The world is running out of resources faster than you may think. Some reports indicate that the supply of commodities such as copper, lithium and boron could fall well short of demand as early as 2030.
Not only will this shortfall further strain supply chains (and make the things we rely on everyday such as smartphones increasingly more expensive), the need for clean energy technology will also increase competition for metals and other resources, hampering our efforts to solve climate change.
In facing these stark challenges ahead, the circular economy holds deep promise. Instead of the “take-make-waste” model widespread in manufacturing today, imagine a world where everything we need is produced completely from recycled materials.
This would mean no wastage of past resources, and no need to extract, process and refine virgin minerals. Carbon emissions would fall off, pollution would decrease, and the environment would be preserved against further damage.
But more than a drastically cleaner planet and a more sustainable way of living, the circular economy will also impact the commodities markets, bringing about changes to demand and usage patterns. This can create new opportunities for investors savvy enough to keep up.
In this article, we will explore the interplay between the circular economy and the commodities markets, and how environmentally-minded investors can capitalise on this emerging trend.
New opportunities for commodities trading in the circular economy
Before diving in, it’s crucial to grasp the fundamental principles of the circular economy.
At its core, this economic model seeks to design out waste and pollution, keep products and materials in use, and stop environmental damage to allow natural systems to regenerate.
Circular practices include recycling, remanufacturing, and adopting closed-loop supply chains. As such, investors can look for new opportunities in commodities related to and aligned with these practices.
Here are some sectors that commodity investors may start looking for opportunities.
Recycling and recyclable materials
- One of the core tenets of the circular economy is to increase recycling rates, and improve recycling efficiency so that more resources can be recovered.
- At present, only 9% of plastic is recycled worldwide, creating tremendous plastic waste that ends up in landfills or leaching into waterways. This fact represents two potential areas for improvement as we progress towards the circular economy.
- One, higher rates of plastic recycling could be achieved, including plastic waste collection and management.
- Two, part of the reason why plastic recycling rates are so low at the moment is because many types of plastics are more costly to recycle than to produce new. As such, there is a need for new types of plastics (or plastic substitutes) that are easier to recycle.
- Commodities investors can seek out companies involved in the research, development and innovation of recycling processes and recyclable materials. They can also look at enterprises such as recycling plants and eco-waste management companies that play a crucial role in the circular economy.
- Plastic products are just one sector. The circular economy would also welcome new materials with lower carbon emissions, such as vegan leather made from plants, paper products made from fast-growing bamboo instead of trees, and fabric made from carbon-neutral cotton.
- This means there are opportunities in sustainable agriculture, demand for which is expected to grow as the circular economy develops.
- Traditional food producers and agricultural giants should not be ruled out too. As demand for sustainably produced agricultural products increases, it is conceivable that more producers will also adopt changes aligned with the circular economy, making their stocks a viable option in a circular economy commodity portfolio.
- Clean energy encompasses many sub-sectors, each of which could offer opportunities for circular economy commodity investors. Consider commodities related to energy production, such as solar panels and wind turbines, as well as companies developing energy storage technologies – vital to achieving reliable and stable power supply throughout all weather conditions.
- As the world shifts towards cleaner energy sources, these commodities are likely to experience increased demand.
Circular construction materials
- The construction industry is a significant contributor to resource depletion and waste generation. However, many commonly used construction materials can be recycled, reclaimed or reused, including wood, concrete, steel and copper used in wires.
- Thus, exploring commodities in circular construction may prove fruitful for investors. As sustainable building practices become more prevalent, commodities such as recycled concrete or reclaimed wood are likely to see increased demand.
- On a related note, low-impact materials such as zero-carbon steel, and less-waste construction techniques like modular construction may also be worth looking into.
Challenges in assessing the value of circular economy commodities[4,5]
Circular economy commodities often lack standardised pricing mechanisms. Unlike traditional commodities with well-established markets, circular economy commodities may face challenges in developing consistent pricing benchmarks, making it difficult to assess their fair value. This has been a well-observed phenomena in plastics recycling and scrap metal markets.
Also, circular economy commodities often involve complex and multifaceted supply chains, with multiple stages such as recycling, remanufacturing, and sustainable sourcing. It can be challenging for retail investors to fully understand the dynamics of these moving parts, and disruptions at any stage can impact commodity prices.
Market awareness of circular economy commodities is currently lacking, which can contribute to market inefficiencies and price volatility. Additionally, circular economy commodities are vulnerable due to an absence of regulatory guidelines, and may face short-term price disruptions when there are changes in environmental policies.
Lastly, as newer and more effective technologies and materials are discovered, circular economy commodities may experience price volatility or undergo market shifts. For instance, new solar panels using perovskite have been proven to have higher efficiency, while costing less. This is expected to sway market attention away from silicon-based solar panels.
Strategies for successful commodities trading in the circular economy
Get to know the circular economy
- It’s important to have a thorough understanding of the circular economy to better discern potential opportunities and come up with trade ideas.
- Familiarise yourself with concepts such as closed-loop systems, cradle-to-cradle design, recycling processes, and sustainable sourcing. This knowledge will guide your decision-making and help you identify relevant opportunities.
Identify commodities with potential for high demand in the circular economy
- Focus on commodities that play a crucial role in circular economy practices, such as recyclable materials and scrap metals, clean energy components, sustainable packaging materials, and water-efficient products.
- As you build your list, evaluate the demand and growth potential of these commodities to identify upcoming opportunities.
Understand trends and preferences
- As consumer demand is a strong driving force in markets, it can be worthwhile paying attention to trends and preferences.
- Circular economy commodities may experience heightened demand if they prove to be viable options for circular practices, such as zero-carbon steel in low-impact construction. Companies dealing in such commodities could hold lucrative potential for investors.
Stay informed on important developments
- As discussed, circular economy commodities are susceptible to external forces, including regulatory changes and breakthrough technologies. Thus, it is important to stay informed on important developments that have the potential to create volatility in the markets.
- Additionally, having access to updated news will assist investors in mitigating risks and anticipating challenges that could emerge.
Commodities can unlock opportunities in the circular economy
Undeniably, there is an urgent need to transition to a circular economy, and the sooner we get there, the better.
Commodities are essentially the basic building blocks of our modern lives, and by following the right ones, investors can unlock opportunities in the circular economy to enhance their portfolios.
Just like with stocks, commodities trading can be performed via derivatives such as Contracts-for-Differences (CFDs), allowing investors to potentially benefit from market opportunities without having to take direct ownership of the underlying assets – a particularly challenging endeavour given the form and nature of commodities.
By focusing on commodities that play important roles in the circular economy, investors can contribute in promoting greater sustainability through their investing activities. At the same time, they can take advantage of myriad opportunities to profit as circular practices become more widespread and markets grow and mature in response.
- “The Trading Opportunity That Could Create Resilience In Materials – McKinsey & Co”. https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/the-trading-opportunity-that-could-create-resilience-in-materials. Accessed 4 Dec 2023.
- “Plastic Pollution Is Growing Relentlessly – OECD”. https://www.oecd.org/environment/plastic-pollution-is-growing-relentlessly-as-waste-management-and-recycling-fall-short.htm. Accessed 4 Dec 2023.
- “Why most plastic can’t be recycled – DW”. https://www.dw.com/en/why-most-plastic-cant-be-recycled/a-64978847. Accessed 4 Dec 2023.
- “Scrap Copper Prices Are Tough To Determine – GLE Scrap Metal”. https://glescrap.com/blog/copper-prices-are-tough-to-determine-and-change-daily-from-market-conditions/. Accessed 4 Dec 2023.
- “Rhythms And Reasons In Pricing – Resource Recycling”. https://resource-recycling.com/plastics/2017/10/31/rhythms-reasons-pricing/. Accessed 4 Dec 2023.
- “Perovskite Solar Cells – Office of Energy Efficiency and Renewable Energy”. https://www.energy.gov/eere/solar/perovskite-solar-cells. Accessed 4 Dec 2023.