18 Dec 2023 3 min read

The changing nature of commodities

By Patrick Greene , Justine Schafer

To successfully decarbonise the economy, we need to change the commodities we consume. Fossil fuel consumption will need to fall, but new opportunities will also emerge. What does this mean for commodity allocations?


The following is an extract from our Q4 Asset Allocation outlook.

Winners and losers of the energy transition

The future of the energy transition is uncertain, but if we are to succeed there are some clear messages from the scenario analysis. In our Net Zero 1.5°C scenario, total fossil fuel demand falls by more than half by 2050.

Coal is hardest hit, with demand reductions of over 85% by 2050 due to its rapid phase-out from power generation. Over the same period, oil demand halves due to full electrification of the passenger vehicle market and partial shifts to alternative fuels in heavier transport. By comparison, gas is least impacted, but demand still falls by nearly a quarter to 2050

In our view, there are plenty of commodities with potential to benefit as well. Copper is a key commodity for the electrification of the economy. Lithium and nickel have the potential to benefit from growth in battery sales – though the winning battery technology is far from settled.

Annual solar and wind additions would have to triple and double, respectively, compared with 2021 in our Net Zero 1.5°C scenario. Wind turbines need a lot of steel and zinc. Silicon is used in both solar photovoltaic (PV) cells and electric vehicle battery anodes. Increased biofuel usage could support agricultural commodities through direct demand or competing land use.


What does this mean for returns?

As if knowing the future of demand weren’t challenging enough, we believe investors also need to think about supply to determine commodity returns. If supply adjusts ahead of demand, then prices may rise even as demand falls (and vice versa). For investors gaining commodity exposure through derivatives, the shape of the commodity curve is also likely to influence returns, in our view. So, we cannot extrapolate straight from lower demand to lower returns.

It is also worth acknowledging the role of commodities in portfolios. We discussed this at the beginning of last year, highlighting the diversification[1] benefit and the potential inflation hedging properties – we also discussed why inflation hedging can’t be assumed to work every time. The inflation hedging quality is in large part due to oil and natural gas, key sources of inflationary shocks.

Where does that leave us?

 In the Asset Allocation team we have an equity allocation to a variety of decarbonisation themes. We believe, using equities can help as some of the commodities that benefit from the transition aren’t in commodity indices or are difficult to trade.

The themes we have include battery chemical producers and miners of key metals for batteries. There are also renewable energy producers. You may not consider renewable energy providers as relevant to commodities, but they are the alternative to natural gas and (as electric vehicles grow in popularity) oil.

This approach – maintaining commodities as a diversifying tool in our asset allocation framework, while adding exposure to themes that we believe are set to benefit from the transition – is our way of positioning for evolving commodity demand.

The above is an extract from our Q4 Asset Allocation outlook.


[1] It should be noted that diversification is no guarantee against a loss in a declining market.

Patrick Greene


Patrick is a strategist within LGIM's Asset Allocation team, covering a range of asset classes. Patrick joined LGIM in 2021 from M&G, where his most recent role was in the Long-Term Investment Strategy team, covering both macroeconomic research and investment strategy. Prior to that, he was an economist at CRU, providing economic research relevant to commodity markets. Patrick graduated from Durham University with a degree in economics. He also holds an MSc in economics from Trinity College Dublin and the Investment Management Certificate.

Patrick Greene

Justine Schafer

Head of Climate Modelling

As part of LGIM's Climate Solutions team, Justine heads the modelling of climate scenarios, temperature alignment and climate risk. She joined LGIM in 2021 from Vivid Economics, a consultancy focused on ‘putting economics to good use’, where she worked on quantifying the risks and opportunities from climate change for the financial and resource-extraction sectors. Justine graduated from McGill University with a BA in Economics and Finance and from the London School of Economics with an MSc in Economics.


Justine Schafer