock battery power

According to Deutsche Bank analysis, global lithium demand will almost triple between 2015 and 2025 – with battery tech accounting for 70% of the growth. Morningstar analysts believe the ramp up could be even steeper – more than quadrupling in the same time period.

And that’s on top of an incredible rise in the last two years. Between 2014 and 2016, lithium prices tripled.

Whichever way you cut it, demand looks set to rocket. And as you’d expect in this kind of situation, we’re already seeing a scramble for lithium assets the world over.

For instance, in January 2017 an Australian miner received a bid on a lithium deposit in Africa from to a Chinese buyer… for 2,000 times more than it paid for it, just 11 months before.

Prices are skyrocketing

They say a picture is worth a thousand words. So I’ll save a few and show you a chart that says more than I can about what increased demand is doing to the price of lithium…

Graphic showing the evolution of the price of Lithium, including inflation adjusted.
Source: Metalary

In some places, the leap higher has been even more severe. For instance, in China the price of battery-grade lithium almost tripled last year, from $7,000 per tonne to $20,000.

Lithium producing companies’ share prices are already moving too. Since 2015, the share price of International Lithium Corporation has jumped more than 900%. Or have you ever heard of Rock Tech Lithium? Its share price has been on an absolute tear recently, jumping 2,226% since the beginning of 2015.

We might be in the early stages of a decades’ long energy trend… away from oil, and towards renewables and battery tech.

And early investors have already cottoned on to that – sending the share prices of certain lithium producers skyrocketing.

The rare earth investor’s lesson

Rare earth metals are another example of how technology moved commodity markets. Rare earths are needed in the production of all sorts of electronics. Everything from your phone’s touch-screen to intercontinental ballistic missiles uses them.

The thing is, much of the supply is in risky parts of the globe. Relying on political stability in Africa and exports from China is rather dangerous.

A few years ago a territorial spat between China and Japan heightened tensions enough to make China ban rare earth exports to Japan – a major producer of electronics. You can imagine what happened to rare earth prices and the stock prices of companies that sell them.

But the boom was very short-lived as supply surged to meet demand. The rare earth investment story is as much a caution to investors as a success story these days.

The rules of tech commodity investing

This brings me to the two things you should look for in a successful technology-based commodity trade.

  1. The technology has the potential to boom fast
  2. The commodity supply is restrained

It’s a simple supply and demand argument, really. You’re looking for sudden demand and restricted supply.

But how do you benefit? You can invest in the commodity price itself – commodity trading. Many brokers make this convenient in a variety of ways such as exchange-traded funds (ETFs), futures and contracts for difference (CFDs). Or you can invest in the companies dealing in the commodity.

The next big tech commodity investing story of 2017

So what’s next on the list of commodity-moving technological revolutions? The lithium boom is ongoing. Especially if governments and solar power companies use battery farms to sure up their power supply. Not to mention electric cars.

But to really benefit you need to find the “next big thing”.

Thorium is one possibility. The first nuclear reactor was built using thorium instead of uranium. Thorium reactors are far less likely to melt down and produce less problematic waste.

But thorium doesn’t have the weapons potential of uranium. That’s why the Americans abandoned it – they wanted bombs for the nuclear arms race.

These days thorium might be due for a comeback. The risk is that thorium supply is readily available. So, just like the rare earths move, this might be a trade rather than an investment.

I’m going to let my friend Eoin Treacy explain the next opportunity – graphene. He’s the investment director of Frontier Tech Investor and specialises in this sort of stuff. Here’s what he wrote:

A strand of this material would be lighter than a single human hair… but it’s 200 times stronger than steal, and harder than diamond. It’s also translucent… and stretchy.

Not only that, it’s “smart” – far more so than silicon. It can help process information at the quantum level. And on top of that, it’s one of the most electrically conductive materials ever discovered. It’s also virtually indestructible.

It conducts electricity better than copper, it’s stronger than diamond, it’s more transparent than many other materials, more impermeable to other gases than any other membrane […]

So versatile are its properties that it could be the basis of the next generation of microchips, smartphones, oil and gas pipelines, optical computers, cancer treatments, sports equipment, surgical implants… the list is endless.

Britain is right at the epicentre of the graphene industry. I think every tech investor in the country should consider having some exposure to it tucked away in their portfolio.

I can’t show you how, but Eoin positioned his readers at Frontier Tech Investor to profit.

Technology creates creative destruction

You can also profit from decline. Technology has a habit of destroying an industry just as it created one. This process is called creative destruction.

The discovery of fracking and shale gas led to an oil price crash over the past few years, for example.

If battery technology advances enough and companies like Tesla can make battery-powered cars economical, that could devastate the demand for oil. Some of the biggest companies in the world could see their prospects dashed. Entire nations like Saudi Arabia and Kuwait would be devastated.

Technology can rejuvenate industries too. Oil wells long since abandoned have become economical since drilling and extraction technology advanced. Deep-sea drilling could unlock vast undiscovered oil sources, for example.

Whether your position yourself for the emergence of the new or decline of the old, trading commodity investments to harness the profitable opportunities of technology’s creative destruction is the smart way to go.

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