The Commodity Crunch Point Global Version

September 2019
Chief Investment Office GWM

Investment Research
The commodity
crunch point
3 Foreword
5 What you need to know
6 Introduction
8 Commodity markets in transition

11 Energy: Transition from fossil fuels will be slow but essential
13 Mining: Adjusting to slowing demand
15 Agriculture: Technology meets sustainability
18 Implications for policymakers, investors,

and entrepreneurs
20 The ABC policy framework for commodity transitions
25 Investment implications
30 Takeaways for entrepreneurs: Monetize the opportunities,
mitigate the risks
34 Commodity titans: Regional perspectives

36 The US: Energy independence
37 Russia: Fiscal rule lowers sensitivity to oil, but further measures are needed
38 Saudi Arabia: Progress on reforms, but no room for complacency
39 UAE: A regional role model of diversification
40 Nigeria: Reform implementation to define growth outlook
41 South Africa: Structural reforms urgently needed
42 Brazil: The pro-growth reform agenda
43 Chile: Mining heavyweight poised to adapt to industry’s evolution
The commodity crunch point Editor in Chief Design

This report has been prepared by Tatiana Boroditskaya CIO Content Design
UBS AG and UBS Switzerland AG Werner Kuonen
and UBS Financial Services Inc. Authors (in alphabetic order) Margrit Oppliger
Please see the important disclaimer Jérôme Audran
at the end of the document. Past Michael Bolliger Editors
performance is not an indication of Tatiana Boroditskaya Thomas Gundy
future returns. The market prices Leonardo Carvalho Aaron Kreuscher
provided are closing prices on the Alejo Czerwonko
respective principal stock exchange. Jonas David Contact
Nicole Decker ubs-cio-wm@ubs.com
James Dobson
Wayne Gordon
Rudolf Leemann
Ronaldo Patah
Dominic Schnider
Michaela Seimen
Cover picture Giovanni Staunovo Learn more at:
Getty Images Rachel Whittaker www.ubs.com/cio
2 September 2019 – The commodity crunch point

Foreword
Dear reader,
The fate of commodity markets is clearly intertwined with the state of the global econ-
omy. It is no coincidence that they reached their all-time highs in 2007–08, at a time
when the Chinese economy was expanding at double-digit rates. In those years, the
shares of commodity-producing companies easily outperformed those in many other
sectors, and many investors assumed the good times might last forever. Such expecta-
tions, as we all remember, came to a halt with the global financial crisis.
Since then other important factors have been at work in shaping the changing com-
modity landscape. The sharp rise of the US shale energy industry has posed a formida-
ble threat to traditional exporters of fossil fuels worldwide, forcing sovereigns to drasti-
cally alter their spending habits and search for new areas of revenue and growth.
Another challenge comes in the form of quickly evolving requirements for environmen-
tal, social, and governance standards demanded by concerned citizens, companies, and
investors. These disruptions, while often challenging, create opportunities for entrepre-
neurs and investors alike to tap into new markets and industries, and to benefit from
structural changes in the years ahead. Understanding the key trends and challenges is
therefore of utmost importance for entrepreneurs, investors, and governments.
As the world’s leading wealth manager, UBS advises numerous clients exposed to these
developments either directly or indirectly. Looking at the many opportunities and the
potential pitfalls within these markets, I find it timely that our colleagues from the
UBS Chief Investment Office put together a white paper – “The commodity crunch
point” – that assesses these dynamics in great detail and discusses the consequences
for the players involved.
I hope you find the reading thought provoking and enjoyable.
Caroline Kuhnert
Head UHNW Europe, Middle East & Africa
September 2019 – The commodity crunch point 3

Source: Getty Images

What you need
to know
• The world’s current use of commodities is unsustainable. • Investors need to rethink their investment approach to
Commodity markets must adopt greater urgency in tackling benefit from commodity transitions and mitigate risks.
the challenges posed by climate change, major technologi- We identified several appealing longer-term investment
cal advances, shifts in consumer preferences, and the rise of themes that will likely benefit from the policy responses of
more sustainable commodity supply sources (from renew- commodity-producing countries to the transitions. These
able energy to plant-based proteins). themes include renewable energy and energy efficiency,
clear air and carbon reduction, smart mobility, agricultural
• Amid the slower pace of energy demand growth, fossil fuel yield, protein consumption, and water scarcity.
producers face rising competition from renewables. By
2040 the displaced demand for fossil fuels could exceed • Green bonds could play a key role in funding projects
current US oil demand of nearly 21 million barrels per day. aimed at attaining some of the UN’s Sustainable Develop-
ment Goals (SDGs). They could provide interesting opportu-
• Bulk commodity and metal producers face mounting pres- nities for investors, as nearly every commodity-producing
sure. In the next two decades, we expect demand growth country needs to devote significantly more effort to attain-
for bulk metals to be one-third, or even less, of what it ing the SDGs.
was in the past decade. By contrast, electrification means
demand for lithium and cobalt could as much as quadruple • In the coming years commodity transitions will gain in
in less than a decade. importance and demand more attention and resources from
business owners. Governments worldwide are likely to
• With free resources dwindling, the issue of how to feed place greater emphasis on environmental, social, and gov-
a growing, urbanized population without further harming ernmental (ESG) topics, which could lead to tighter regula-
biodiversity and the ecosystem is intensifying sharply. tions. In this environment, we think companies that build
Overall, the food innovation opportunity will represent a sustainability into the way they do business will enjoy a rela-
USD 700bn market by 2030, according to our estimates. tive advantage.
• Many commodity-producing countries rank among the • Entrepreneurs need to assess the strength and diversity of
most vulnerable to climate change and are also relatively their supply chains. In a world of increasing trade frictions,
unprepared to adapt to the ongoing energy transition. The access to resources is of paramount importance, since com-
shifts in commodity markets compound these challenges modity markets are extraordinarily concentrated. Over 70%
and expose existing structural imbalances in many of the world’s iron ore, corn, and lithium, for instance, are
commodity producers, adding urgency to the need for produced in just five countries.
reforms in them.
• Norway and several Gulf Cooperation Council (GCC)

countries, which prudently accumulated an estimated
USD 3.5trn in rainy day funds, Russia, which used a fiscal
rule to reduce the sensitivity of its fiscal policy and currency
to oil prices, and the United Arab Emirates (UAE) and Chile,
which have successfully diversified their economies, provide
useful examples of best practices in their policy choices.

Chapter 1
Introduction
Commodities play a pivotal role in our life. In agriculture, c limate change. Equally, many corporations may no longer be
wheat, soybeans, cattle, and the like are essential to covering able to operate on a business-as-usual basis, as they will have
our basic nutritional needs; energy moves our cars and heats to grapple with the consequences of the commodity transi-
our homes; and we rely on raw materials to build houses, tions. Investors and entrepreneurs will also need to rethink
factories, and cities. The trading house Trafigura estimates their strategies to benefit from the numerous opportunities
that each year about USD 10trn worth of commodities is pro- and manage emerging risks.
duced and consumed, which makes the sector the biggest
and a rguably most important one worldwide. Three key takeaways for entrepreneurs, investors
and sovereigns
The only constant is change This report identifies three key ways that entrepreneurs, inves-
Ongoing innovation exposes the commodity industry to tors, and governments can utilize to seize opportunities and
continuous and rapid change. Environmental considerations, mitigate risks arising from the commodity transitions. For sov-
social developments, and advancing governance standards ereigns, success in adjusting to commodity transitions critically
(ESG factors) also leave their mark. Food production already depends on their approach to allocating commodity revenues,
accounts for 40% of land use, 30% of greenhouse gas emis- building up non-commodity sectors, and changing the com-
sions, and 70% of freshwater consumption. Major efforts modity sectors: we highlight these three challenges in the
and investment will be needed to sustainably feed a growing ABC policy framework for commodity transitions.
world population and to end poverty and hunger – two of
the UN’s Sustainable Development goals. In our view, the policy choices of commodity-producing coun-
tries such as Norway and several GCC countries that have
Similarly, the rising demand for renewables – at the expense prudently accumulated an estimated USD 3.5trn in rainy day
of fossil fuels – will usher in opportunities for new products funds; of Russia, which used a fiscal rule to reduce the sensi-
and innovations. Morocco, home to the world’s largest con- tivity of its fiscal policy and currency to oil prices; and of the
centrated solar plant, is aiming to become a world leader in UAE and Chile, which are diversifying their economies, all
renewable energy. Other countries are likely to follow suit. exemplify best practice in addressing these challenges.
The extent of the investment needs and the importance of For entrepreneurs, the three ways to monetize the opportuni-
a safe and reliable energy supply will make this transition a ties and mitigate risks are: build sustainability into the way
slow one, however, and close collaboration between the they do business, as the ESG performance of their companies
public and private sector will be a key to success. and the countries they operate in increasingly affects their
business reputation and brand value; use commodity disrup-
No time to rest tions to diversify, either geographically, as commodity produc-
The transformation in commodity markets is set to test the ers open up their markets, or into the emerging sectors that
existing economic models of commodity-producing countries. are disrupting their business models; and create nimble but
It will expose their structural weaknesses while forcing govern- resilient operating models by considering the strength and
ments to rapidly search for new opportunities. Many commod- diversity of their supply chains and deciding on early versus
ity-producing countries need to ramp up efforts to prepare late adoption when investing in a new technology.
their economies for energy transitions and the effects of

Chapter 1 – Introduction
Investors should consider that countries better positioned to to and the risks confronting investors in greater detail. We
cope with commodity transitions should generally offer more conclude the paper by focusing on some of the world’s lead-
attractive risk-adjusted returns over a long-term investment ing commodity producers: Brazil, Chile, Nigeria, Russia, Saudi
horizon. But increasing efforts to deal with the changing Arabia, South Africa, the UAE, and, last but by no means
commodity landscape can boost asset prices, too, especially least, the US.
if these improvements occur from a weaker base.
We hope that you enjoy reading The commodity crunch point
Investors should also consider longer-term investment themes and welcome your feedback.
that will likely benefit from the policy responses of commod-
ity-producing countries to commodity transitions. These
themes include renewable energy and energy efficiency, clear Michael Bolliger
air and carbon reduction, smart mobility, agricultural yield, Head Investment Office CEEMEA
protein consumption, and water scarcity.
Finally, as many of the changes we foresee originate from

ESG trends, investors are well advised to make use of sustain-
able investing, including green bonds, to reap positive finan-
cial returns out of commodity sector disruption.
The remainder of this report is structured as follows: Chap-

ter 2 discusses our views on what we consider the key com-
modity market trends in the decades ahead. In Chapter 3 we
look at the commodity market’s implications for sovereigns
and entrepreneurs, and we discuss the opportunities open

Chapter 2
Commodity markets
in transition
Source: alamy

Chapter 2 – Commodity markets in transition
Commodities are the building blocks of our

society. But our current use of them is unsus-
tainable, making change inevitable across the
sector. The diversification away from fossil
fuels like coal, oil, and natural gas is underway
already, but the process of creating a sustain-
able future will be a gradual and costly one,
we believe.
Bulk commodity and metal producers face
mounting pressure from slowing demand
growth, regional shifts in consumption, and
growing calls to address social and environ-
mental concerns. This poses major challenges
to the mining industry. The agricultural system
requires a complete overhaul. Agriculture
already accounts for most of our water and a
high percentage of our land use, as well as the
bulk of human-generated greenhouse gases.
With free resources dwindling, the issue of
how to sustain a growing, urbanized popula-
tion without further harming biodiversity and
the ecosystem is intensifying sharply. In this
chapter, we discuss some of the changes set to
transform key commodity markets over the
coming years and decades.
Chuquicamata open-pit copper mine, Chile.

Table 1
Commodity production is in the hands of few players

Top 5 producers’ share of global production in 2018, in %
Commodity 1 2 3 4 5 Total
Energy Oil US Saudi Arabia Russia Canada Iran
16.2% 13.0% 12.1% 5.5% 5.0% 51.7%
Natural gas US Russia Iran Canada Qatar
21.5% 17.3% 6.2% 4.8% 4.5% 54.3%
Coal China India US Indonesia Australia
46.0% 9.5% 8.6% 6.8% 6.1% 77.0%
Metals Gold China Australia Russia US Canada
12.0% 9.4% 8.4% 7.6% 5.8% 43.2%
Silver Mexico Peru China Russia Chile
23.0% 16.9% 13.4% 5.1% 4.9% 63.3%
Platinum South Africa Russia Zimbabwe Canada US
68.8% 13.1% 8.8% 5.9% 2.6% 99.2%
Palladium Russia South Africa Canada US Zimbabwe
40.5% 32.4% 8.1% 6.7% 5.7% 93.4%
Copper Chile Peru China US Congo
27.6% 11.4% 7.6% 5.7% 5.7% 58.0%
Aluminum China India Russia Canada UAE
55.0% 6.2% 6.2% 4.8% 4.3% 76.5%
Nickel Indonesia Philippines New Caledonia Russia Australia
24.0% 15.0% 9.0% 9.0% 7.0% 64.0%
Iron ore Australia Brazil China India Russia
36.0% 19.6% 13.6% 8.0% 3.8% 81.0%
Lithium Australia Chile China Argentina Zimbabwe
60.0% 19.0% 9.0% 7.0% 2.0% 97.0%
Cobalt Congo Russia Cuba Australia Philippines
64.3% 4.2% 3.5% 3.4% 3.3% 78.7%
Agriculture Soybeans US Brazil Argentina China India
34.1% 32.0% 15.0% 4.4% 3.2% 88.7%
Corn US China Brazil EU Argentina
32.6% 22.9% 9.0% 5.6% 4.5% 74.6%
Wheat EU China India Russia US
18.8% 18.0% 13.7% 9.8% 7.0% 67.3%
Sugar India Brazil EU Thailand China
18.5% 16.5% 10.2% 7.9% 5.9% 59.0%
Coffee Brazil Vietnam Colombia Indonesia Ethiopia
37.2% 17.4% 8.2% 6.1% 4.2% 73.1%
Lean hog China EU US Russia Brazil
53.9% 21.3% 10.5% 3.6% 3.2% 92.5%
Live cattle India Brazil China US EU
23.5% 16.9% 16.2% 12.4% 9.9% 78.9%
Source: BP Statistical Review of World Energy 2019, GFMS, U.S. Geological Survey, USDA, UBS, as of July 2019

Energy: Transition from fossil fuels Fig. 1
Global energy demand

will be slow but essential Values in million tons of oil equivalent
18,000
Estimation
The development of renewable energy is essential to securing 16,000
our energy future, in our view. Environmental benefits are 14,000
the key motivator in the near term. Over time, energy diversi- 12,000
10,000
fication is needed to mitigate instability in energy availability
8,000
and pricing, particularly from supply or demand shocks in the
6,000
oil and gas markets. A cleaner, more sustainable and secure 4,000
energy supply base is both vital and feasible. But demand for 2,000
most energy resources, including oil, coal, and natural gas, 0
2000 2017 2025 2030 2035 2040
is still projected to rise in the years ahead despite growing
aspirations to diversify away from fossil fuels. Source: International Energy Agency World Energy Outlook 2018, UBS, as of June 2019
Growing global hunger for energy, but a

changing menu exceeds the current US oil demand of nearly 21 million
Global energy demand is expected to rise by nearly 27% barrels per day.
through 2040, according to the International Energy Agen-
cy’s (IEA) base case projections. This implies a slower pace of Renewables and natural gas to gain…
demand growth (1% annually) than in the recent past, The IEA predicts that about 43% of the increase in global
thanks in part to advances in energy efficiency. energy demand will be satisfied by renewables, including
hydropower, wind, solar, geothermal, and bioenergy. This rise
Our global energy resource base will change significantly. implies an annual growth rate of 2.6% in the coming
While consumption of oil, natural gas, and coal is projected decades, although with important differences among renew-
to rise by over 16% by 2040, their market share is set to ables: demand for electricity generation from wind and solar
decline to 74% of the global energy resource base (com- is projected to grow nearly 8% per year. Through 2040, about
pared to 81% in 2017), according to IEA projections. This 40% of the global energy demand growth being forecast is
equates to some 23 million barrels of oil equivalent per for electricity, which should pave the way for growth in wind,
day of displaced demand for fossil fuels by 2040, which solar, and other renewables. Natural gas, a relatively abun-

dant, less polluting, low-cost fossil fuel used in power genera- Fig. 2
tion and industrial applications, will also likely see robust Share of energy demand by source
demand growth (IEA forecasts nearly 2% p.a.) and will take 2040 projections (outer circle) vs 2017 (inner circle) in %
further market share from coal.
…and oil to lose market share 20

22
Oil demand is projected to rise, too, though it will likely slow 14
Coal
27
to 0.4% annually through 2040 from 1.4% over the last 5 Oil
20 years, according to IEA estimates. The changing fuel mix 5 Gas
Nuclear
for transportation should play a crucial role: gasoline demand
22 Renewables
could peak in the mid-2020s due both to more efficient cars
consuming less fuel and to alternatively powered vehicles 32 28
(hybrids, electrified vehicles). This would partially offset rising 25
demand for oil used for bunker fuel for ships, air, and freight
transportation, industrial applications, and petrochemicals. Oil
stands to lose slightly more than 4 percentage points of its Note: Renewables include alternatives such as bioenergy, wind and solar, geothermal,
and hydropower
market share by 2040, according to the IEA.
Source: International Energy Agency World Energy Outlook 2018, UBS, as of June 2019
The difficulty of a rapid transformation

The growth outlook for renewables has been quickly acceler-
ating as more nations announce clean energy aspirations. Ramping up energy supply requires investing intensively in
This trend is likely to intensify, we think, as the social and eco- plants and infrastructure. And a rapid and significant expan-
nomic costs stemming from adverse weather conditions rise sion within the renewables sector could strain resources
further. But we caution against ignoring the impediments to throughout the supply chain (e.g., in engineering, labor, mate-
a rapid transformation. A combination of technical, logistical, rials such as copper, nickel, and lithium, equipment, and parts).
and financial constraints and ongoing consumption increases, Such a transition is likely to be costly and time consuming.
especially from emerging economies, make it hard to envision Since the global oil and natural gas market is established and
an imminent peak in fossil fuel demand. relatively efficient, consumers will probably have to continue
relying on it for the time being, as long as oil and gas remain
affordable and readily available.

Government policies will play an important role too. Transform- In the next two 10-year periods, we expect demand growth
ing the energy industry requires central planning and substantial for bulk metals to be one-third of what it was in the past
investment. In the power sector in particular, where the deploy- decade, or even less. Demand growth for base metals should
ment of new technologies is most prevalent, vigilance will be be around half to two-thirds less than previously.
needed to ensure adequate supplies and a reliable infrastructure
framework. For this reason, we expect the pace of new energy For platinum group metals (platinum, palladium, rhodium,
technology adoption and deployment to be heavily influenced etc.), the demand backdrop is set to transform more materially
by government policies and funding. The IEA estimates that, over the next 10–20 years as transportation increasingly shifts
of the USD 2trn worth of annual investment required to meet from combustible to electric engines. Palladium will likely suf-
future demand, approximately 70% of it will come from fer the largest drop in demand, as its use in autocatalysts, a
governments or be driven by regulatory requirements. key part of combustible engines, accounts for around 80% of
total metal offtake. The outlook for platinum is less gloomy,
especially if China succeeds in commercializing fuel-cell-pow-
Mining: Adjusting to slowing
Fig. 3
demand Urbanization trends
Yearly average change,10-year rolling windows, values in million people
Demand growth for bulk and base metals is set to decline over being newly urbanized
the next two decades. After rising 13% and 20% in the previous 90
two 10-year periods (2008–2018 and 1998–2008), the pace of 80
global urbanization is likely to fall off to only 1%–2% between 70
60
2018 and 2028, according to UN estimates.. It might even stall
50
thereafter. The speed of urbanization matters greatly for com-
40
modity demand (see Fig. 3), particularly for bulk commodities 30
(iron ore, coking coal, steel), which are closely linked to infra- 20
structure and housing construction activity. Incremental demand 10
for base metals (aluminum, copper, nickel, zinc, lead) should be 0
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
more resilient, as they are tied less to infrastructure and housing
and more to capital and consumer goods, the demand for which Africa Asia Europe Latin America North America Oceania
is growing as per capita income in emerging economies rises. Source: UN, UBS, as of July 2019

ered vehicles that use platinum loadings on a large scale. Can miners find salvation in technology?
Moreover, the greater use of platinum than palladium for jew- The mining industry tends to be a late adopter of technology.
elry and investment purposes could stabilize demand for it. Yet improved crushing and grinding methods, which often
account for the bulk of a mine’s total energy demand, can help
Gold and silver demand will likely stay strong thanks to the reduce energy and water use. Advances in automation, drones,
rising middle class in Asia and other regions, where their use and big data can enable operations to be managed remotely
for investment and jewelry/fabrication purposes should create and in real time across the entire value chain. Doing so could
ongoing favorable conditions for prices. increase the utilization rates of mining assets – for example, by
necessitating the use of fewer trucks, raising fuel efficiency,
Growing challenges from stakeholders and lowering staffing costs – and improve safety aspects by, for
Traditional measures of success like shareholder returns are instance, reducing the number of workers in pits.
increasingly being looked at in the context of environmental,
social, and governance (ESG) standards. The public is demand-
ing more accountability from mining companies, a trend we Table 2
expect to continue in the coming years. Creating value for Global demand growth for select commodities
local communities and the country the company operates in 10-year CAGR
will thus play an even greater role in its ability to obtain per-
mits and secure financing. Commodity 1998 –2008 2008 –2018 2018 –2028 2028–2038
Iron ore 6.3% 3.3% 1.1% 0.8%
Adopting new technologies like blockchain could make it
easier for consumers to track where goods are produced and Coking coal 2.8% 3.9% 1.4% 0.9%
judge whether they meet ESG standards. For investors, partic- Steel 6.0% 3.4% 1.2% 0.8%
ularly banks, there is an increasing reluctance to allocate capi- Aluminum 5.6% 5.6% 3.6% 2.6%
tal to miners that don’t pursue best practices. Pressure from
capital market participants on the mining industry to meet Copper 2.9% 2.7% 1.8% 1.6%
ESG requirements is set to climb further. Nickel 2.1% 6.4% 3.5% 3.2%
Zinc 3.3% 2.4% 1.8% 1.3%
Although some companies stand out, most miners, we believe,
Lead 4.0% 3.5% 2.0% 1.9%
need to prepare more for this eventuality. And given the pub-
lic’s limited trust in the industry, changing its reputation will be Estimates
a herculean task, though not an impossible one, in our view. Source: WoodMac, UBS, as of July 2019

Sensors connecting all assets to a centralized system have the zinc, and lead to meet longer-term demand. They’re too low
potential to create “smart” mines, while new technologies will for aluminum, which is trading into the cost curve, although
fundamentally alter how orebodies are mined. Cost efficiencies supply availability should suffice over the long term with
should improve – we anticipate double-digit savings rates – in higher prices. Current copper prices, on the other hand,
many areas, with production processes finally becoming more should not just rise in nominal but also real terms in the com-
agile. In the absence of new mega mining projects, which will ing decades since ore quality among deposits is likely to deteri-
become sparser, companies will also be able to manage large orate and put upward pressure on the cost curve.
numbers of smaller mining assets/sites more effectively. And,
equally important, the required skillset of the mining work-
force should shift from a niche to a broad talent pool. Agriculture: Technology meets
The industry’s current focus on capital and supply discipline sustainability
and using excess cash to repay debt and reward shareholders
(through equity buybacks, special dividends) should not pre- Farmers are facing a reckoning. In their quest to produce ever
vent it from becoming more efficient in its operations; on the more food they have been incentivized to disregard environ-
contrary, we see the recent fiscal conservatism favoring invest- mental costs, leading to a depletion of biodiversity, soil health,
ment that improves the productivity of existing mining assets. and the social costs associated with the use of scarce
resources like water and energy. Food production globally
Commodity-specific trends matter currently accounts for 40% of land use, 30% of greenhouse
Supply and demand prospects vary greatly by commodity, gas emissions, and 70% of freshwater consumption, accord-
not just between bulks, base metals, and precious metals but ing to the UN, while 25% of the world’s farmland has been
within each sector. In our view, current prices are more than rated as highly degraded and another 44% is considered
adequate for iron ore and coking coal, cobalt, lithium, nickel, moderately or slightly degraded.
Food production globally currently accounts for…

Food production globally currently accounts for...
Lithium and cobalt
Our less-rosy growth outlook for bulk, base metal, and
palladium demand stands in stark contrast to our fore-
40% of land use
cast for lithium and cobalt, which are closely linked to

electrified vehicle (EV) sales via rising demand for bat-
teries. Over the next seven years, we project lithium’s 30% of greenhouse
gas emissions
market size to triple or quadruple and cobalt’s to dou-

ble. Behind this marked increase stands a dramatic rise
in EV sales, which we expect to reach 15–18 million
70% of freshwater
consumption
Source: United
Source: United Nations
Nations
units per year by 2025. This suggests that every sixth
or seventh vehicle being sold could be electric in 2025.
The somewhat slower demand pace in cobalt largely The UN estimates that farmers will need to produce at least
reflects the adoption of new battery technology, which 50%–60% more food by 2050 as the global population
could cut cobalt use substantially. The provided guid- swells to around 10 billion and as billions enter the middle
ance does come with a fairly large margin of error, class. To grow healthy food in a sustainable way for such a
however, due to the high growth numbers and the vast number of people, our current approach to agricultural
fact that the technology is in flux; both markets will production must be rethought. Technology, in our view, is the
likely swell considerably. So can supply meet demand? only way to secure the nutrition needed without destroying
Yes, it should do so for at least the next five years, leav- the planet. Such technology already exists, but its develop-
ing prices vulnerable to some setbacks – mainly for ment has followed a silo approach, i.e. integration has been
lithium as cobalt prices have already reversed sharply. slow. Strengthening the innovation uptake in emerging mar-
But given low supply visibility in the longer term and kets is crucial, as much of the supply and demand growth
structural demand growth for electrified vehicles, will occur in these regions.
broader and lasting setbacks from current prices seem
unlikely to us.

Drivers of change: Environmental risks and shifting solutions with improved environmental safety and completely
consumer demands new approaches that improve yield and increase natural plant
Agriculture is highly sensitive to changes in temperature and resistance to diseases and pests. For example, gene-editing
water availability, and climate change alters the relationships technologies – like CRISPRs – mark a new era in biology, help-
among crops, pests, pathogens, and weeds. It also exacerbates ing to improve drought tolerance and the nutritional content
several trends such as dwindling populations of pollinating of food without incorporating DNA from another species.
insects, increasing water scarcity, and fishery declines.
Innovations like vertical farming, lab-grown food, and algae
The UN predicts that agricultural regions close to the equator aquaculture are being integrated with the components of the
will be affected acutely. For example, it estimates that the Bra- Fourth Industrial Revolution – big data, Internet of Things (IoT),
zilian state of Mato Grosso, one of the most important agricul- and artificial intelligence – throughout the agriculture supply
tural regions worldwide, might suffer an 18%–23% decline in chain. These components, along with satellites working in con-
soybean and corn output by 2050 because of climate change. junction with smart sensors, should supercharge efforts to save
So it is not surprising that Brazil has been a leading global water, for instance.
investor in agricultural R&D (see Chapter 4 for further details).
The Midwest US and Eastern Australia – two other important Distributed ledger technologies – i.e. blockchain – have the
regions worldwide – might also experience substantial declines potential to build trust, traceability and provenance, increase
in agricultural output due to extreme heat. connectivity, and lessen the risks associated with food fraud
incidences. The widespread adoption of IoT and cloud com-
Consumer eating patterns are also changing drastically puting should increase the use of robotics and automation in
because of shifting expectations and rapid product innovation. storage, distribution, logistics, retail, and consumption, and
Surging middle-class growth and increasing consumer demand could provide virtual marketplaces for buyers and sellers.
for transparency and nutritious alternatives are transforming
the global food industry. New consumption trends in products such as alternative pro-
teins are another disruptive force, upending traditional meat
What new techniques will be used and what production and processing supply chains. New plant-based
new products grown? protein products are swiftly claiming supermarket shelf space,
Numerous new technologies can be applied to raising agricul- having gained wider distribution and public acceptance in the
tural productivity, safeguarding environmental health, and sat- past two years. Likewise, the US’s non-dairy milk market grew
isfying evolving consumer preferences. They include biological 60%, to USD 21bn, from 2012 to 2017.

Table 3
IoT is one of the fastest-growing technology

device markets (units in bn)
IoT 2018 2024 CAGR
Wide-area IoT 1.1 4.5 27%
Short-range IoT 7.5 17.8 15%

Total 8.6 22.3 17%
Sources: Ericsson, UBS, as of November 2018
How extensive is the opportunity?

Overall, the food innovation opportunity will represent, we
estimate, a USD 700bn market by 2030. We expect it to grow
at a 15% compound annual growth rate during this period,
a fivefold increase from 2018’s USD 135bn. Farming 4.0 (or
smart farming) is one promising segment. By 2030, we see it Source: Getty Images
becoming a USD 90bn market, up from USD 15bn in 2018.
According to Ericsson, the number of IoT connections is
projected to grow at an average annual growth rate of 17%
from 2018–2024, rising from 8.6bn units in 2018 to 22.3bn
by 2024. Upside risks include widespread adoption of plant-based
rotein sparked by millennials and emerging market consum-
p
Such rapid adoption should also become widespread within ers, greater network effects in the food delivery industry
agriculture as connectivity advances, with farmers applying resulting in repeat orders exceeding forecasts, and higher-
IoT technologies and advanced analytics to streamline their than-anticipated efficiency gains in smart farming. Downside
processes and optimize resources. The plant-based protein risks include higher regulatory hurdles to registrations of
segment also holds significant potential. We envision it new technology (i.e., GM traits), producer opposition to data
expanding from USD 4.6bn in 2018 to USD 85bn by 2030 sharing, and consumer resistance to gene-edited crops and
as penetration rates increase from 0.4% to 6%. plant-based proteins.
Fig. 4
How big is the addressable market?
How big is the addressable market?
Revenue opportunity
CAGR (%)
4.6
Plant-based meat 28%
85
60
Online food delivery 365 16%
15
Farming 4.0 90
16%
49.4
Seed science 135
9%
6
Seed treatment 25 13%
135
Total 700 15%
2018 (in bn) 2030 (in bn)

Sources: Company reports, Bloomberg Intelligence, UBS estimates, as of June 2019
Source: Company reports, Bloomberg Intelligence, UBS estimates, as of June 2019

Chapter 3
Implications for
policymakers, investors,
and entrepreneurs

Chapter 3 – Implications for policymakers, investors, and entrepreneurs
A rich commodity endowment is undoubtedly

a blessing for commodity-producing countries,
serving as the engine for growth, jobs, and
wealth creation. But it can also turn into a
curse, often referred to as Dutch Disease, as
economies are exposed to the vagaries of com-
modity markets and the long-term dominance
of one sector leaves others underdeveloped.
In addition, the changes underway in the com-
modity markets are set to test the existing eco-
nomic models of the commodity-producing
countries by laying existing structural weak-
nesses bare while forcing governments to
search rapidly for new opportunities. Many
commodity producers can no longer operate
on a business-as-usual basis. Their policy
choices will shape their economies and have a
global impact on the environment and the
world economy, while providing opportunities
and risks for investors and entrepreneurs alike.
In this chapter we discuss three key ways that
entrepreneurs, investors and governments can
seize opportunities and mitigate risks arising
from the commodity transitions.
The windmill park between

Denmark and Sweden.

The ABC policy framework

for commodity transitions
In this section we draw from the experience of policymakers
in eight key commodity-producing countries – the US, Saudi
Arabia, the UAE, Russia, Nigeria, South Africa, Brazil, and
Chile – on how to address important economic challenges
intensified by the commodity transitions. The country selec-
tion reflects their pivotal role in major commodity markets, as
well as a wide range of economic conditions and headwinds/
tailwinds from commodity transitions.
Most commodity-producing countries need to step up economic

reform in the face of these transitions. While each country’s cir-
cumstances are unique, the three key common policy challenges
that form the ABC framework for commodity transitions are: Source: Getty Images
how to allocate commodity revenue, how to build up non-com-
modity sectors, and how to change the commodity sectors.
Solving these challenges will put a country on a more solid Spending is tempting but comes with risks, given the reve-
economic footing, in our view, by enhancing its growth and nue fluctuations associated with commodities. During periods
employment prospects, building up its fiscal buffers, making of high revenue many governments spend the windfall either
it less dependent on commodity prices, and facilitating the by increasing fiscal expenditures or passing it on to citizens.
transition to a more environmentally sustainable economic Examples include large public sector employment and low
model. This in turn should benefit investors exposed to its taxes. This raises fiscal breakeven prices, i.e., the commodity
financial markets and entrepreneurs active or considering price required to balance the fiscal budget. Fig. 6 shows that
involvement in the country. countries more reliant on commodities tend to run larger
fiscal deficits than those less involved in the commodity busi-
A: How to allocate commodity revenue? ness, although there are notable exceptions on both sides.
Policymakers have to decide the most advantageous way of
dividing up volatile revenue between spending and investing While increasing expenditures is a popular decision, reversing
initiatives and select a fiscal framework that best achieves their higher spending when commodity prices fall or export vol-
developmental objectives (see Fig. 5). umes decline is usually politically difficult. This can create a
Fig. 5
How to allocate commodity revenues?

Commodity
revenues
Spending Investing
Private spending Public spending Financial assets Non financial

– lower taxes – higher ongoing – domestic or inter- assets
– lower utility tariffs government national assets
expenditures – reducing domestic
and/or external debt
Tangible assets Intangible assets

– infrastructure – improvements to
– stakes in foreign labour productivity,
companies investment climate
Source: UNCTAD, UBS, as of July 2019

legacy that can lower a country’s long-term growth potential, Fig. 7
ultimately resulting in either a pressing need to enact painful Saudi Arabia: Oil prices, government expenditures
reforms, as is currently observable in South Africa, or outright
and real GDP growth are all correlated
economic decay, Venezuela’s current tragic reality.
All indicators in %
50 10
Investing requires more discipline. If implemented efficiently, 40 8
it can help commodity-producing countries achieve several 30 6
objectives. Investing in financial assets can enhance resilience 20 4
10 2
to external shocks, as such fiscal buffers enable policymakers
0 0
to enact countercyclical policies and reduce the debt burden; –10 –2
the assets can also be used to expand pension systems and –20 –4
ensure intergenerational wealth transfer, given the non- –30 –6
–40 –8
renewable nature of resources. Investing in non-financial –50 –10
assets can help diversify the domestic economy and improve 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
its growth and employment outlook by addressing key struc- Real GDP growth rate Change in government expenditure (y/y, le scale)
(right scale) Change in average Brent oil price (y/y, le scale)
tural impediments to growth.
Source: IMF, UBS, as of July 2019
Fiscal framework matters

Russia and Saudi Arabia relied on two distinct fiscal
frameworks to accumulate significant foreign exchange (FX)
reserves and establish sovereign wealth funds (SWF). In of USD 40/bbl. This policy lowered the sensitivity of the coun-
Saudi Arabia the allocation of hydrocarbon revenues is try’s fiscal policy and the Russian ruble to oil prices.
driven by the state of the fiscal and current account bal-
ances, which depend on oil prices and export volumes. This This fiscal rule is an interesting way of ensuring a disciplined,
arrangement reinforces the impact of oil price volatility on transparent, and predictable approach to investing and spend-
the economy (see Fig. 7). ing commodity revenue. Adopting such a framework helps
avoid excessive government spending by reducing the scope
By contrast, Russia in recent years adopted a new fiscal rule- for political discretion. Following a fiscal rule to the letter also
based budgetary policy that transfers to the National Wealth lends credibility to policymakers and is favorably regarded by
Fund oil and gas revenues derived from an oil price in excess investors and credit agencies.
Fig. 6
Commodity producers on average appear to run relatively larger

fiscal deficits
Primary balance data is 2013–2018 average; commodity dependence data (% of current external receipts)
is 2014–2018 average
6
Norway
4
Qatar
Germany
Primary balance, in % of GDP
2 Korea
New Zealand
Switzerland South Africa
0
Russia
Turkey
Indonesia Brazil Australia
US
–2 India
China Nigeria
Abu Dhabi
–4
Kenya
–6
Bahrain Saudi Arabia
–8
–10
0 10 30 40 50 60 70 80 90
Commodity dependence
Source: Fitch, UBS, as of July 2019

B: How to build up non-commodity sectors? Fig. 9
Economic diversification has been a key objective for many Non-oil sector accounts for about 70%
commodity producers, which ongoing commodity transitions
of UAE economy
add urgency to. In recent decades the UAE has become a
GDP breakdown by sector (in %)
global financial center, an international transportation hub,
100
a popular tourist destination, and a location of choice for
multinational corporations. This has reduced its reliance on 80
oil exports, with the non-oil sector now accounting for over
70% of the domestic economy (see Figs. 8 and 9). In our 60
view, the UAE’s success stems from its business-friendly envi- 40

ronment, excellent infrastructure, and openness to trade,
capital, and labor flows. 20
0
Chile provides another example of successful economic diver- 2012 2013 2014 2015 2016 2017
sification, with the agricultural sector and a number of service Oil Non-oil
sectors (including financial services, hospitality, and communi- Source: UAE government, UBS, as of July 2019
cations) having gained importance. As a result, copper reve-
nue now makes up less than 5% of fiscal revenue from a
peak of 21% in the mid-2000s (see Fig. 10). This transforma-
tion can be credited to a supportive investment climate, a
clear regulatory framework, and predictable monetary and fostering a healthy investment climate and a solid institutional
fiscal policies, in our view. framework, along with measures that enhance infrastructure
and make doing business easier. Adopting such policies can
Developing non-commodity sectors includes capitalizing on help countries lower the structural hurdles to growth while
a country’s competitive strengths and ensuring the right fostering job creation, which is particularly important for
ingredients are in place to enable businesses to flourish. countries with expanding young populations, such as those
Policies that support non-commodity sectors should focus on in the Middle East and Africa.
Fig. 8
UAE leads the way in reducing export concentration

Product concentration index for exports
1.0
0.8
0.6
0.4
0.2
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Brazil Chile Nigeria Russia Saudi Arabia South Africa USA UAE
Note: the closer the index value is to one the more concentrated the exports are on several products.
Source: UNCTAD, UBS, as of July 2019

C: How to change commodity sectors? Fig. 10
In our view, the objective of policymakers is to enact measures As Chile diversifies its economy, government
that enable a smooth transition for the commodity industries
reliance on copper revenue has diminshed
facing structural headwinds while encouraging the develop-
Government gross copper revenue (as % of total revenue)
ment of promising new industries and sectors.
25
Energy-producing nations have historically had a high share 20

of fossil fuels in their energy mix, reinforced by their relatively
low (subsidized) domestic prices, which often resulted in low 15
energy efficiency and distorted incentives for other economic 10

activities. In recent years Saudi Arabia and the UAE have
embarked on energy-pricing reforms and energy-efficiency 5
initiatives, which reinforce each other as the countries aim

0
to reduce domestic energy consumption through its more 2006 2008 2010 2012 2014 2016 2018
efficient use. Source: Central Bank of Chile, UBS, as of July 2019
Fig. 11
Other commodity-exporting countries, such as Kuwait and
Qatar, have also implemented energy-pricing reforms, but Fossil-fuel consumption subsidies in select EMs
more progress is required (see Fig. 11). Morocco’s experience Data for 2018
shows that such reforms can be beneficial for energy import- 2,000 80
ers as well. In our view, greater energy-efficiency and the 1,800 70
1,600
removal of subsidies can place a country on a more environ- 1,400
60
mentally sustainable energy consumption path while also 1,200 50
extending its hydrocarbon reserve life. The transition can be 1,000 40

800
challenging, though; lifting subsidies is often politically costly 30
600
and the economic impact can be substantial, although the 400
20
effects tend to be transitory. 200 10

0 0
Kuwait
Saudi Arabia
UAE
Qatar
Bahrain
Russia
Argentina
Indonesia
Mexico
South Africa
China
India
Colombia
Nigeria
Saudi Arabia and the UAE also aim to diversify their fuel mix
by actively investing in renewable energy, particularly solar
energy, given their advantageous location and sunny climate.
The UAE’s Energy Strategy 2050 envisions the share of clean Subsidy per capita (USD/person, le scale)
energy in its energy mix reaching 44% of its needs. Saudi Average subsidisation rate (in %, right scale)
Arabia has recently announced a target of 60 gigawatts of Source: IEA, UBS as of July 2019
Opportunities in renewables: Morocco’s experience

Developing renewable energy sources can be a smart way The southern city of Ouarzazate is home to Africa’s largest
to reduce energy dependence while creating jobs, increas- solar plant and the world’s biggest concentrating solar
ing competitiveness, and combating climate change. The power facility. Morocco produced 35% of its electricity
case of Morocco is instructive in this regard. It depends mix from renewable energies in 2018, up from 10% in
highly on energy imports, which cover 90% of its energy 2007. The plan is to reach 52% of the electricity mix by
needs. Oil and gas imports account for more than 15% of 2030, by expanding its renewable energy capacity more
total imports, or 6% of GDP. The country’s oil price sensi- than three times to 10,000 megawatts, with 45% coming
tivity has declined on the fiscal side after energy subsidies from solar, 42% from wind, and 13% from hydroelectric
were removed and an automatic price adjustment formula energy. This should further reduce the country’s external
adopted. To help meet the constraints of growing domes- sensitivity to oil prices. Its experience could serve as a use-
tic energy demand and reduce dependence on imports, ful example of diversifying the energy mix, one that could
the government took a strategic tack toward renewable interest energy-importing and -exporting countries with
energy, aiming to exploit the 3,000 annual hours of sun- high solar energy potential, such as those located in Africa
light the country enjoys. The results have been impressive. and the Middle East.

Fig. 12
Enabling efficient energy transition

WEF energy transition ranking, 2019 edition (vertical axis) and energy intensity level of primary energy
for 2015 (horizontal axis)
Energy intensity
10 8 6 4 2 0
0
High rank
More intensive Norway Less intensive
20
Canada US Chile
Mexico Colombia
Energy transition
40
Brazil Peru
Australia
Argentina Indonesia 60
UAE
Russia Phillipinnes
China India
80
Saudi Arabia
Low rank
100
South Africa Nigeria
120
OECD
Note: WEF energy transition index ranks 115 countries on the basis of their readiness for energy transition and perfor-
mance of their energy systems. Lower energy intensity ratio shows that one unit of output is produced with less energy.
Source: World Bank, WEF Fostering effective energy transition, UBS, as of July 2019
installed capacity by 2030. These initiatives could help improve

a country’s readiness for energy transition; numbers calculated
by the World Economic Forum (WEF) rank Saudi Arabia 98th
and the UAE 67th out of 115 countries (see Fig. 12) in this area.
Countries with large agriculture sectors are adopting policies

to enhance agricultural yield. As discussed in Chapter 2, the
impact of climate change on agricultural regions threatens to
be especially acute for countries located close to the equator.
Not surprisingly, Brazil has been a leading spender on agricul-
tural R&D, a trend we expect to continue.
Regulators, entrepreneurs and investors, and consumers in all

commodity sectors are likely to pay more attention to the ESG
footprint of companies. For example, Chile’s copper industry
is increasingly focusing on sustainability, with a marked rise in
related annual investment.
These policy changes in commodity-producing countries are

boosting demand for certain products, including in renewable
sector and those that enhance energy efficiency, carbon
reduction, and agricultural yield. We discuss the longer-term
investment implications of this trend in the next section.
One way to fund the environmental projects for sovereigns
and companies alike is via green bonds, which we also review
in the next section.

Investment implications How well are countries positioned to cope with

the challenges ahead?
Moreover, from a top-down perspective, a country’s ability
The profound changes in the commodity markets mean to deal with its commodity transition is also crucial. Those
that investors need to rethink their investment strategy. We better positioned to cope with the challenges involved should
highlight three approaches for investors to navigate these generally offer more attractive risk-adjusted returns over a
changes. long-term investment horizon, in our view. But the increasing
efforts to deal with the changing commodity landscape can
Approach 1: Embrace the change boost asset prices too, especially if these improvements occur
Investors need to carefully consider the ways their existing from a more vulnerable base.
and new positions would be affected by the commodity tran-
sitions. For a start, many investors invest directly in commodi-
ties. Gold, for example, enjoys a long-standing reputation as a
safe-haven asset. We think commodities can provide interest- What commodity dependency
ing opportunities for tactical investors. An alternative way to means for bond index composition
build exposure to the asset class is via the stocks and bonds of
commodity-producing companies. The bonds of gold miners, Debt issuance patterns of commodity producers are also
for example, not only benefit from rising gold prices, they often linked to commodity prices. Following the oil price
often offer appealing coupon payments. Investment selectivity drop in 2014, Gulf Cooperation Council (GCC) countries
is essential. For single bond investors, a careful issuer selection have ramped up their external debt issuance to fund wid-
is key. Company fundamentals tend to be at least as impor- ening fiscal deficits, with GCC borrowers contributing
tant as the price change of the underlying commodity. about one-third of all EM sovereign debt issuance in
2016–18. This culminated in JP Morgan announcing the
The trends in the commodity market also affect financial mar- inclusion of over USD 110bn of bonds from five GCC
kets. The decline in crude oil prices from late 2014 until early countries (Saudi Arabia, Qatar, UAE, Bahrain, and Kuwait)
2016 is a good reminder. The financial assets of countries to its widely tracked USD EMBIG sovereign indexes. As a
linked to commodity markets tend to be highly sensitive to result, the index allocation to the Middle East will
commodity price fluctuations. They afford investors the oppor- increase to over 15% (up from less than 3%), which is a
tunity to express a positive/negative view on a particular com- strong catalyst to GCC bond performance.
modity via long/short positions in them.

In this regard, we find it useful to compare commodity-pro- The US outscores most EM commodity producers by every
ducing countries using six common indicators (see Table 4). measure, but is ranked lower than Norway on all indicators
In addition to credit fundamentals, reflected in a country’s apart from global competitiveness. Nigeria sits on the other
credit ratings, we consider how well an economy is positioned side of the spectrum: it ranks lowest by all global indicators
to deal with energy transition and climate change, how and, along with India, Indonesia, and the Philippines, screens
it performs against the UN’s 17 Sustainable Development as the country most exposed to climate change globally. This
Goals, and where it stands in terms of global competitive- signifies the magnitude of the challenges that sovereigns face
ness and ease of doing business. In addition to the eight in adjusting their economies, as well as the extent of the
countries examined in detail in this report, we provide informa- opportunity to improve.
tion on another 11 commodity-producing nations for context.
Table 4
How the economies compare?
Country S&P Moody’s Climate Energy Ease of Global Sustainable

change transition Doing Competi Develop-
Business tiveness ment
Commodity US AA+ Aaa 15 27 8 1 35
titans* UAE** AA Aa2 33 67 11 27 65
Chile A+ A1 28 26 56 33 31
Saudi Arabia A– A1 56 98 92 39 98
Russia BBB– Baa3 33 79 31 43 55
South Africa BB Baa3 81 114 82 67 113
Brazil BB– Ba2 80 46 109 72 57
Nigeria B B2 148 109 146 115 159
Other Australia AAA Aaa 5 43 18 14 38
commodity Canada AAA Aaa 13 35 22 12 20
producers
Norway AAA Aaa 1 3 7 16 8
China A+ A1 57 82 46 28 39
Mexico BBB+ A3 76 37 54 46 78
Peru BBB+ A3 72 44 68 63 51
Philippines BBB+ Baa2 112 59 124 56 97
Indonesia BBB Baa2 102 63 73 45 102
Colombia BBB– Baa2 76 34 65 60 67
India BBB– Baa2 120 76 77 58 115
Argentina CCC– Caa2 69 61 119 81 45
* Commodity titans refer to commodity-producing countries we examine in this paper.

** Abu Dhabi’s S&P rating is used for the UAE.
Note: Data represents country ranking on each of five indexes. Climate change is represented by ND-Gain Country index which ranks 181 countries in terms of their vulnerabil-
ity to climate change and readiness to improve resilience. WEF energy transition index ranks 115 countries on the basis of their readiness for energy transition and performance
of their energy systems. WEF Global competitiveness index 4.0 ranks 140 countries on key determinants of long-term growth. WB Ease of Doing Business Ranking 2019 ranks
190 countries on regulations that affect operating a business in a country. Sustainable Development is represented by the 2019 SDG Index ranking 162 countries on their
performance against the UN’s 17 Sustainable Development Goals.
Source: ND-Gain Country Index 2017, WEF Fostering Effective Energy transition, 2019 edition; WEF Global Competitiveness Report 2018, WB Doing business 2019, Sustainable
Development Report 2019 1, Bloomberg, UBS as of 3 rd of September 2019
1
Sachs, J., Schmidt-Traub, G., Kroll, C., Lafortune, G., Fuller, G. (2019): Sustainable Development Report 2019. New York: Bertelsmann Stiftung and Sustainable Development
Solutions Network (SDSN)

The Sustainable Development Goals (SDGs)
Source: UN
South Africa, together with most EM energy-producing coun- ticularly when commodity prices plummet. Significant FX
tries, needs to ramp up its energy-transition efforts. Reducing buffers lend credibility to Saudi Arabia’s and the UAE’s pegs,
its reliance on coal to generate electricity is essential. Along which have a long track record of anchoring economic and
with Nigeria, Saudi Arabia, Indonesia, India, and the Philip- financial stability. By contrast, Nigeria, which has devalued
pines, it must do significantly more to meet the UN’s 17 SDGs. its currency in the past, could come under close scrutiny by
investors. As opposed to previous periods of market pressure,
Saudi Arabia, the UAE, and Russia have much stronger fiscal Nigerian policymakers are now better positioned, in our
profiles than South Africa and Nigeria, so – all else being view, to ensure FX stability due to a stronger external bal-
equal – they are in a b
etter position to address the challenges, ance, positive real interest rates, and renewed capital inflows.
in our view. Any improvements made are likely to be viewed The latter helps to improve access to FX liquidity, which
positively by investors, supporting the valuations of a coun- remains crucial.
try’s financial markets.
Exchange rate regimes: Opportunities and risks

The currency regimes for the countries we consider range from
floating, such as in the US, Russia, and Chile, to the USD pegs Fig. 13
of Saudi Arabia and the UAE and the multiple exchange rates
with a quasi-peg in Nigeria. A commodity exporter with a flexi-
The fiscal rule helped to lower RUB sensitivity
ble exchange rate experiences high volatility, as the currency to oil prices
serves as a shock absorber for the economy. When commodity USDRUB and oil price (Brent in USD/bbl)
prices are plunging, tactical hedges should be considered as a 90
strategy to protect the value of assets denominated in local 80

currencies. As we have discussed above, Russia is an interest- 70
ing case as policymakers successfully reduced the ruble’s very
USDRUB
60
high sensitivity to oil prices by using the fiscal policy rule intro-
50
duced in early 2017 (see Fig. 13). In our view, such policy
40
choices could serve as a blueprint for prudent policymaking in
many EM commodity exporters. 30
20
0 50 100 150
While a less flexible exchange rate arrangement helps Oil price
smooth out (or reduce) FX volatility, investors have to monitor 2011 to January 2017 Since February 2017
the ability of policymakers to maintain the arrangement, par- Source: Bloomberg, UBS, as of August 2019

Approach 2: Monetize longer-term investment trends

Population growth, aging, and urbanization are trends we SWFs create opportunities for
see persisting through the economic cycle and political volatil-
ity in the coming decade. As discussed above, these trends investors and entrepreneurs
and their external effects, coupled with the increased drive
to tackle climate change and a broad range of technological Commodity-producing countries accumulate significant
advances, are disrupting commodity markets and requiring wealth, pooled in and managed by their sovereign
commodity-producing countries to adjust their policies and wealth funds (SWFs). According to data compiled by
compel the companies that operate in them to refocus their the Sovereign Wealth Fund Institute, energy exporters
businesses. Norway, Saudi Arabia, UAE, Qatar, and Kuwait have
accumulated an estimated USD 3.5trn (over 50% of
For investors, these trends can provide appealing long-term the top 15 SWFs holdings) – remarkable for countries
investment opportunities due to the above-average growth that account for less than 3% of global GDP.
rates they promise and the ability to capture the produced
value added. We express these investment opportunities SWF activities often open up opportunities for investors
in eight UBS CIO Longer Term Investment (LTI) themes: and entrepreneurs. For example, Saudi Arabia’s ambition
Renewables, Energy efficiency, Clean air and carbon reduc- to grow its USD 320bn SWF into the world’s largest (the
tion, M iddle East – prosperity beyond oil, Smart Mobility, goal is USD 2trn by 2030) is likely to be funded via gov-
Agricultural yield, Protein consumption, Water scarcity. ernment transfers, privatizations of state-owned compa-
Visit ubs.com/lti to find out more. nies, and raising debt, including Eurobonds. The latter
two activities could increase the country’s share in MSCI
Diversification within each theme and across themes mini- and JP Morgan EMBI indexes for stocks and bonds,
mizes risks related to specific technologies and companies. respectively, deepening liquidity and providing technical
We advise investors with existing holdings of single securities support to the valuations of its debt and equity instru-
in the affected sectors to revisit their investments in light of ments. Corporate governance standards are also likely to
the expected changes. For example, the move to a cleaner rise amid the ongoing push for structural reforms. Saudi
energy mix would benefit companies operating along the Arabia’s SWF aims to bring in strategic partners in select
renewables value chain and would be more problematic for sectors ranging from energy efficiency and technology to
companies that are part of the coal value chain. tourism and entertainment, which could interest entre-
preneurs with expertise in those sectors.
CIO Longer Term Investment themes
Agricultural
yield
Renewable Protein
energy consumption
Resources
Resources
Population
Population
growth
growth Aging
Aging
Energy Water
efficiency scarcity
Society
Society Technology
Technology
Clean air Urbanization

Urbanization Smart
and carbon
mobility
reduction
Influencer Middle East –
Key drivers
Prosperity
Source: UBS beyond oil

Approach 3: Make use of sustainable investing

As many of the changes we foresee for commodity markets Green bonds: Taking
originate from environmental, social, and governance trends,
investors are well advised to consider a shift to suitable invest-
a closer look
ment strategies. Such strategies seek to optimize the risk- We define green bonds as fixed income instruments
reward of an investment portfolio by adding exposure to issued to fund projects with environmental or climate-
industry leaders, i.e., to sovereigns and companies that are related benefits. They also have reputational benefits for
most advanced in meeting the shifting requirements, and the issuers and can help to diversify the investor base.
avoiding exposure to the laggards. There is also a growing In recent years green bonds have gained popularity.
number of fixed income instruments, green bonds for
instance, that link their proceeds to climate-change solutions. The government of Ireland, in its National Development
As such, investing in them not only enables investors to con- Plan, foresees spending 1 of every 5 euros on green proj-
tribute to solving some of the world’s most pressing chal- ects. A total of EUR 23bn, or 13% of GNI, will be spent
lenges, they can do so without the risk of forfeiting investment on Sustainable Mobility, Sustainable Management of
performance via lower returns or higher volatility, in our view. Water and Environmental Resources, and the Transition to
a Low Carbon and Climate Resilient Society. With yearly
Sustainability considerations in commodity investing refinancing needs of EUR 10–15bn and average green
The commodity industry is increasingly affected by the drive bond issuance of EUR 2–3bn envisioned, green bonds
to address ESG concerns. Awareness is also growing among form a fundamental part of Ireland’s funding profile.
commodity producers and consumers of the importance of
sourcing and using non-renewable resources in a responsible Developing a local green bond market can be also used
way. For investors, an additional consideration is how to as a tool to attract private capital for infrastructure
invest in commodity markets in a sustainable manner. investments. For example, Nigeria became the first Afri-
can nation to issue an inaugural local currency green
For example, investors concerned about the environmental bond in December 2017, which emphasized its commit-
and societal effects of mining gold bars may look to invest ment to developing low-carbon sectors.
in responsibly sourced sustainable gold, which is mined and
produced by small-scale artisanal mining companies in confor- All commodity producers we consider need to do more
mity with high social, environmental, and safety standards. to achieve the UN’s SDGs (see Table 4). In our view,
Sustainable gold can help mitigate the environmental effects green bonds could play a key role in funding projects
of gold mining as well as generate positive social impact for the aimed at achieving select ones, such as Goal 6 Clean
miners and communities where it is sourced and processed. Water and Sanitation, Goal 7 Affordable and Clean
Energy, Goal 13 Climate Action. For transparency and
In some asset classes sustainable investment (SI) approaches credibility purposes the bonds should be issued in line
are relatively well established, but in commodities there is still with the Green Bond Principles.
little guidance. Research by the UN Principles for Responsible
Investment (PRI) found that commodities had the lowest
penetration of SI approaches of any asset class (in 2016).
pants to raise standards and have a positive impact through
In our view, the most notable study on commodity investing to such industry initiatives as the Sustainable Commodity Initia-
date was published in 2011 in a collaboration between a spe- tive. It is jointly run by the International Institute for Sustain-
cialist ESG research provider, the UN PRI, and the Swiss Federal able Development (IISD) and the UN Conference on Trade and
Department of Foreign Affairs.2 It examined the different com- Development (UNCTAD) to promote sustainable practices in
modities and the investment strategies linked to them, commodity production and trade and to contribute to envi-
explored their varied ESG implications and the options for ronmental, social, and economic prosperity on a global scale.
mitigating them, and made practical recommendations that
sustainable investors can adopt. Among them: prioritizing In the future, we expect improved data to enhance the under-
transparency, limiting investments in areas likelier to create standing of the relationship between commodity investing and
environmental or social harm (i.e., an exclusion approach), sustainability. We foresee greater innovation in SI approaches,
formally assessing ESG risks (integrating ESG information into such as sustainable commodity indexes, and an increase in the
the investment decision), and engaging with market partici- number of commodities that have verified sustainable supply
chains. However, industry, governments, and regulators need
2
Ivo Knoepfel and David Imbert (September 2011). The Responsible to commit themselves to engaging market participants and
Investor’s Guide to Commodities. onValues Ltd establishing robust global standards for sustainability.

Takeaways for entrepreneurs: Fig. 14
Regulatory barriers for FDI have declined in recent years

Monetize the opportunities, OECD FDI Regulatory Restrictiveness Index, scores rank from 0 (open) to 1 (closed)
mitigate the risks 0.40 0.09

0.35 0.08
0.30 0.07
In the coming years the commodity transitions and policy 0.25
0.06
responses of commodity-producing nations to these changes 0.20
0.05
will grow in importance, which will demand greater attention 0.04

0.15
0.03
and resources from business owners. Below we list three take- 0.10 0.02
aways that focus on ways to monetize the opportunities and 0.05 0.01
mitigate the risks. 0 0
Russia Saudi South Brazil Chile US
Arabia* Africa
Takeaway 1: Use commodity disruptions to diversify
2018 level (le scale) Change 2018 vs 1997 (right scale)
One strategy businesses could adopt in response to major
shifts in commodity markets is diversifying. For example, Note: For Saudi Arabia index change is for 2018 vs 2010, as no prior data is available.
The index has no data for UAE and Nigeria
there may be growing incentives to diversify operations
Source: OECD FDI Regulatory Restrictiveness Index, UBS, as of July 2019
geographically. Countries undergoing commodity transi-
tions may look to attract foreign investors by allowing joint
ventures as a way of gaining business and technological
know-how in industries that offer the potential for economic Entering another country might help entrepreneurs diversify
diversification. To this end, many have reduced regulatory their resource base and access new, often large domestic mar-
barriers to foreign direct investment (FDI) (see Fig. 14). kets. They should devote the necessary time and energy to
Further progress in this direction could create opportunities understanding the legal, regulatory, market, and cultural envi-
for businesses. ronment of their new venture. For example, FDI regulations
vary markedly both by industry and country (see Table 5).
Table 5
FDI rules in the spotlight

OECD FDI Regulatory Restrictiveness Index 2018
Scores rank from 0 (open) to 1 (closed)
Select industries South Chile Brazil United Russia Saudi

Africa States Arabia
Primary sector 0.01 0.15 0.14 0.18 0.21 0.61
Mining, incl. oil extraction 0.01 0 0.03 0.1 0.33 1
Manufacturing 0.01 0 0.03 0 0.16 0.21
Construction 0.01 0 0.03 0 0.15 0.21
Transport 0.19 0.41 0.08 0.55 0.45 0.33
Hotels & restaurants 0.11 0 0.03 0 0.2 0.21
Media 0.3 0.19 0.55 0.25 0.53 0.44
Communications 0.01 0 0.08 0.11 0.15 0.42
Financial services 0.05 0.02 0.11 0.04 0.49 0.35
Business services 0.26 0.01 0.06 0 0.28 0.37
Real estate investment 0.06 0 0.03 0 0.43 0.97
FDI Regulatory Restrictiveness Index 0.06 0.06 0.09 0.09 0.26 0.37
Note: The index has no data for UAE and Nigeria. Primary sector includes agriculture, forestry, fishery and mining.
Source: OECD FDI Regulatory Restrictiveness Index, UBS, as of July 2019

A diligent risk assessment by the countries themselves should Fig. 15
include the likely impact on the environment, resource situa- Supply concentration of select commodities
tion, and public perception of any partnership with foreign Share of top three countries producers in total production, in 2018, in %
firms.
100
80
Business owners facing disruption from commodity transitions
60
can also adapt by diversifying into the emerging sectors
40
that are disrupting their business models. For example, many
20
established oil and gas players are looking to expand their
0
resource base by incorporating renewable energy assets. They
Rare earths
Platinum
Lithium
Soybeans
Palladium
Cobalt
Iron ore
Aluminium
Corn
Coal
Coffee
Live cattle
Silver
Wheat
Nickel
Copper
Sugar
Gas
Oil
Gold
are adopting a “cleaner” barrels approach in conventional
fields’ development by distinguishing between prospective
exploration projects based on their carbon intensity.
Source: BP Statistical Review of World Energy 2019, GFMS, USDA, U.S. Geological Survey,
UBS, July 2019
Established automakers meanwhile are shifting their resources
(and sizable R&D and M&A budgets) in the race to mass pro-
duce EVs. If successful, such a strategy could help these com-
panies reduce their vulnerabilities to the changing competitive
landscape and even turn these threats into an opportunity.
come. It might force businesses to take a more stringent
Takeaway 2: Build sustainability into how you approach to an array of issues that matter to consumers than
do business might be required, for example, under local regulatory standards
Entrepreneurs need to consider ESG factors as part of their in the countries where they operate or source their inputs.
response to major commodity market shifts. ESG performance
in their company, the countries in which they operate, and Takeaway 3: Create nimble but resilient
across their supply chains increasingly affects business reputa- operating models
tion and brand value. In fast-moving markets, seizing new opportunities and miti-
gating risks depend on having a robust operating model with
Governments worldwide are placing greater emphasis on sufficient flexibility. Having an adequate contingency plan pre-
ESG topics, a trend we expect to continue, especially with pared to react to changes in the legal, regulatory, and market
countries adjusting their policies to attain the UN’s SDGs. This environment is crucial not only to ensuring the success of a
could lead to tighter regulations and, in this environment, we venture abroad but to protecting the incumbent business.
think companies that follow best practices in these areas will Volatile business-cycle dynamics in many emerging markets
enjoy a relative advantage. can be accompanied by significant exchange rate losses.
Ensuring access to funding and foreign exchange often proves
When entering a new market or shifting supply chains in critical during such crises.
response to commodity disruptions, it makes sense to favor
countries with a better track record on ESG issues and Entrepreneurs can also consider the strength and diversity of
sustainability. Failure to do so could be costly, with repercus- their supply chains. In a world of increasing trade frictions,
sions ranging from regulatory fines and consumer boycotts to access to resources is of paramount importance. The US Com-
avoidance of their company’s financial instruments by ESG- merce Department estimates that the US must import its entire
driven investors. supply of 14 of 35 crucial minerals; it depends on imports to
cover over half of its needs for more than 80% of these miner-
Today two-thirds of consumers vote with their wallets: the als. Concerns about the security of these supplies have risen of
approach taken by companies on ESG matters has become a late given the obvious concentration risk (see Fig. 15). The rel-
key determinant in consumer purchasing choices, according to atively high supply concentrations for lithium and cobalt make
2018 Edelman Earned Brand 3 survey. A 2017 YouGov study 4 this issue particularly important for EV manufacturers.
reveals that 20% of consumers have boycotted a company
following news about issues that range from corruption to Equally, policy actions contemplated by commodity producers
unfair treatment of workers in company supply chains. In our can have major implications for supply chains and whole busi-
view these issues will only rise in importance in the years to ness models alike, depending on whether such policies are
permanent or temporary. This issue is likely to increase in
3
‘Brands take a stand’, 2018 Edelman Earned Brand, October 2018 importance for business owners, as we expect regulatory
4
‘Inside the Mindset of a Brand Boycotter’,YouGov report, April 2017 changes to become even more prevalent.

However, being nimble and making a fast short-term decision Plenty of pioneering technologies have ended up being a
should not come at the cost of long-term value creation. t ransitional step between the old world and the new one.
When it comes to investing in a new technology, for exam- For example, whale oil reached mass popularity as a lighting
ple, entrepreneurs need to decide whether to be an early or fuel in the mid-19th century, but couldn’t cope with the sky-
a late adopter. Early adopters are likelier to enjoy the “first rocketing demand. New fuels entered the scene and petro-
mover” advantage, but they face greater potential risks. Early leum won out.
adoption of technology and techniques in fracking, coupled
with know-how about their most efficient use, has helped first Late adopters, by contrast, while conceding the “first
movers secure premium acreage at low prices in the US. This mover” advantage, take less risk. They can potentially avoid
has served as a key competitive advantage. the traps of picking transitional technologies, suffering
How secure is your supply chain? Lessons from Indonesia

In January 2014 Indonesia banned unprocessed bauxite grade Indonesian nickel ore proved hard to substitute for,
and nickel ore exports. It wanted to encourage domestic which resulted in a number of nickel-smelting plants being
ore processing to capture the greater added value along built domestically, some with foreign partners. Reintroduc-
the value chain. Faced with fiscal challenges stemming ing the ban two years early, in December, has led to a sig-
partly from a drop in commodity prices, the government nificant nickel price increase.
relaxed the ban in 2017 and postponed its full implemen-
tation to 2022. But it recently announced that the ban Indonesia’s experience suggests that supply chain adjust-
on nickel ore exports will be brought forward to this ments can prove costly both in terms of capital expendi-
December. tures and the time needed to make the changes. Produc-
tion facilities can fall idle and lower overall utilization rates.
Many bauxite buyers, in the wake of the initial announce- So regulatory risks need to be monitored carefully, espe-
ment, switched to other suppliers, and after the ban was cially by companies that rely on access to natural resources
relaxed Indonesia struggled to regain its market share. High in the host country.

a drastic industry consolidation, or forking out exorbitant While each industry faces its own opportunities and threats,
R&D costs while benefiting from the innovations of early entrepreneurs need to ensure that they have sufficient
adopters. resources and access to know-how to understand the key
trends and the potential for significant disruptions in their
EV batteries are currently evolving as manufacturers seek ways industry. In our view, a conscious decision to be an early or
to speed up their charging time and extend the range of the late adopter is better than a wait-and-see approach or, even
vehicles powered by them while at the same time lowering worse, an unpleasant surprise.
vehicle sticker prices. The investment needed (either in the
form of R&D or M&A in buying up existing battery producers)
could take several years to pay off, assuming the technology
used is adopted in the mass market. Compared to pure EV
manufacturers, established carmakers appear better positioned
to make the investment, which is often modest relative to their
existing sales revenue and cash flow.
The boom-and-bust cycle in the solar panel manufacturing industry

The rapid growth of the solar power industry, propelled by decline to the present day, reaching around USD 10/kg.
government subsidies, ongoing efficiency gains, and rela- Solar panel market prices too are under pressure due to
tively low barriers to entry, has led to a large number of oversupply, which is good for demand growth but bad for
new entrants along the whole supply chain. The price of manufacturers. Consolidation across the supply chain is
polysilicon, the key production input, exceeded USD 450/kg ongoing, so larger firms are likely to fare better than their
in 2008, which spurred rapid growth in manufacturing smaller competitors due to improved factory utilization,
capacity. Polysilicon prices subsequently plummeted by 75% brand strength, and low-cost structures.
as the market became oversupplied and has continued to

Chapter 4
Commodity titans:
Regional perspectives
Source: alamy

Chapter 4 – Commodity titans: Regional perspectives
The ability of commodity-producing countries

to adjust to ongoing commodity transitions
depends on the factors driving their domestic
economy. Understanding them and the pivotal
global trends discussed in Chapter 2 will help
investors and businesses seize opportunities
and navigate headwinds. Despite growing
energy independence, the US is not immune
to the energy transition toward renewables,
but it is better positioned to deal with it than
major EM fossil fuel producers, which rely
heavily on energy.
Commodity transitions compound existing
structural imbalances in all seven EM com-
modity producers under review and add
urgency to the need for reforms. As discussed
in Chapter 3, the policy choices of commodity
producers such as Russia, which used a fiscal
rule to reduce the sensitivity of its fiscal policy
and currency to oil prices, and the UAE and
Chile, which are diversifying their economies,
could serve as a blueprint of prudent policy-
making for EM commodity exporters like Bra-
zil, Nigeria, and other African nations.
Noor Ouarzazate Concentrated

Solar Power Station Complex.
Morocco.

The US:
Energy independence
In the last decade the discovery and advantages (for instance, natural gas the rapid growth in shale oil production,
exploitation of more US oil and gas in the US sells for less than half of the its overall energy contribution to the
reserves has cleared the path to energy price in Asia). The country’s reduced US economy remains fairly low, unlike
independence, thanks to the new reliance on oil imports and access to the significant energy dependency
extraction techniques of horizontal drill- inexpensive natural gas is visible across exhibited by several other major produc-
ing and hydraulic fracturing (known trade, investment, and industrial pro- ers. The US economy also ranks better
as “fracking”) s uitable to the country’s duction. Low-cost natural gas particu- in terms of resilience to energy transi-
large shale oil and gas deposits. The US, larly benefits power generation and tion and climate change. We expect the
the largest oil consumer in the world, petrochemical companies. US to further improve its transition read-
is now the largest oil producer as well iness by enlarging its renewable energy
and will likely export more oil than it The US is likely to continue reaping sector and reaping energy-efficiency
imports from 2020 on. It is also a net the benefits of its energy independence, gains.
exporter of natural gas, with shale gas but its energy industry is not immune
production accounting for about 70% to longer-term headwinds either, as fos-
of total production, up from just 2% sil fuel demand growth is likely to fall,
in the early 2000s. in our view. In contrast to other major
fossil fuel producers, however, the coun-
With an abundant domestic natural try, in our view, is better positioned to
gas supply, the US now enjoys pricing deal with a demand dropoff. Despite
Table 6
The United States – facts and figures

Population (million people) 327
GDP per capita, PPP, USD 55,650
Growth dynamics
(annual GDP change, 2018–2020)
2.9% 2.6% 1.9%
2018 2019 2020
Commodity exports, 2017

Share of total exports 25%
Share of GDP 2.0%
Commodity exports composition 11% Agriculture

(share of total exports, 2017) Fuels
9%
5% Ores, metals
Top 3 global producer of Soybeans 34.1%

(share of global production, 2018) Corn 32.6%
Natural gas 21.5%
Oil 16.2%
Lean hog 10.5%
Coal 8.6%
Ease of doing business 8

(rank out of 190 countries, 2019) (for comparison: 7 – Norway, 9 – the UK)
Global competitiveness 1
(rank out of 140 countries, 2018) (for comparison: 2 – Singapore)
Fracking drill rig

Source: IMF, UNCTAD, USDA, BP Statistical Review of World Energy 2019, WEF Global in the US.
Competitiveness Report 2018, WB Doing business 2019, as of July 2019 Source:
Getty Images

Russia: Fiscal rule lowers sensitivity

to oil, but further measures are needed
Russia is a world-leading producer and developed tools to reduce the impact of structure, and the investment climate
exporter of oil and natural gas, metals volatile energy markets. The new fiscal are problematic.
and mining products, and agricultural rule, introduced in 2017, transfers oil
commodities. Its prudent macroeco- and gas revenues derived from an oil The government has announced an
nomic policies compare favorably to price in excess of USD 40/bbl to the ambitious program for 2019–2024 aimed
those of EM commodity producers such National Wealth Fund, increasing at raising potential growth to 3% from
as Brazil. Its solid finances are mani- reserves and lowering the sensitivity of the current 1.5% and halving poverty to
fested in a very low public debt-to-GDP fiscal policy and the exchange rate to oil 6.6% by 2024. The program will channel
ratio of about 14%, fiscal and current price fluctuations. In our view, such poli- government investments in infrastructure,
account surpluses that are supported by cies could serve as a blueprint of prudent health, education, social policy, the envi-
energy exports, and sizable international policymaking for other commodity ronment, support for small businesses,
reserves that fully cover its external debt. exporters. and exports. We expect the impact on
Its robust fundamentals are reflected in growth to become visible in 2020 at the
its investment grade ratings, and under- In our view, Russia’s relatively modest earliest, but program execution has been
pin the quality of its credit instruments. long-term growth potential requires slow to date. An efficient and timely
reforms beyond the energy sector. An implementation of these projects would
In contrast to several Middle Eastern aging population, subdued productivity, help to address structural challenges, but
energy exporters, the Russian economy the high share of state-owned enter- uncertainties linger. The World Bank 5 esti-
is more diversified. Its policymakers have prises in the economy, the state of infra- mated that greater investment, pension
reform, and a gradual rise in productivity
would boost the country’s potential
Table 7
growth to 3% by 2028 – four years later
than targeted by the government.
Russia – facts and figures
5
Okawa Y., Sanghi A. Potential growth: out-
Population (million people) 144 look and options for the Russian Federation,
GDP per capita, PPP, USD 26,015 World Bank Policy Research Working Paper,
December 2018
Growth dynamics
2.3% 1.9%
1.2%
2018 2019 2020

Share of GDP 17.7%
Commodity exports composition 59% Fuels

(share of total exports, 2017) Agriculture
8%
8% Ores, metals
Top 3 global producer of Palladium 40.5%

(share of global production, 2018) Natural gas 17.3%
Platinum 13.1%
Oil 12.1%
Gold 8.4%
Aluminium 6.2%
Cobalt 4.2%

(rank out of 190 countries, 2019) (for comparison: 30 – Spain, 32 – France)
Construction
Global competitiveness 43 of a petrochemi-
(rank out of 140 countries, 2018) (for comparison: 42 – Latvia, 44 – Cyprus) cal and oil refin-
ery near the
city of Tobolsk
Source: IMF, UNCTAD, U. S. Geological Survey, GFMS, BP Statistical Review of World Energy in Russia.
2019, WEF Global Competitiveness Report 2018, WB Doing business 2019, as of July 2019 Source:
Getty Images

Saudi Arabia: Progress on reforms,

but no room for complacency
Saudi Arabia was the second-largest icant progress is being made on struc- Fig. 16
global oil producer in 2018 with one of tural reforms, which we think could lift Saudi Arabia’s fiscal breakeven oil
the lowest extraction costs. It has pru- the country’s long-term potential price still above current market prices
dently used its oil revenues to build up growth, create jobs, and raise invest- Estimated fiscal breakeven oil prices, in USD/bbl (2019)
public buffers of almost USD 800bn, ment opportunities in a range of sectors
roughly equal to its GDP. The oil industry such as tourism, mining, industry, Algeria
Oman
plays a dominant role in the economy, energy, including solar energy, and
Bahrain
accounting for about one-fourth of logistics.
Saudi Arabia
GDP, two-thirds of fiscal revenue, and UAE
three-quarters of total exports. The But deeper structural reforms are neces- Iraq
Saudi economy went into recession and sary, in our view. For instance, labor Turkmenistan
the fiscal balance dropped to a double- market reforms should encourage Saudi Azerbaijan
Kuwait
digit deficit when oil prices plunged in nationals to work in the private sector
Qatar
2014. Policymakers swiftly reacted by and companies to hire them. Govern-
Kazakhstan
announcing Vision 2030, an ambitious ment interventions in the economy
0 20 40 60 80 100 120 140
and comprehensive plan to diversify the should be carefully handled given the
Source: IMF, UBS, as of April 2019
domestic economy and public finances. large economic footprint of the public
sector. And additional fiscal adjustments
Higher oil prices provided some fiscal are needed, as the Saudi government
reprieve, with the deficit moderating to currently requires an oil price of
around 4% of GDP and growth recover- USD 80–85/bbl to balance its budget, The more challenging outlook for fossil
ing to 2.2% in 2018. Meanwhile, signif- according to IMF estimates (see Fig. 16). fuels, as outlined in Chapter 2, will
result in further pressure. GDP growth
should hover around 2%–3% in
2018–2020, markedly lower than that
Table 8 in 2011–2014, when oil prices hovered
above USD 100/bbl. Creating jobs
Saudi Arabia – facts and figures
through economic diversification will
Population (million people) 33 remain crucial to maintaining social sta-
GDP per capita, PPP, USD 49,728 bility, given high unemployment and
population growth. In this respect,
Growth dynamics
(annual GDP change, 2018–2020) attracting investor interest through
3.0% public-private partnerships is a key
2.2% 1.9%
2018 2019 2020

medium-term objective.

Share of GDP 27.5%

2%
2% Ores, metals
Top 3 global producer of Oil 13%

(share of global production, 2018)

(rank out of 190 countries, 2019) (for comparison: 91 – Tonga, 93 – St. Lucia)
(rank out of 140 countries, 2018) (for comparison: 38 – Thailand, 40 – Lithuania)
Source: IMF, UNCTAD, BP Statistical Review of World Energy 2019, WEF Global
Competitiveness Report 2018, WB Doing business 2019, as of July 2019

UAE: A regional role model

of diversification
Similar to Saudi Arabia, the United Arab ply disruption risks through the Strait of direct more investment into energy-
Emirates (UAE) has s izable hydrocarbon Hormuz, the world’s most important intensive areas like steel and aluminium.
reserves, over 90% of which come from chokepoint with an oil flow of about Still, the path toward diversification
Abu Dhabi. The UAE’s economy is more 20% of global oil demand. remains long and likely bumpy.
diversified and enjoys large buffers that
provide significant shock-absorption The UAE’s assets could finance decades Volatile energy prices, regional geopolit-
capacity. The country’s strengths include worth of current fiscal deficits, but what ical tensions, exposure to the global
solid public finances, a moderate fiscal underpins our upbeat outlook on it is its business cycle given the country’s eco-
break-even oil price (estimated at about push for diversification, which has been nomic openness, and challenges in the
USD 65/bbl), robust institutions, and a an objective since the Emirates were real estate and banking sectors are all
stable political environment. formed in 1971. The country has since factors worth watching. Global uncer-
become a global financial center, an tainties and increasing competition from
We expect the hydrocarbon sector to international transportation hub, a pop- neighboring countries will likely force
remain strategic for growth, as well as ular tourism destination, and a location the UAE to regularly innovate and rein-
public and external finances, in the next of choice for multinational corporations. vest in itself. But its solid track record in
decade. It accounted for about 30% of This stems from its business-friendly the area of reforms makes us cautiously
GDP and 43% of the UAE’s government environment, excellent infrastructure, optimistic about its future. The liberal-
revenue last year, 48% and 65% for good quality of life, and openness to ization of foreign investment laws and
Abu Dhabi alone. The country is push- trade, capital, and labor flows. On the reforms to the visa system have helped
ing ahead with major investment plans, fiscal front, the government has ratio- consolidate the country’s status as one
which may lift daily production capacity nalized spending while introducing new of the world’s most competitive econo-
by one-third to 4mbpd by 2020. This taxes, such as a 5% VAT, to help diver- mies. The UAE ranked 11th in the World
will keep the UAE exposed to volatile oil sify revenue away from oil. Efforts con- Bank’s latest annual Doing Business
prices, the long-term energy transition, tinue to support industrial activities, report, up from 26th place in 2017. Such
and regional tensions, particularly sup- such as chemicals and plastics, and best-in-class practices could serve as a
blueprint of policymaking for other
commodity-driven economies around
the world.
Table 9
UAE – facts and figures

Growth dynamics
2.8% 3.3%
1.7%
2018 2019 2020

Share of GDP 54.8%

(share of total exports, 2017)
23% Ores, metals
5% Agriculture

(rank out of 190 countries, 2019) (for comp.: 10 – Macedonia, FYR, 12 – Sweden)
(rank out of 140 countries, 2018) (for comparison: 26 – Spain, 28 – China)
Jebel Ali
Source: IMF, UNCTAD, WEF Global Competitiveness Report 2018, WB Doing business 2019,
Container Port
as of July 2019
Dubai UAE.
Source: alamy

Nigeria: Reform implementation

to define growth outlook
Nigeria is Africa’s largest oil and gas lation doubling. Without a meaningful Fig. 17
producer. Energy represents around increase in growth, social spending Nigeria depends greatly on oil prices
90% of exports. Although the share of would need to be spread thinner in the Current account balance, GDP growth and Brent oil price
exports in N igeria’s GDP has halved in years ahead. 8 120
the last decade to a comparatively low
6 100
level of about 10%, the hydrocarbon Structural reforms aimed at diversifying
sector remains a key driver of growth the economy away from oil, improving 4 80
and is pivotal for public finances. business conditions, and tackling secu- 2 60
Despite the rise of service sectors, which rity risks are needed to put the economy
0 40
now constitute over 50% of the econ- on a stronger footing, in our view. This
omy, the energy sector still accounts for would help address the joblessness of –2 20
over half of all fiscal revenues as the fis- the growing young population and fur- –4 0
2014 2015 2016 2017 2018 2019
cal revenue base is underdeveloped and ther raise living standards. Implementa-
tion of Nigeria’s Economic Recovery and CA balance (% of GDP, le scale) Oil price (USD/bbl,
tax collection remains weak.
GDP (% y/y, le scale) right scale)
Growth Plan 2017–20, which sets out a
Source: Bloomberg, UBS as of June 2019
The economy has recovered from the comprehensive reform agenda, remains
2016 recession (the first one in over two key. As d iscussed in Chapter 3, policy
decades), which was spurred by the oil choices made by other EM commodity
price slump and disruptions in the Niger producers such as Russia and the UAE
Delta. But growth rates are now less could serve as a blueprint for commod-
than half of the 2000–14 average. ity exporters like Nigeria and its African
According to UN projections, Nigeria neighbors.
could be the third most populous coun-
try in the world by 2050, with its popu-
Table 10
Nigeria – facts and figures

Growth dynamics
2.3% 2.6%
1.9%
2018 2019 2020

Share of GDP 11.6%

5% Agriculture
2% Ores, metals.

(rank out of 190 countries, 2019) (for comparison: 145 – Mali, 147 – Grenada)

(rank out of 140 countries, 2018) (for comp.: 114 – Cote d’Ivoire, 116 – Tanzania)
Offshore oil
Source: IMF, UNCTAD, WEF Global Competitiveness Report 2018, WB Doing business 2019,
platform in
as of July 2019
Nigeria.
Source: alamy

South Africa: Structural reforms

urgently needed
South Africa is in a period of subdued down as well. The economy and its cles, serving as an area of focus in the
growth. GDP has expanded on average financial markets depend to a large National Development Plan.
by only slightly more than 1% on a per extent on external factors, including
capita basis in four out of the last five commodity prices, to fund the persistent While we think policymakers are setting
years. Although the economy is current account deficit. While the US- the right priorities, timely and effective
expected to recover, a return to sustain- China trade dispute is a headwind, the adoption of them is far from certain.
ably higher growth rates would be a agriculture sector might benefit from High income inequality, unemployment,
positive s urprise, even when factoring in trade substitution. lackluster growth, and powerful labor
the better reform outlook. While the unions could easily spark social tensions.
economy is fairly diversified, commodi- Reforms, in our view, are crucial if a fur- The lengthy process needed to renew
ties are an important part of it; agricul- ther deterioration in economic prospects the Mining Charter is a good example.
ture represents 2.5% of GDP and min- is to be avoided. Measures must be In our view, the new charter is a step
ing 7.5%, with commodities accounting taken to improve productivity and com- toward better regulatory and policy cer-
for over half of all exports. petitiveness, make foreign investment tainty in the mining industry, and can
attractive given the low domestic sav- help restore competitiveness in the sec-
The long-term decline in South Africa’s ings rate, and raise the efficiency of tor. But the involvement of numerous
growth potential, in our view, stems state-owned enterprises. Current reform stakeholders and the country’s demand-
from stalling productivity growth and a efforts are proceeding in the right direc- ing socio-economic background pro-
lack of investment. A deteriorating busi- tion, with export-led growth of agricul- longed the process and added con-
ness environment and widespread cor- tural goods, tourism, and high-value straints. In this regard, South Africa
ruption have contributed to the slow- manufacturing, such as of motor vehi- serves as an important reminder of how
critical and challenging it is to optimize
stakeholder engagement while enacting
timely and effective reforms in the min-
ing industry.
Table 11
South Africa – facts and figures Other initiatives like land reform, which
foresees expropriations without com-
Population (million people) 58 pensation and has raised concerns
about the protection of property rights,
Growth dynamics are ongoing. While we expect the rule
(annual GDP change, 2018–2020) of law to prevail, property rights to be
1.1%
0.8% 0.7%
protected, and agricultural or financial
2018 2019 2020 activities not to be permanently
affected, the challenging backdrop pro-
Commodity exports, 2017 vides a fertile ground for further initia-
Share of GDP 14.6% tives. The ability to deal with this in an
institutional and constitutional frame-
Commodity exports composition work will be critical. Overly unorthodox
32% Ores, metals
13% Agriculture choices might ultimately backfire via fur-
12% Fuels ther pressure on credit ratings, the cost
of funding, the exchange rate, and the
country’s growth potential, adding fur-
Top 3 global producer of Platinum 68.8% ther headwinds to the mining industry.
(share of global production, 2018) Palladium 32.4%

(rank out of 190 countries, 2019) (for comparison: 81 – Bhutan, 83 – Qatar)
(rank out of 140 countries, 2018) (for comparison: 66 – Georgia, 68 – Croatia)
Source: IMF, UNCTAD, U.S. Geological Survey, WEF Global Competitiveness Report 2018,
WB Doing business 2019, as of July 2019

Brazil: The pro-growth

reform agenda
Brazil’s economy is well diversified and in soy and corn output by 2050. In this The government is currently working on
domestically driven, with overall exports regard, a recent OECD report concludes a series of pro-business initiatives rang-
making up just 10% of GDP. Still, the that Brazil’s support to agriculture could ing from tax reform, infrastructure
commodity sector plays an important be better targeted to support on-farm investment, and privatization programs
role in it, with commodities constituting investments that explicitly incorporate to measures aimed at reducing red tape
about 60% of exports, including a hefty technological innovations, advanced and corruption and increasing trade.
40% contribution from agriculture. A farm management, and, importantly, We see a good chance that many of
leading agricultural producer, Brazil is the latest environmental practices. these initiatives will be adopted as the
one of the main countries driving global administration and a majority in Con-
expenditure on agricultural R&D, which Economic growth has been anemic in gress appear to have a pro-market tilt.
is particularly important to it as its agri- Brazil for the last decade, averaging just
cultural regions neighbor the equator, 1.2% a year. Pension reform approval
where climate change is likely to be is necessary to put the country on a
especially acute. more solid fiscal footing, but it cannot
improve the country’s long-term growth
As discussed in Chapter 2, the Brazilian prospects singlehandedly. As the gov-
state of Mato Grosso, one of the most ernment’s investment capacity may
important agricultural regions in the stay low for longer, private investment
world, may face an 18%–23% decline is crucial.
Table 12
Brazil – facts and figures

Growth dynamics
2.4%
1.1% 0.8%
2018 2019 2020

Share of GDP 6.7%
Commodity exports composition 40% Agriculture

14% Ores, metals
9% Fuels
Top 3 global producer of Coffee 37.2%

(share of global production, 2018) Soybeans 32%
Iron ore 19.6%
Live cattle 16.9%
Sugar 16.5%
Corn 9%

(rank out of 190 countries, 2019) (for comparison:
108 – Papua New Guinea, 110 – Nepal)
(rank out of 140 countries, 2018) (for comparison: 71 – Montenegro, 73 – Jordan) Mass soybean
harvesting at
a farm in Mato
Source: IMF, UNCTAD, USDA, U. S. Geological Survey, WEF Global Competitiveness Grosso, Brazil.
Report 2018, WB Doing business 2019, as of July 2019 Source:
Getty Images

Chile: Mining heavyweight poised

to adapt to industry’s evolution
Chile is the world’s largest copper pro- been mitigated by its economic diversifi-
ducer. Mining accounts for about 10% cation. Despite the challenges it faces,
of GDP and over 50% of exports, with Chile is well positioned to adjust to the
copper representing almost 90% of min- ongoing transformation of global mining
ing shipments. That said, Chile has diver- activities, in our view. Its prudent fiscal
sified its economy: the mining industry’s and monetary policy, healthy financial
share of GDP has declined by 20% since system, and relatively low government
2008. Meanwhile, the agricultural and intervention in the economy should all
service sectors have gained in impor- assist it in managing this transition.
tance. As a result, copper-related reve- Significant fiscal buffers accumulated
nue makes up less than 5% of govern- in the stabilization fund and a credible
ment revenue today, down from a peak fiscal rule leave scope for countercyclical
of 21% in the mid-2000s. Chile’s copper policies. Government-initiated reforms
industry is increasingly focusing on sus- aim to improve the business environ-
tainability, with a marked rise in related ment and lift growth prospects. Once
annual investment. approved, the reforms could bear fruit,
but their slow passage through
The country’s still-exaggerated depen- Congress, where the government lacks
dence on commodities is a key risk to its a majority, has been weighing on
economic outlook, but one that has business confidence.
Table 13
Chile – facts and figures

Growth dynamics
4.0% 3.4% 3.2%
2018 2019 2020
Commodity export, 2017

Share of GDP 22.0%
Commodity exports composition 56% Ores, metals

30%
1% Fuels
Top 3 global producer of Copper 27.6%

(share of global production, 2018) Lithium 19%

(rank out of 190 countries, 2019) (for comparison:
55 – Brunei Darussalam, 57 – Cyprus)
Chuquicamata
is the biggest
Global competitiveness 33 open pit copper
(rank out of 140 countries, 2018) (for comparison: 32 – Estonia, 34 – Portugal) mine in the
world by exca-
vated
Source: IMF, UNCTAD, U. S. Geological Survey, WEF Global Competitiveness Report 2018, volume.
WB Doing business 2019, as of July 2019 Source:
Getty Images

Table 14
Select macro indicators of commodity producers

Data for 2018
Unit Brazil Chile Nigeria Russia Saudi South UAE US

Arabia Africa
Population Million 208 19 194 144 33 58 10 327
people
GDP per capita, PPP USD 14,360 23,092 5,358 26,015 49,728 12,156 61,673 55,650
GDP growth, % change 1.1 4.0 1.9 2.3 2.2 0.8 1.7 2.9
constant prices
GDP, current prices USD billion 1,868 298 397 1,631 782 368 425 20,494
Gross national savings % of GDP 14.6 19.5 15.8 30.1 34.2 14.6 29.2 19.0
Total investment % of GDP 15.4 22.7 13.7 23.0 25.9 17.9 22.6 21.1
Inflation, end of period % of GDP 3.7 2.1 11.4 4.3 2.5 4.9 3.1 2.0
consumer prices
General government % of GDP 87.9 25.6 28.4 14.0 19.1 56.7 18.7 105.8
gross debt
General government % of GDP –6.8 –1.5 –4.5 2.8 –4.6 –4.4 –1.8 –4.3
budget balance
General government % of GDP –1.7 –1.2 –2.9 3.4 –5.1 –0.7 –1.5 –2.6
primary balance
General government % of GDP 31.3 23.7 8.0 35.9 30.5 29.1 28.4 30.9
revenue
Current account balance % of GDP –0.8 –3.1 2.1 7.0 8.3 –3.4 6.6 –2.3
Source: IMF, UBS as of July 2019

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September 2019

Chief Investment Office GWM

5 What you need to know

8 Commodity markets in transition

18 Implications for policymakers, investors,

34 Commodity titans: Regional perspectives

The commodity crunch point Editor in Chief Design

2 September 2019 – The commodity crunch point

I hope you find the reading thought provoking and enjoyable.

September 2019 – The commodity crunch point 3

Source: Getty Images

• Norway and several Gulf Cooperation Council (GCC)

September 2019 – The commodity crunch point 5

6 September 2019 – The commodity crunch point

Source: Getty Images

Finally, as many of the changes we foresee originate from

The remainder of this report is structured as follows: Chap-

September 2019 – The commodity crunch point 7

8 September 2019 – The commodity crunch point

Commodities are the building blocks of our

Chuquicamata open-pit copper mine, Chile.

September 2019 – The commodity crunch point 9

Commodity production is in the hands of few players

10 September 2019 – The commodity crunch point

Source: Getty Images

Energy: Transition from fossil fuels Fig. 1

Global energy demand

Growing global hunger for energy, but a

September 2019 – The commodity crunch point 11

Source: Getty Images

…and oil to lose market share 20

The difficulty of a rapid transformation

12 September 2019 – The commodity crunch point

Source: Getty Images

September 2019 – The commodity crunch point 13

Source: Getty Images

14 September 2019 – The commodity crunch point

Food production globally currently accounts for…

cast for lithium and cobalt, which are closely linked to

market size to triple or quadruple and cobalt’s to dou-

September 2019 – The commodity crunch point 15

Source: Getty Images

16 September 2019 – The commodity crunch point

IoT is one of the fastest-growing technology

Wide-area IoT 1.1 4.5 27%

Short-range IoT 7.5 17.8 15%

Sources: Ericsson, UBS, as of November 2018

How extensive is the opportunity?

2018 (in bn) 2030 (in bn)

September 2019 – The commodity crunch point 17

Source: Getty Images

18 September 2019 – The commodity crunch point

A rich commodity endowment is undoubtedly

The windmill park between

September 2019 – The commodity crunch point 19

The ABC policy framework

Most commodity-producing countries need to step up economic

How to allocate commodity revenues?

Private spending Public spending Financial assets Non financial

Tangible assets Intangible assets

20 September 2019 – The commodity crunch point

legacy that can lower a country’s long-term growth potential, Fig. 7

Fiscal framework matters

initiatives, which reinforce each other as the countries aim

A diligent risk assessment by the countries themselves should Fig. 15