Technological advancements are having an impact on commodity investment, which could keep returns relatively low as production increases.
“Commodities is a dangerous category,” said James P. McCaughan, CEO of Des Moines, Iowa-based Principal Global Investors and president of parent Principal Financial Group.
“Human ingenuity has made them cheaper and easier to do,” Mr. McCaughan added. “The glut of commodities is pretty technologically driven.”
Two examples are agriculture and oil production, he said. Technology has raised the crop yield from seeds, and hydraulic fracturing has boosted oil production, he said.
“A horizontal well can cover a larger area than a vertical well,” Mr. McCaughan said. “There's more production than there used to be.”
Even without these technological advancements, commodity cycles are very long, he said.
If investors don't get the timing right, their returns could be 20% to 25% less than what they had expected, Mr. McCaughan said.
Technological changes, including the impact of advances in renewable energy, are expected to have an impact on demand for commodities, said Evan Corley, head of natural resources in the San Francisco office of private equity manager Pantheon Ventures.
Commodities as a sector is constantly evolving, Mr. Corley said.
For example, demand for coal is down due to the current move away from coal as an energy source, Mr. Corley said. At the same time, technology is driving the evolution of renewable energy through such innovations as improved battery storage, he said.
“In the long term, it is inevitable that renewables will have an impact on demand for commodities,” Mr. Corley said.
But it will take time and capital investment to replace commodities such as oil and gas with renewables, Mr. Corley added.
Some industry executives are optimistic that the increase in supply from technological advancements will be offset by lower expected demand for commodities.
“One must understand that commodities are basically about supply and demand,” said Victor Sperandeo, a founding partner, president and CEO of EAM Partners LP, a futures-based index development firm.
“The demand comes from increasing world population,” Mr. Sprandeo added. “So although technology helps increase supply, it does not mean the price of commodities will decline.”