We recently compiled a list of the 13 Best Commodity Stocks To Buy According to Analysts. In this article, we are going to take a look at where Vale S.A. (NYSE:VALE) stands against the other commodity stocks.

Two major trends that are shaping commodity markets are the rising interconnection of the market and the increasing importance of power in the energy transition, as per a report. The link between necessary commodities for the energy transition, such as LNG and metals, grew to 56% in 2022-23, up from 27% in 2015-19. With the introduction of more than 100 new tankers in the previous three years, the supply of LNG is rising dramatically. By 2028, it is anticipated that there will be more LNG carriers than oil carriers. Flexible contracts and increased competition between Europe and Asia are the main causes of this change.

Moreover, estimates suggest that power will play a larger part in the energy transition by 2040, contributing between $1.3 trillion and $2.4 trillion, expanding at a rate of up to 5% annually. Since renewable energy is predicted to account for the majority of the power mix between 2030 and 2050, significant investments in transmission networks, flexible power assets, and renewable energy sources will be required to meet net-zero targets. Up to 50% of the steel, copper, and aluminum needed for production will come from wind turbines alone.

Meanwhile, it is becoming more difficult to reduce inflation as global commodity prices level off, according to the World Bank's April 2024 Commodity Markets Outlook. The price decline from mid-2022 to mid-2023 was 40%, but it has since stabilized. However, since the middle of 2023, indices of commodities prices has largely not altered. The World Bank projects that global commodity prices will fall by 3% in 2024 and 4% in 2025, assuming that geopolitical tensions do not flare up again. Inflation will continue to rise above central bank targets despite this modest decline as per the report World Bank.

Oil prices are still high as the world economy is going down; Brent crude is expected to average $84 a barrel by 2024, as per the World Bank. Prices might rise above $100 in the event of global upheaval, providing investors in oil substantial profits. Secondly, due to geopolitical uncertainty and the robust demand from central banks in developing countries, gold is predicted to reach record highs in 2024. This confirms gold's reputation as a "safe haven" asset in times of market volatility.

Moreover, the demand for metals like copper and aluminum is being driven by investments in green technologies. Already at a two-year high, copper prices are predicted to grow by 5% in 2024, while aluminum prices are forecasted to rise by 2% due to rising demand for renewable energy infrastructure and electric vehicles.

On the other hand, a report from a large US bank stated that, in May, commodity prices reached all-time highs, driven by increases of 74% in only 1.5 months for U.S. natural gas, copper, gold, and cocoa. A retreat in June was brought on by profit-taking and worries about the U.S. economic slowdown. By year's end, Natasha Kaneva projects a 10% growth in the commodity market, citing weather-related supply chain disruptions and favorable fundamentals that might raise the price of gas, oil, and agricultural products. Energy transition commodities may see more gains from China's decarbonization initiatives, and gold prices may reach $2,600/oz by 2025 as a result of Fed rate cuts and central bank easing.

Methodology:

We sifted through holdings of commodity ETFs to form an initial list of 20 commodity stocks. Then we selected the 13 stocks that had the highest upside potential based on analysts' consensus. We have only included stocks in our list with an upside potential of 30% or higher. The stocks are ranked in ascending order of the upside potential.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)

Aerial view of a giant iron ore mine, showcasing the mineral deposits of the company's Ferrous Minerals segment.

Vale S.A. (NYSE:VALE)

Upside Potential: 63.31%

Iron ore and pellets are produced worldwide by Vale S.A. (NYSE:VALE), a sizable mining company. To focus on iron ore, nickel, and copper, the company sold off noncore assets including its steel, coal, and fertilizer businesses in recent years. The bulk materials division, which mainly sells iron ore and iron ore pellets, accounts for the majority of earnings. The relatively smaller base metals category consists of copper mines that produce copper in concentrate and nickel mines and smelters. It has decided to sell a minority 13% ownership in energy transition metals, its base metals business, which is slated to go into effect in 2024 and is likely the first step in separating base metals from iron ore.

The Q2 2024 performance of Vale met analysts' expectations. The primary driver of earnings, iron ore sales volumes, jumped by 25% from the previous quarter and by 7% YoY. Although first-half sales volumes of 144 million metric tons are 10% higher YoY, Vale maintained its guidance for 2024 output of 310 million to 320 million metric tons. Analysts believe 2024 sales volumes are likely to be lower than production, as has generally been the case in recent years, despite the strong first half and sales generally being greater in the second half due to seasonal factors. Therefore, Morningstar analysts have kept the 2024 iron ore sales prediction at 305 million metric tons, which is unchanged from 2023. The quarter's average iron ore fines prices of roughly $98 per metric ton and the half-year average of $99 are in line with its full-year assumption of roughly $101.

With record iron ore output and advancements on significant expansion projects adding 30 million tonnes of capacity, Vale S.A. (NYSE:VALE) recently reported good operational performance. Most crucially, Vale's reduced unit costs in comparison to producers in India and China, as well as high-cost producers like Anglo American, enable it to remain profitable even in low-price conditions. There are 9 analysts who have collectively rated the stock as a "buy", with an upside of 63%.

Overall VALE ranks 1st on our list of the best commodity stocks to buy according to analysts. While we acknowledge the potential of VALE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than VALE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.