The growing recovery of the world’s economies has led to a sharp rise in the demand for metals, crops and energy when supplies are still constrained. Kim Parlee speaks with Hussein Allidina, Head of Commodities, TD Asset Management, about the role of commodities in a diversified portfolio.
- What's been driving up commodity prices? Will it continue? And what's interesting for you to pay attention to? Hussein Allidina is Head of Commodities at TD Asset Management. He joins us now to take us through it. Hussein, I listed off a number of commodities-- copper, silver, oil, corn, everything showing some pretty lofty levels. What's driving all this?
- Yeah. So thanks for having me, Kim. Look, I think bigger picture, it's a combination of both improvements in demand as well as a relatively challenged supply side. So on the demand side, we're seeing on the heels of the stimulus and the reopening globally, we're seeing a pickup in demand. And there's quite a bit of pent-up demand, as we know.
On the supply side, which is particularly of concern, commodities have been for the better part of a decade in a bear market. And there has been a material disincentive to invest in the supply side. Commodities have a long lead time. Commodities like copper, you mentioned, oil, lumber-- they have long lead time. So even though prices are higher today and the economics might justify additional production, it's going to take some time before that production comes to fruition.
KIM PARLEE: Hmm. Can you take us through one example? I mean, let's look at copper. I mean, you talk about the supply side. I mean, it's interesting, because are we generating new demand coming out of the pandemic that wasn't there before? Or is it just a perfect storm of a lot of things coming together?
HUSSEIN ALLIDINA: Yeah, that's a great question, Kim. So it's a couple of things, right? So if we look at the world and how the world kind of pulled out of the pandemic, Asia and in particular China was first. And you saw quite a bit of robust demand and strong imports from China on the heels of their recovery.
The other feature I think that is supportive for copper, nickel, lithium, these commodities are integral components of the electric vehicles that are expected to take market share from conventional vehicles. And that sort of feature, that reality, that ESG sort of component is stimulating a lot of interest in copper.
The demand for copper today that goes into vehicles is a relatively small percentage of the overall. But when we look over the course of the next several years, I'd argue that some of the forecasts that we're seeing, there simply isn't enough copper even if we invest to meet those targets.
So it's a combination of kind of the old economy reviving itself on the heels of the stimulus that we're seeing and the opening of economies globally, as well as this new demand that's stemming from the sort of green energy transition or revolution that we're embarking on.
KIM PARLEE: Hmm, fascinating. It's a pretty bullish thesis. I got to ask you about oil, because when people hear ESG, oil is not on the list often for ESG, but I'm expecting not everyone's going to turn around and buy an EV tomorrow. There still is a demand. And cars are only half of what I assume the demand in the world. There's still got to be demand for oil
HUSSEIN ALLIDINA: Yeah. So I think the market spends a lot of time talking about copper, talking about lithium, talking about renewable fuels. I think there's a pretty big mismatch in our thinking or analysis around the issue of oil. We still consume close to 100 million barrels a day, record levels of oil globally. 2/3 of that demand, Kim, is used in transportation.
And what you're seeing because of the focus on ESG is that, notwithstanding the fact that the economics might justify incremental production, the companies historically that would make those investments are shunning away from making them, largely owing to kind of the backlash that they're receiving from their shareholders.
So we've not invested in the supply side over the course of the last 10 years, because the market-- like other commodities, we're in a bear market. Now that the economics allow us to invest, we're discouraged to invest because of ESG. And the IEA came out this morning, the International Energy Agency came out this morning and said, look, if we have any hope of reaching our 2050 targets, we need to stop investing in oil immediately. That's happening on one hand.
On the other hand, and you mentioned this. Not everyone is driving an electric vehicle, right? We don't have enough copper, frankly, to allow everyone today to drive an electric vehicle. 2/3 of my global energy demand is still transportation. And transportation is not something that you can change overnight, right? We see this in Toronto with the build-out of our public infrastructure and how long that takes.
So I think, actually, that oil, on a sort of three-, five-year view, Kim, has I think quite a bit more upside. And I think it's going to be probably the surprise that stems from the commodity space in that time frame.
KIM PARLEE: Hmm, fascinating. Hussein, great conversation. We'd love to have you come back. Will you join us again?
HUSSEIN ALLIDINA: I would love that. Thank you.