With inflation forecast to move even higher over the coming months, commodity stocks have come into sharper focus for many investors. Historically, the prices of commodities have risen during times of high inflation. While this may or may not continue in the current era of high inflation, the long-term outlook for a range of commodity firms appears to be upbeat.
For instance, iron ore miner Rio Tinto (LON: RIO) and copper miner Antofagasta (LON: ANTO) may enjoy heightened demand in a growing global economy that is moving towards a net zero future. Their valuations, financial strength and growth prospects suggest they offer investment appeal on a long-term view.
Antofagasta’s share price has risen by 5% year-to-date, but has been highly volatile. The company reported that it is on track to meet production guidance for the full year despite a drought in Chile. Meanwhile, a proposed royalty tax on the mining sector in Chile could weigh on investor sentiment in the short run.
However, the long-term prospects for the copper price appear to be positive. It is used extensively in electric vehicles and renewables infrastructure. In fact, electric vehicles use four times as much copper as internal combustion engine vehicles and renewables infrastructure uses up to twelve times as much copper as fossil fuel-based systems. With the number of electric vehicles in existence forecast to rise 13-fold between 2020 and 2030, and net zero ambitions being widely held across major economies, demand for copper is likely to rise significantly.
The supply of copper could struggle to keep pace with rising demand. A lack of exploration over recent years has contributed to a minimal number of major finds. This could mean that the price of copper has a bright future based on simple demand/supply dynamics.
Antofagasta’s share price currently trades on a forward price-to-earnings ratio of 14. This suggests that it offers good value for money based on the long-term prospects for the copper price, although volatility could remain high due to an uncertain near-term outlook for the global economy.
Rio Tinto’s share price has also outperformed the FTSE 100 index’s flat year-to-date performance. It has risen by 14% since the turn of the year in spite of an uncertain outlook for China’s economy. It continues to experience Covid-19 challenges that have prompted lockdown measures. Since it is the world’s largest importer of iron ore, a slowdown in its economic growth rate could harm the prospects for the commodity.
Encouragingly, the company is seeking to diversify its asset base as it aims to focus on commodities that are essential to the world’s transition towards net zero. For example, it recently completed the acquisition of a lithium mine in Argentina. Its £1.3bn net cash position should mean that it has the financial means to engage in further M&A activity to complement its iron ore operations over the coming years.
Trading on a forward price-to-earnings ratio of around 11, Rio Tinto’s shares seem to offer a wide margin of safety at the present time. Although an uncertain outlook for China’s economy may weigh on them in the short term, the company’s long-term strategy, low valuation and solid financial position indicate that it has further capital growth ahead.