The global crossroads: Geopolitics meet commodity markets

Earlier this month, my colleague Prem Panesar wrote on the impact the conflict in the Middle East may have on oil. You can find the article here. In this week’s edition of Views from the Desk, however, I will take a broader look at the interplay between geopolitical developments and commodity markets.

The world order is fracturing

In “A Crude Awakening” Carlyle argued that the geopolitical landscape of today is the most fractured since the Cold War. The private markets firm argued that one of the consequences is a commodity super cycle “characterised by price spikes and volatility with higher highs and higher lows.”

Source: Carlyle

A period characterised by higher commodity prices, especially fuels, and volatility, cannot bode well for the global economy. Every nation or trading block is exposed to this kind of storm. However, there are some which are more exposed than others. For example, Europe’s economic future does not look bright against such a backdrop.

Bruegel argued in “Dependence on Fossil Fuels, Not on the United States, Is Europe’s Worry” that the European economy remains exposed to imports of fossil fuels from places of great geopolitical instability, such as Russia.

Source: Bruegel

Moreover, with demand for artificial intelligence (AI) on the rise, the need for more electricity is also expected to increase. Robeco wrote in an article late last year:

“The U.S. is at the epicenter of this acceleration, with power demand in the next decade expected to increase almost three times the pace of the last two. This will bring its total consumption from 4,100 TWh in 2024 to 5,300 TWh in 2035. Such an increase is equivalent to the combined annual consumption of France, Germany and Italy.”

Source: Robeco

This brings us to one of the central themes found at the intersection of geopolitics and commodity markets: new technologies, such as AI, and the materials needed to support their development and adoption.

Rare earths earth materials and national security

Deutsche Bank wrote in a recent report that “rare earth metals, a subset of critical minerals, is a group of 17 metallic elements that possess magnetic and conductive properties that have significantly improved the performance, efficiency, longevity, and reliability of countless modern technologies.”

Critical minerals are used in key U.S. military systems. However, the biggest deposits of rare earths, which are central to these technologies come from China. The Asian country is the world’s biggest exporters of these important commodities.

Source: Deutsche Bank

However, the relationship between the U.S. and China is difficult. As New York Life Investment Management wrote in “U.S.-China: What to Expect in 2026”, tensions between the two superpowers are likely to remain elevated for years to come.

However, there is hope for negotiations on certain matters. Nevertheless, the Chinese government is aware of the importance of rare earths for the U.S. military. As such, many expect these commodities to be a central point of these negotiations.

What it means for allocators

The investment implications of these developments are vast, presenting allocators with novel opportunities but also with new risks. Amundi argued in “Geopolitics: Power as Policy” that today’s environment calls for a clear focus on diversification:

“In a multipolar world where leverage comes from critical resources and military power, governments are prioritising resilience. […] New security alliances and trade deals are emerging despite intensifying economic friction as policy makers seek to compensate for the eroding global order. […] With multilateralism retreating, diversification is increasingly critical for investors.”

Savvy Investor will soon publish a chart pack focused entirely on the theme explored briefly in this edition of the Views from the Desk. If you are an institutional investor, you can become a member for free and access it here.

Thank you for reading.