ICG Commodity Update – January 2025

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Over the weekend, President Trump announced new tariffs: 25% on imports from Canada and Mexico and 10% on imports from China, with Canadian energy facing a lower 10% tariff starting February 4. This policy move has already impacted global markets, particularly oil prices, which rose on Monday due to fears of supply disruptions. However, gains were tempered by concerns over a potential trade war and economic slowdown. The tariffs will significantly impact U.S. refiners, as Canada and Mexico supply a quarter of U.S. crude imports. Canadian heavy crude is essential for U.S. refineries, and substituting it with U.S. shale will be inefficient, leading to compressed refining margins and higher consumer costs. However, analysts predict that Canadian oil producers will bear most of the burden due to limited alternative export markets. The natural gas market will also see cost-sharing between suppliers and consumers in key U.S. regions with limited substitution options. Prolonged implementation of tariffs could in theory weaken GDP growth and oil demand, with a stronger U.S. dollar further suppressing demand by raising fuel costs in local currencies. Investors are closely monitoring OPEC+ discussions, expecting the group to maintain its gradual output increases. Despite Trump’s calls for lower oil prices, OPEC+ is likely to stick to its “precautious, proactive, and pre-emptive” approach, planning to add barrels starting in April if market conditions warrant it. Meanwhile, Trump has signaled potential revisions to waivers on Venezuelan crude imports and hinted at harsher sanctions against Russia. Major oil companies, including Chevron, Exxon, and Shell, reported lower fourth-quarter refining margins due to increased global refining capacity and sluggish demand growth. Interestinlgy, the 2025 US onshore drilling outlook looks weak, with indicators and industry leaders like Halliburton and Schlumberger pointing to slower growth. Despite these challenges, Chevron plans to build natural gas-based power plants adjacent to data centers, anticipating a surge in energy demand driven by AI. Exxon has also expressed interest in decarbonized data centers, highlighting the evolving intersection of energy and technology. Despite market volatility, analysts see the energy sector benefiting from AI-driven growth and sector shifts, reinforcing its indispensable role in the global economy.

Industrial Metals

The global commodities market is facing significant turbulence driven by escalating geopolitical tensions and renewed trade war fears sparked by President Donald Trump’s tariff announcements. Trump’s decision to impose 10% tariffs on Chinese goods and 25% tariffs on products from Canada and Mexico has created widespread uncertainty across industrial metals markets. The threat of retaliatory measures from Mexico and Canada, along with concerns about economic slowdown, is raising fears of supply chain disruptions and inflationary pressures on global trade. Aluminum, in particular, is expected to experience considerable volatility due to the U.S.’s reliance on Canada for approximately 69% of its primary aluminum imports. This dependency is likely to cause a surge in U.S. premiums as producers and consumers scramble to adjust to the new tariffs, further destabilizing the market. Other industrial metals, such as copper, iron ore, and zinc, are also feeling the pressure. While copper remains critical for the energy transition, tariff fears and the prospect of slower economic growth have led to price declines. The rise of the U.S. dollar, triggered by the tariff announcements, further exacerbates the situation by making metals more expensive for international buyers. This combination of tariff threats, economic uncertainty, and a stronger dollar is creating a volatile and challenging environment for global commodity markets. In parallel, the mining sector is undergoing a shift in corporate strategies, with major players like Rio Tinto and Glencore revisiting the possibility of mega-mergers after years of avoiding large transactions. This change is driven by the need to secure key commodities that are essential for the energy transition. Rio Tinto’s reconsideration of large deals was spurred by BHP Group’s $49 billion attempt to acquire Anglo American, which highlighted the importance of diversifying portfolios. BHP’s recent copper output surge underscores the metal’s increasing significance in the global economy. The mining sector’s focus on acquisitions, particularly in copper, lithium, and iron ore, reflects the drive to increase exposure to these critical resources. Despite challenges such as weaker demand for iron ore, the trend toward consolidation signals an intensifying competitive landscape and a shift toward more aggressive growth strategies in the industry.

Precious Metals

Gold prices have reached record highs, with futures hitting more than $2’800 an ounce. The surge comes amid growing economic uncertainty, geopolitical tensions, and shifting monetary policies. Investors continue to view gold as a safe-haven asset, with demand rising as fears of financial instability grow. President Donald Trump’s tariffs on Canada, Mexico, and China have intensified concerns about a global trade war. The U.S. imposed a 25% tariff on Canadian and Mexican goods and a 10% levy on Chinese imports, prompting retaliatory measures. While trade uncertainty typically boosts gold’s appeal, a stronger U.S. dollar and elevated borrowing costs have limited gains. Analysts suggest that if trade tensions escalate, demand for gold could rise further as investors seek protection against market instability. Central bank policies have also played a role in gold’s recent rally. The Federal Reserve’s decision to hold interest rates steady, coupled with rate cuts from the European Central Bank and the Bank of Canada, has increased gold’s attractiveness. Lower interest rates reduce the opportunity cost of holding non-yielding assets, making gold more appealing. Market expectations for further rate cuts in the U.S. have fueled additional buying interest. The weakening dollar has further supported gold prices, making the metal cheaper for international buyers. Recent U.S. economic data, including a softer-than-expected GDP report, has contributed to the dollar’s decline. Concerns over inflation and economic growth have driven investors toward gold as a hedge against potential downturns. Some analysts now predict that gold could surpass $3,000 an ounce if uncertainty persists. Gold’s price movements have also been influenced by physical market dynamics. JPMorgan Chase & Co. has announced plans to deliver over $4 billion worth of gold bullion against futures contracts in New York, taking advantage of arbitrage opportunities created by price disparities between trading hubs. The demand for physical gold has surged, leading to increased shipments from London to the U.S. as traders rush to secure metal before potential tariff impacts take hold. While gold prices remain volatile, market sentiment suggests that ongoing economic and geopolitical risks will continue to support demand. Analysts remain divided on whether the rally will persist, but for now, gold continues to assert its role as a key hedge against financial uncertainty.

ICG Commodity Update – December 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

The oil market remains highly divided and cutting through the noise is crucial. The IEA predicts a large 950kboe/d inventory build for 2025, while the EIA anticipates a modest draw of 80kboe/d. Historically, IEA forecasts of large builds have often failed to materialize. Since OPEC restricted media access to its meetings, mainstream coverage has leaned bearish. Critics argue that OPEC’s production cuts have benefited US producers, raising concerns that OPEC might flood the market to undercut shale. However, a similar attempt by OPEC a decade ago backfired, costing the group billions as US production proved more resilient than expected. Learning from this, OPEC+ has taken a more cautious approach, extending production cuts until March 2025 and slowing monthly supply increases to 138kboe/d, reducing 2025 supply growth by 840kboe/d. Compliance from Kazakhstan and Russia has also improved under Saudi pressure, though its longevity remains uncertain. Despite frequent predictions of a US shale production peak, output continues to grow, albeit more slowly. However, rising gas output relative to crude is signaling maturing shale basins. Indeed, over the past 9 years, 41% of US production growth came from natural gas, with oil contributing only 28%. With oil prices hovering ~$70/bl, many producers have scaled back capex to prioritize free cash flow over expansion. Global demand is expected to rise by 1.3mboe/d in 2025, with China and India leading growth. India’s demand increase is forecasted at 330kboe/d, up from 220kboe/d in 2024. Despite ongoing concerns about China’s real estate sector, stimulus measures and growing demand for petrochemicals are likely to sustain consumption. Additionally, China exported 4.5m cars in 2024, incl. 3.1m ICE vehicles. This surge in affordable ICE exports could fuel demand growth in emerging markets, where car ownership is becoming more accessible. Interestingly, despite widespread fears of a glut, inventory trends and time spreads, which remain in backwardation, suggest strong near-term demand and no imminent oversupply. Geopolitical risks are also a critical factor heading into 2025. Trump’s return to power is expected to lead to tougher sanctions on Iran. Finally depressed sentiment, coupled with attractive valuations and high dividends, makes oil and gas equities a compelling contrarian opportunity.

Industrial Metals

Global resource industries are at a crossroads, driven by competition, policy shifts, and the push for sustainability. Boliden AB is acquiring zinc and copper mines in Portugal and Sweden for $1.52 billion, nearly doubling its zinc output while boosting copper supplies for its smelters. This strategic move ensures supply security as smelting margins face strain. At the same time, Lundin Mining is selling these assets to focus on growth in Latin America. In the US, revised hydrogen tax credits aim to establish leadership in clean energy. The Biden administration expanded eligibility to include nuclear power and carbon-captured natural gas, alongside renewables. These changes promise to accelerate domestic hydrogen production, critical for decarbonizing heavy industries. While some environmental groups applaud the revisions, others caution against potential loopholes that could enable polluting practices. Meanwhile, China is tightening export controls on advanced lithium and battery technologies to protect its dominance in the electric vehicle supply chain. The restrictions target processes like lithium refining and cathode production, crucial to high-performance batteries. While the curbs bolster China’s grip on these resources, they intensify trade tensions, particularly with the US. Chile’s state-owned Codelco, the world’s largest copper producer, is making strides in its recovery after years of underinvestment. A strong December output reflects management changes and progress on delayed projects. With plans to regain peak production levels by 2030, Codelco is also expanding its role in lithium production to support the energy transition. However, regulatory challenges continue to disrupt the sector. In Kazakhstan, uranium production at the Inkai joint venture between Cameco and Kazatomprom has been suspended due to delays in securing approvals. While the halt is not expected to impact long-term production targets, it highlights operational vulnerabilities in a tightly regulated industry. These interconnected developments reveal the global race to secure critical resources for a greener future. Companies like Boliden and Codelco are reshaping operations, while nations such as the US and China are leveraging policies to dominate emerging clean energy markets. This competition underscores a broader shift toward sustainability, with geopolitical tensions and regulatory complexities shaping the path forward.

Precious Metals

The gold industry is navigating a critical period marked by mergers, acquisitions, and strategic shifts, driven by economic and geopolitical risks. The Trump administration’s potential policies, including higher tariffs and a widening federal deficit, could fuel inflation, prompting increased demand for gold as a hedge. Additionally, concerns around artificial intelligence and quantum technologies disrupting markets may weaken the dollar and exacerbate fiscal instability, further boosting gold’s role as a safe asset. Central banks, especially in Eastern Europe, are significantly increasing their gold reserves. Poland, the world’s largest gold buyer in the second quarter, is acquiring gold to mitigate risks from Russia’s invasion of Ukraine and other geopolitical uncertainties. Similarly, the Czech National Bank is diversifying its national reserves, with gold playing a crucial role. This growing trend highlights the importance of gold as a defensive asset for countries facing external shocks and historical conflicts. On the corporate front, gold mining companies are adjusting their strategies in response to the soaring price of gold. Northern Star Resources has acquired De Grey Mining in an all-share deal to secure more supply, particularly focusing on the Hemi project in Western Australia, which is set to become one of the country’s top gold mines. Newmont Corporation, following its acquisition of Newcrest Mining, is divesting non-core assets, such as the Éléonore mine, to focus on high-margin, long-life assets. Barrick Gold, however, is focusing on organic growth, particularly with its Fourmile project, which promises to significantly enhance its reserves in a major gold-producing region. Goldman Sachs has raised its gold price forecast by 19%, predicting it could reach $3,150 per ounce amid growing concerns over U.S. fiscal sustainability and inflation. Analysts expect that inflation, geopolitical risks, and potential U.S. policy shifts — such as higher tariffs or energy disruptions — could further drive demand for gold as a hedge against these uncertainties. The report also emphasizes the role of commodities in investment portfolios, with gold and oil offering crucial protection against inflation and economic volatility. In summary, the gold market is set for continued growth, driven by central banks’ increasing gold acquisitions, strategic adjustments by mining companies, and the anticipation of rising gold prices. With global economic risks looming, gold is poised to maintain its appeal as a safe haven.

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ICG Commodity Update – November 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Crude oil has traded within a narrow range since mid-October, driven by geopolitical tensions in the Middle East, waning demand from China, and uncertainties surrounding President-elect Donald Trump’s potential policies on oil supply from Russia, Iran, and the US. Despite Trump’s “drill, baby, drill” rhetoric, US oil and gas producers are unlikely to ramp up output significantly. Exxon Mobil’s Upstream President Liam Mallon emphasized that economic considerations remain the priority. “I think a radical change is unlikely because the vast majority, if not everybody, is primarily focused on the economics of what they’re doing,” Mallon stated at a recent conference. TotalEnergies CEO Patrick Pouyanne added, with some irony, “Maybe [Trump] has a magic recipe to push them to drill like mad,” noting that US producers prioritize shareholder returns over production increases. OPEC will meet on December 5 to determine production policy for early 2025. Slowing Chinese demand and rising supplies in the Americas may prompt the group to delay planned production hikes by several months to avoid a price slump. However, analysts suggest OPEC+ may focus more on compliance than on addressing market fundamentals. The International Energy Agency (IEA) warns that even canceling supply hikes might not prevent a surplus in 2025. While India could contribute to demand growth, its impact is expected to be more modest compared to China’s historical influence. Natural gas markets, particularly in Europe, are tightening as a cold start to winter drives demand and raised prices for 2024 and 2025 by +30% already in some markets like TTF. Europe remains vulnerable, with storage levels below last year’s and continued reliance on imports. While most of Europe has shifted away from Russian gas, some eastern nations remain dependent on Moscow. If winter remains mild — as it has for the past two years — global supply-demand balances should remain stable, with prices similar to recent winters. However, colder-than-expected temperatures or unforeseen disruptions could tighten supply and trigger significant price spikes.

Industrial Metals

The outlook for key commodities is showing a complex but optimistic picture, particularly in the context of the energy transition. While certain metals like cobalt and lithium face challenges, others like copper, aluminum, and steelmaking coal are benefiting from strong demand and strategic shifts. CMOC Group, the world’s largest cobalt miner, has expressed concern over the metal’s future in electric vehicle batteries. As lithium iron phosphate batteries rise in popularity due to lower manufacturing costs, cobalt’s role is expected to diminish significantly. CMOC’s aggressive expansion in the DRC has contributed to an oversupply, pushing cobalt prices to their lowest since 2016. Despite these bearish trends, CMOC’s close ties with battery maker CATL offer some reassurance as they aim for supply chain security, though the cobalt market faces an uphill battle in the coming years. On the other hand, lithium is seeing a revival, particularly in China, where demand for electric vehicles is spiking. Chinese subsidies have spurred a recovery in lithium carbonate prices, while a series of supply cuts from mines across Australia and China are expected to tighten the market. However, analysts caution that a surplus could emerge by 2025, depending on global demand and trade dynamics, with China’s strategic moves potentially influencing the market further. In the copper sector, BHP’s CEO highlighted the critical need for $250 billion in investment over the next decade to meet the soaring demand for copper, a key element in renewable energy infrastructure. Copper demand is projected to surge by up to 100% by 2050, underscoring the necessity of M&A to secure resources. That hunger drove BHP to spend $2bn for a stake in a copper prospect in Argentina this year, raising eyebrows over the price. Aluminum is also experiencing bullish momentum, following China’s decision to remove a tax rebate on aluminum exports. This move is expected to reduce Chinese aluminum supply, boosting global prices, especially for high-value-added products. Similarly, Russian aluminum producer Rusal’s decision to cut production by up to 13% in response to soaring alumina costs illustrates the ongoing challenges in the sector. This production curtailment, although modest in global terms, could significantly impact supply-demand balance in the coming months.

Precious Metals

Central banks, especially those in Eastern Europe, have significantly increased their gold stockpiles, seeking to shield against these external risks. Countries like Poland, the Czech Republic, and Serbia have been particularly active in diversifying their reserves, emphasizing gold’s role as a stable asset amid growing uncertainties, such as the ongoing conflict in Ukraine and the possibility of new US tariffs. Central banks globally are also poised to continue accumulating gold, with many expecting further increases in their reserves. The demand for gold is also being influenced by rising fears about the US fiscal situation, with Goldman Sachs projecting that if concerns about US debt sustainability grow, gold could hit $3,150 per ounce by December 2025. The yellow metal is viewed as an effective hedge against inflation and geopolitical risks, especially in times of fiscal stress or when central banks ease monetary policies. Goldman Sachs points to potential inflationary pressures under a second Trump administration, including higher tariffs, tax cuts, and defense spending, all of which could further push investors toward gold. In addition to central bank buying, gold prices are being supported by speculative flows, especially from ETFs, and a surge in demand from wealthy individuals and family offices. The metal has benefitted from a market cycle where long-term investors are positioning themselves for inflation, with gold seen as a reliable store of value during such times. On the supply side, gold production has seen a boost, with global mine output up by 3% in the third quarter, following years of stagnant growth. However, industry experts caution against expecting any sudden supply surges due to permitting and construction challenges, as well as the high costs associated with expanding mining operations. Additionally, recycling efforts have gained traction, providing a boost to gold supply. Mining companies are also strategically positioning themselves to benefit from the high gold prices. For example, Newmont recently sold its Éléonore mine in Quebec for $795 million as part of its strategy to focus on Tier 1 assets with strong cash flow potential. Similarly, other major producers, such as Barrick Gold, are focusing on organic growth, advancing high-potential projects like the Fourmile and Goldrush developments. These companies are emphasizing long-term sustainability and resource expansion in top jurisdictions, ensuring they are well-placed to capitalize on the growing demand for gold.

ICG Commodity Update – October 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Oil prices saw heightened volatility in October as escalating tensions in the Middle East fuelled concerns over potential disruptions to energy infrastructure. However, skepticism is growing over whether the conflict will meaningfully impact oil supplies. On Sunday, OPEC+ announced it would extend its 2.2mboep/d production cut through December. The group had planned to begin gradual monthly increases, starting with an additional 180,000 bpd in December, but postponed this due to weak demand. Meanwhile, China’s manufacturing sector surprised markets by expanding in October, suggesting some stabilization following recent economic stimulus measures. Residential property sales in China also rose in October, marking the first YoY growth of 2024 and further boosting confidence in its economic outlook. Another factor that may be underestimated is the rapid growth of India’s oil demand. Between 2003 and 2023, India’s oil consumption grew at 4% above the global average, accounting for 17% of global demand growth. Currently, India represents 5% of global oil consumption, with rising demand largely fuelled by a young population and a fast-growing economy. Nevertheless, with limited domestic reserves, India remains heavily reliant on imports, with only 13% of its 2023 crude needs met by local production. This growth in demand is expected to persist through 2040, with the working-age population projected to increase by 63 million annually. This week will be pivotal for energy markets as the U.S. presidential election approaches. Both Kamala Harris and Donald Trump support expanding domestic energy production and keeping prices affordable, though their methods differ. Harris advocates a balanced approach, integrating green energy technologies with current production to maintain price stability. She has reversed her stance on a fracking ban, recognizing the need for stable production during the green transition. Trump, meanwhile, proposes loosening environmental regulations to boost oil and gas output, aiming to grow U.S. market share. Regardless of the outcome, energy companies are calling for consistent, long-term policy to sustain investment momentum. Chevron CEO Mike Wirth recently emphasized that a coherent energy policy is essential to promote investment and ensure affordable, reliable energy supplies.

Industrial Metals

Rio Tinto’s recent acquisition of Arcadium Lithium for $6.7 billion underscores a strategic pivot towards bolstering its lithium production capabilities. This all-cash deal, which values Arcadium at a 90% premium, is seen as a crucial move to enhance Rio Tinto’s portfolio alongside its established aluminum and copper operations, facilitating the supply of essential materials for the growing battery market. As global markets focus on achieving net-zero emissions, the demand for lithium, vital for battery technology, is expected to soar. Recent governmental measures in China aimed at supporting its faltering economy are enhancing the outlook for metals. The Chinese government’s pledge to invigorate the property sector, a major driver of metal consumption, combined with hints of increased government borrowing, signals a more favorable environment for commodities. Iron ore prices have already shown resilience, rising following these announcements. Furthermore, the stabilization in copper demand is noteworthy, annual consumption has nearly doubled over the past decade, with a robust structural uptrend evident. Despite challenges from the property market, copper demand remains anchored in traditional sectors like construction, infrastructure, and manufacturing. The shift towards clean energy is significantly influencing copper demand as well. The growth of electric vehicles, projected to make up a significant share of copper consumption, along with substantial investments in solar and wind power, creates a compelling outlook for the market. With copper required for wiring, batteries, and energy infrastructure, projections indicate that renewable energy segments could soon account for over two-thirds of marginal copper demand, bolstering the case for price increases. Amid these dynamics, the aluminum market is also experiencing a tight supply scenario, with alumina prices hitting records due to various supply disruptions, such as those from Guinea and production outages in Australia. The challenges in sourcing raw materials have pressured aluminum producers, further fueling the bullish sentiment in metal markets. In essence, as global economies emphasize sustainable growth and energy transitions, the metals sector stands to gain significantly. Strong demand signals, coupled with strategic moves by major industry players like Rio Tinto, highlight a robust outlook for metals as essential components of future infrastructure and energy solutions.

Precious Metals

The outlook for gold, silver, and precious metals remain exceptionally positive, buoyed by robust demand and strategic investor interest. Gold prices have surged more than 30% this year, reaching record highs, with demand hitting 1,313 tons in the third quarter—an increase of 5% year-on-year. This growth in demand has resulted in the total value of gold surpassing $100 billion for the first time, driven by strong inflows into gold exchange-traded funds (ETFs) and increased investments in bars and coins, highlighting gold’s appeal as a hedge against economic uncertainty and inflation. Despite the favorable market conditions, some of the world’s largest gold miners are facing challenges in translating these high prices into profits. Newmont recently revised its operational forecast, reducing expected gold production for 2024 to 5.6 million ounces, down from the prior 6.0–6.2 million ounces range. This decreases, combined with increased contractor reliance (25% of costs) and labor inflation, drove Q3’s all-in sustaining cost (AISC) to $1’611/oz. Looking ahead, Newmont anticipates an AISC of around $1’500/oz and $1.8bn in annual sustaining capex, largely due to complex operational demands at newly acquired Lihir, Brucejack, and Cadia assets. While these assets present integration challenges, Newmont’s strong free cash flow and expanded $2bn share buyback highlight its financial stability, offering some offset to market concerns. These operational hurdles, however, appear unique to Newmont and may not reflect broader sector performance. Meanwhile, the precious metals market is undergoing significant changes that enhance its attractiveness to investors. The gold-to-silver ratio indicates a growing retail interest in silver. Furthermore, ongoing geopolitical tensions and macroeconomic uncertainties continue to bolster the perception of gold and silver as safe-haven assets. In summary, while specific challenges persist for some leading gold producers like Newmont, the overall market dynamics and demand fundamentals present compelling opportunities for investors in gold and silver equities. The sector is well-positioned for potential growth and profitability as it adapts to evolving conditions. It is clear that there is a significant disparity between the soaring prices of gold and silver and the valuations of the companies that mine these precious metals – it should be only a matter of time before share prices adjust.

ICG Commodity Update – September 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Oil prices dropped nearly 9% in September, despite a late-month rally in the broader commodity complex driven by China’s economic stimulus. This decline may indicate a shift in market focus from demand improvements to concerns over additional supply. Prices fell further after a FT report suggested Saudi Arabia might abandon its price-targeting strategy and increase output. Since November 2020, OPEC+, led by Saudi Arabia, has cut output to stabilize prices, but this strategy has been undermined by weak demand, especially from China. At the same time, Saudi Arabia’s market share and revenues have declined amid rising non-OPEC+ production and weakening demand. Though the FT report may be denied, Saudi Arabia’s frustration with non-compliant OPEC+ members like Iran, Russia, and the UAE is evident, raising the possibility of increased Saudi production unless quotas are enforced. However, oil prices rebounded by $5/bl in early October as Middle East tensions escalated. Israel-Iran conflicts, including the killing of Hezbollah’s chief and a missile strike on Israel, have heightened risks. The rise in crude prices reflects investors factoring in a renewed risk premium as potential military conflict between these key regional players threatens vital oil flows. Analysts note the market hasn’t fully factored in risks to Iranian oil facilities or the possibility of Iran blocking the Strait of Hormuz, a threat made but never carried out. A recent BMO study of 120+ oil and gas companies shows the “all-in” cost to cover expenses and generate a 10% return has risen to $70.84/boe in 2023, up 16% YoY. While costs are now slightly above pre-pandemic levels, they remain significantly below the peak observed during the 2014 cycle. Conversely, BMO estimates OPEC+’s all-in breakeven price to be $89/bl in 2024. While the oil and gas sector’s stock market performance has been lacklustre over the past decade, equities have outperformed significantly since 2021, reflecting improving financial returns and free cash flow profiles. Despite this, valuation multiples have only modestly recovered and remain near the low end of historical norms, in contrast to the broader market. The ECF, with its focus on low-cost producers with high returns and growing free cash flow, is well-positioned to benefit from the current energy environment.

Industrial Metals

Industrial metals have experienced a significant rally following China’s announcement of measures to boost economic growth and revive its property market. China’s initiatives, including increased consumer lending, cuts to short-term interest rates, and reductions in mortgage rates, have sparked optimism in global commodity markets. On a single day, iron ore prices surged 6.7%, marking the most substantial daily increase in over 16 months, while copper, aluminium, and zinc also saw impressive gains. This positive momentum comes despite a backdrop of earlier economic challenges, as China’s real estate sector has struggled, leading to concerns about demand. Analysts believe that while China’s policy measures aim to uplift market sentiment, the overall economic landscape is improving, potentially supported by future fiscal stimulus and increased infrastructure spending. Moreover, the anticipation of interest rate cuts in major economies, especially following the U.S. Federal Reserve’s recent half-point reduction, is creating a more favourable investment climate. This environment encourages mining companies to explore mergers and acquisitions as a strategy to enhance their portfolios and secure new projects. With copper and other industrial metals projected to see soaring demand due to the energy transition and technological advancements, miners are increasingly looking to expand operations through strategic acquisitions. Recent deals reflect a growing trend where companies invest in established assets rather than solely relying on exploration. As large players leverage their balance sheets to acquire companies with promising projects, this trend can lead to greater efficiencies and increased supply. Additionally, China’s economic strategies include a pivot towards emerging markets and increased use of the renminbi (RMB) in international trade. This trend, coupled with the expansion of the BRICS bloc and efforts to establish trade systems outside of the U.S. dollar, could reshape commodity markets. Notably, over 50% of China’s transactions involve the RMB, which may lead to higher pricing dynamics for industrial metals as the dollar weakens and dedollarization accelerates. Overall, recent measures from China and ongoing M&A activities provide a glimmer of hope for the industrial metals market. The interplay between recovery efforts, evolving trade practices, and geopolitical factors is set to create a positive trajectory for metals.

Precious Metals

The gold industry is experiencing a resurgence, buoyed by a increase in gold prices, which have reached all-time highs. At the recent Denver Gold Forum, executives discussed growth prospects and potential M&A – this marks a stark contrast to previous years when the industry faced high operating costs and a lack of investor interest. The current optimism stems from an almost 28% rise in gold prices since January, supported by aggressive central bank buying, geopolitical tensions, and a shift towards de-dollarization. These factors are creating a strong demand for gold, not only as a safe-haven asset but also as a strategic component in portfolios. The recent surge in gold prices has attracted significant attention from institutional investors, indicating a growing confidence in the long-term prospects of the sector. However, the industry is exercising caution, with leaders emphasizing discipline in spending and a focus on shareholder returns. Notably, companies like Newmont and Barrick Gold are now prioritizing responsible acquisitions and cash flow management to avoid the pitfalls of the past. Despite the positive market conditions, junior miners continue to face challenges, struggling with capital flows and discounted valuations. Nonetheless, there are signs of an emerging bull market with increased exploration spending and new discoveries, reflecting a healthy level of optimism across the sector. Central banks have continued their purchasing spree, with record demand expected to drive prices higher, while geopolitical conflicts in the Middle East and Eastern Europe maintain gold’s status as a safe haven. Additionally, the potential for further Federal Reserve rate cuts could lead to more favorable conditions for gold investments in the near future. While gold stocks have lagged the metal’s performance, analysts believe that the current environment may present a compelling buying opportunity as profit margins improve. The focus is now on operational efficiency and prudent capital management, which could enhance overall profitability across the sector. Companies are poised to capitalize on this favorable backdrop, making the gold sector an attractive space for investors seeking growth. The ongoing consolidation in the industry, marked by high-profile acquisitions, highlights the strategic shift toward acquiring quality assets. Overall, the gold mining sector is on an upward trajectory, and with disciplined strategies in place, it is well-positioned for a prosperous future.

ICG Commodity Update – August 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Oil prices have erased nearly all of this year’s gains over the past couple of months due to economic concerns in major consuming nations, coupled with ample supply, which has weighed heavily on market sentiment. Meanwhile, in Libya, the state oil firm has declared force majeure at the El-Feel field, with an escalating power struggle already halving the nation’s output. These disruptions may provide OPEC+ with the opportunity to restore some production next quarter, as initially planned. However, the market remains divided on whether OPEC+ will proceed with the planned production increase. Looking at the longer-term outlook, Exxon recently published its energy forecast with several notable points. According to the report, a consumption level of 50mmbtu per person is necessary to significantly improve human development indicators. However, today, more than 4 billion people live in countries that fall below this “modern energy minimum.” This level is far below the standard of living in modern societies, where reliable energy is essential for housing, infrastructure, jobs, and mobility. Bringing these nations up to the modern energy minimum is expected to drive a 15% increase in global energy use between now and 2050. While renewables will undoubtedly play a critical role in this energy transition, oil and natural gas will continue to constitute more than 50% of the world’s energy mix in 2050. Even if every new car sold in 2035 were electric, oil demand in 2050 would still be around 85mboe/d – similar to levels seen in 2010. Exxon projects that oil demand will plateau after 2030, but remaining above 100mboe/d through 2050. On the supply side, Exxon estimates a natural decline rate of 15% per year, nearly double the IEA’s estimate of around 8%. At this rate, oil supplies could drop from 100mboe/d today to less than 30 million by 2030. Meanwhile, wind and solar contributions to the global energy mix are expected to increase more than fourfold, while coal will continue to be displaced by lower-emission sources such as natural gas. This shift is significant, as electricity usage is projected to grow by 80% by 2050 as part of the global energy mix. In summary, as Exxon emphasizes, energy is essential for improving quality of life, and the world will require more of it in the future – something that appears to be underestimated by the current market.

Industrial Metals

August began turbulently for global markets, with a broad sell-off driven by concerns ranging from a tepid employment report to the unwinding of the yen carry trade. This led to nearly 90% of the MSCI World Index closing in the red on the first Monday of the month. However, by the second week, market fears had subsided, and the recession scare proved to be temporary. Despite the broader market’s recovery, industrial metals struggled to regain lost ground, ending the month in negative territory. China played a significant role in this underperformance, as the country’s last engines of growth showed signs of faltering amid an ongoing property crisis that continues to weigh on the broader economy. Given that China historically accounted for over 50% of global commodity demand growth pre-pandemic, it is challenging to build significant deficits in these markets without robust Chinese demand. Currently, most analysts expect China’s economic growth to fall short of the government’s target of “around 5%”. Adding to these demand-side challenges, the supply side was stronger than anticipated. This combination has led to rising inventories in most metals, with some increases even defying typical seasonal trends. The steel market, in particular, has been impacted, as weak construction activity in China has resulted in growing inventories of steel and iron ore, putting downward pressure on prices. While this usually results in an influx of cheap foreign steel, despite protective tariffs, US steel executives remain optimistic about a recovery in 2025, driven by an improving US economy and large infrastructure projects. In the copper market, supply growth, primarily from the Democratic Republic of Congo, has surged by 7% this year, outpacing historical norms. Global copper demand has also risen by 6.7% during the same period, largely driven by China. Notably, BHP’s recent commodity outlook highlights that China’s copper-in-use stock per capita is only half that of the US. Moreover, India’s copper market is projected to grow five times by 2050. BHP is confident in copper’s long-term fundamentals, estimating a need for 10mtpa of new supply over the next decade, requiring around $250bn in investment. Despite this short-term turbulence, Goldman maintains its structural view that the growth in green metals demand and the long-cycle nature of copper supply, along with declining investment, will ultimately lead to inventory depletion and, consequently, scarcity pricing.

Precious Metals

Gold has surged more than 20% this year, maintaining its position around $2,500/oz. This robust performance has been fueled by several factors, including optimism surrounding monetary easing, a weakening dollar, and substantial central-bank buying. Additionally, gold’s appeal as a safe-haven asset has been amplified by ongoing geopolitical conflicts worldwide. In the near term, market participants are closely watching the upcoming nonfarm payrolls report, scheduled for release this Friday, which could provide crucial insights into the central bank’s rate-cutting trajectory. A weaker labor market could raise expectations for more aggressive easing, which typically benefits gold due to its non-interest-bearing nature. Despite the record-high gold prices, gold mining companies have not seen a corresponding boost in performance. As highlighted by Barron’s last weekend, gold miners have significantly underperformed over the last few years, though this trend may be starting to reverse. The NYSE Arca Gold Bugs Index (HUI) is currently only 10% above its level from August 2016, when gold was trading at just $1,300/oz. Two primary factors explain this underperformance. First, between 2011 and 2015, the five largest gold miners took $80bn in impairments from overpaid mergers and cost-overrun projects. This history of capital mismanagement has made investors hesitant to return to mining stocks until they see evidence that management teams have learned from past mistakes. The second factor was that from 2020 to 2022, operating cost inflation outpaced the rise in gold prices, squeezing miners’ margins. However, costs have recently moderated, improving the outlook. Notably, the HUI’s earnings per share are expected to quadruple this year compared to 2016. Despite these positive developments, gold stocks remain undervalued, making up just 0.5% of the S&P 500 – a proportion similar to the market bottom in 2015, when the industry’s profit margins were only about 12%. Today, those margins are nearing 40%, offering a much greater margin of safety. Our PMC portfolio is expected to achieve EBITDA margins of 51% next year, with even more significant growth in free cash flow with a yield of 12.2% in 2025 and 13.9% in 2026. This positions gold equities as an unprecedented opportunity, combining low valuations with high potential returns – an opportunity the market has yet to fully recognize. Paradoxically, the gold equity ETF GDX has seen $1.5bn in redemptions so far in 2024. However, we think this may change.

ICG Commodity Update – July 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Recession fears crept into the market at the end of July, leading to a sell-off of economically sensitive commodities. Both oil benchmarks have lost more than 7% over the month in the longest run of weekly losses this year, reaching a new seven-month low at the beginning of August. Economic data from top oil importer China, combined with a survey showing weaker manufacturing activity across Asia, Europe, and the US, raised the risk of a sluggish global economic recovery that would weigh on oil consumption. According to a Bloomberg survey, China’s crude imports in the 2H24 are projected to stagnate compared to the previous year. Nevertheless, oil demand is expected to show a seasonal improvement after August, driven by higher runs, restocking in coastal cities, National Day weeks in Sep/Oct, and the SPR/CPR refilling program in the 4Q24. On the other side, OPEC crude production remained broadly flat month-on-month. Geopolitical concerns have not had a significant impact on prices so far, despite the escalating conflict in the Middle East raising concerns that the conflict may spiral into a broader war involving the US and Iran, possibly hampering crude exports. On the corporate side, the battle between Chevron and Exxon over Guyana’s $1 trillion oil field took another twist last week when arbitrators announced they would need nearly a year to settle the dispute. Chevron’s stock plunged as the news meant its $53bn acquisition of Hess, which holds a 30% stake in the Guyana field operated by Exxon, would be further delayed. The shares took another hit later in the week when Chevron missed earnings estimates. Adding salt to the wound, Exxon handily beat earnings expectations, largely due to completing the $60bn purchase of Pioneer. By the way, Chevron is relocating its headquarters to Houston from California after repeatedly warning that the Golden State’s regulatory regime was making it a tough place to do business. A similar situation is unfolding in the UK, where the government has decided to increase the windfall tax on oil and gas producers, bringing the headline rate of tax to 78%, one of the highest in the world. This measure aims to fund the country’s push towards renewable energy. However, it remains to be seen whether this tax increase will effectively boost the share of renewable energies in the UK.

Industrial Metals

China’s substantial accumulation of commodities, including record-high copper reserves, is reshaping the global industrial metals market. This buildup has been driven by various factors, including uncertainties surrounding US elections, potential trade restrictions, and geopolitical tensions, such as possible conflicts with Taiwan. These concerns have led to weaker performance in commodity prices recently, especially in industrial metals like copper. However, several bullish indicators suggest a positive long-term outlook for the sector. China’s State Grid Corp, the world’s largest copper consumer, has announced a 13% increase in its annual budget, raising it to RMB600 billion. This significant boost is intended to support the expansion of infrastructure, including ultra-high-voltage lines for renewable energy projects. Although this shift may initially reduce copper demand in favor of aluminum, the substantial budget increase and focus on infrastructure indicate a potential rebound in copper consumption. The market is expected to adjust from recent weak discretionary purchases and lower operating rates for wire and cable fabricators. Additionally, China has mandated that all energy-intensive industries in Inner Mongolia use renewable energy by 2025. This policy is likely to increase copper demand due to the need for improved power distribution networks, even as aluminum substitution slightly reduces copper use. The global copper market remains optimistic, anticipating significant supply deficits in the coming years due to increased investments and ongoing infrastructure projects. On the company side, the mining industry is experiencing a resurgence in mergers and acquisitions. Teck Resources, having recently sold its coal business, is now a prime target due to its valuable copper assets. Major players such as Anglo American, Vale, BHP, Rio Tinto, and Freeport-McMoRan are actively exploring potential deals with Teck. Vale’s interest in expanding its base metals division and Anglo American’s focus on restructuring highlight a strategic shift towards copper. Despite facing operational challenges and regulatory scrutiny, the increased M&A activity and investment commitments from major industry players reflect a bullish sentiment for copper and industrial metals. As global demand for metals rises, driven by infrastructure development and renewable energy mandates, the industrial metals sector is poised for significant growth and investment opportunities in the coming years.

Precious Metals

Gold has demonstrated significant volatility and resilience recently, reflecting broader market dynamics and geopolitical tensions. In the past quarter, gold prices surged to record levels, reaching around $2,400 per ounce in April and May, and peaking at approximately $2,480 per ounce in July. This impressive performance has been driven by escalating geopolitical risks, including tensions in the Middle East where conflicts have heightened gold’s appeal as a safe-haven asset. Despite these gains, gold prices have experienced notable fluctuations. Gold’s volatility has been influenced by a global stock market rout, prompting some traders to liquidate gold positions to cover margin calls on other assets. However, the anticipation of Federal Reserve rate cuts and ongoing geopolitical uncertainties continue to support gold prices. The strong performance of gold has translated into impressive financial results for major gold mining companies. Over the past three months, Agnico Eagle, Kinross Gold, and Alamos Gold collectively generated over $1 billion in free cash flow. Specifically, Agnico Eagle reported a 5.7% FCF yield based on Q2 FCF of $557 million, Kinross achieved a remarkable 12.4% FCF yield from $364 million in Q2, and Alamos posted a 6.0% FCF yield with $107 million in Q2 FCF. This substantial increase in free cash flows, alongside stabilizing costs, underscores a positive shift in the sector and highlights the attractiveness of these companies to investors. Analysts are focusing on commentary regarding capital allocation and shareholder returns, as these factors will be crucial for investors navigating this period of high FCF generation. Additionally, gold’s traditional role as a safe-haven asset has been reinforced by central bank buying and strong demand from Asian consumers. Despite recent reductions in gold ETF holdings and significant net sales (ETFs saw record outflows in first half), the sector’s fundamentals remain strong. In fact, gold ETF inflows surged to their highest level since March 2022 in July. With its strategic role in uncertain times and positive financial indicators, gold’s long-term outlook remains optimistic, supported by its enduring appeal as a safe-haven investment.

ICG Commodity Update – June 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Brent crude oil prices recovered to $85/bl in June, rebounding from a post-OPEC+ meeting low. The decision to start adding barrels to the market from October (about 200kboe/d each month) caused a brief decline to $77/bl at the beginning of the month. Additionally, the perception that geopolitical risks to crude supplies are diminishing contributed to the initial decline. OPEC+ compliance remained relatively flat month-over-month, but the market saw robust supplies from outside the group, with the US reaching 13.25mboe/d in April, the highest since December last year. Demand remains the most significant area of uncertainty. The IEA and OPEC have diverging outlooks. OPEC maintained its estimate for consumption growth this year at 2.25mboe/d, while the IEA cut its forecast by 100kboe/d to 960kboe/d. China’s economic outlook is a major factor weighing on the market. Weak May data from China led some refiners to cut operating rates and extend maintenance. Nevertheless, the Energy Institute’s Statistical Review of World Energy reported that China now consumes more energy on a per-capita basis than Europe, driven by greater demand from the industrial sector. Meanwhile, energy demand from industrial producers in Europe is declining due to high prices. While China’s energy consumption has increased, its carbon intensity has decreased. The Energy Institute highlighted that China leads in new coal power plant construction but also in wind and solar capacity additions. Last year, China’s additions in these renewable sectors exceeded the total new wind and solar capacity added by the rest of the world, leading to a downward trend in carbon intensity. Interestingly, despite the increased oil prices this year, oil and gas equities have not seen a significant rise. Historically over the last few years, oil and gas companies were less sensitive to price drops, but now, even with higher prices, their shares are lagging. Analysts attribute this to equity investors’ concerns with cyclical stocks in the current environment. Fundamentally, companies in the upstream sector are performing well. Cash margins are at record highs, free cash flow yields remain in double digits, and valuations continue to be at record lows. Recognizing this, companies are actively pursuing M&A across the industry.

Industrial Metals

Following a robust Q2 2024 performance by base metal equities, particularly those linked to copper and AI themes, recent copper price declines have led to cautious and selective investor positioning. Investors now await stronger signals of Chinese buyers returning to the market. As copper hit record highs last month, senior Chinese traders began contacting Western hedge fund managers, seeking insights. Historically, these veteran traders leveraged their knowledge of China’s economy to gain an edge in the copper market. A tug of war is unfolding between bullish fund managers, who have invested heavily in copper anticipating future shortages, and Chinese buyers, who are more focused on current market conditions. The outcome of this struggle will likely dictate copper prices: sustained recovery signs in Chinese buying could propel the market to new highs in the second half of the year. The surge in NVIDIA shares and the growth of data centers have significantly influenced commodity market interest and price dynamics in 2024. Despite the advent of photon-based data transfer in new data center designs, the broader narrative is simpler: the world is entering a more electricity-intensive growth phase. This will drive incremental demand for metal conductors to transmit electricity. The International Energy Agency forecasts global grid spending to reach $450 billion this year, up from $300 billion in recent years. Additionally, the U.S. electrical equipment manufacturing index is now 14% above pre-pandemic levels, compared to a 1% rise in overall industrial output. As electricity production is part of industrial output (and tend to go hand in hand with metals demand), this should enhance global industrial growth and bolster the capital expenditure cycle. On the supply side, raw material markets are facing significant constraints. For copper, lead, and zinc, treatment charges paid to smelters are well below historical norms, even turning negative recently. Some miners have secured low terms for 2025, indicating expectations that supply issues will persist. Unlike the quick resolution of market constraints seen in nickel, lithium, or iron ore through aggressive Chinese investment, copper presents a tougher challenge. However, there is potential for China to increase its investments in Africa, particularly in the Democratic Republic of Congo, and in smaller, less explored countries. China views these investments strategically, prioritizing long-term supply security over immediate project returns and prices.

Precious Metals

Gold held steady at the start of the second half, as traders assessed whether soft US economic data might prompt the Federal Reserve to consider monetary easing. Last friday’s release of the core personal consumption expenditures price index, the Fed’s preferred measure of US inflation, showed a 2.6% year-over-year increase – the slowest since March 2021. Though above the Fed’s 2% target, this deceleration could pave the way for lower interest rates, potentially benefiting non-interest-bearing assets like gold. Additionally, the 2024 Central Bank Gold Reserves survey revealed that 29% of central banks plan to increase their gold reserves in the next 12 months, marking the highest level recorded since the survey’s inception in 2018. Spot gold prices surged to record highs in Q2 2024, stabilizing around $2,300 per ounce and lifting gold miners’ share prices. However, current valuation multiples suggest market skepticism about sustaining profit margins at these levels – Investors closely watch miners’ cost management and efforts to enhance shareholder returns. Despite cost inflation and a tight labor market, these pressures appear to have eased. Stable gold prices are expected to generate strong free cash flows, bolstering cash reserves given the sector’s modest debt levels. Assuming gold prices hold, stronger cash flows are anticipated in H2 2024, with many miners forecasting a backend-loaded production profile. Investors await clarity on miners’ capital allocation strategies in their Q2 2024 reports, expecting enhanced returns such as special dividends and significant share buybacks to further drive shareholder value. In contrast, platinum group metal (PGM) equities face continued uncertainty, with only a fraction of producers operating at a loss due to reluctance to cut production amid market challenges. Looking ahead to 2024, supply risks loom larger due to power issues in South Africa and operational hurdles in Russian mines. As the gold market navigates these dynamics, the interplay between economic data, Federal Reserve policies, and operational efficiencies will shape outlooks for both gold miners and PGM producers. Investor focus remains on maximizing returns amid favorable gold prices while managing ongoing challenges. The ability of gold miners to adapt to evolving market conditions and effectively allocate capital will be crucial in maintaining investor confidence and sustaining growth momentum in the sector.

ICG Commodity Update – May 2024

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

Energy

Over the past month, oil prices have reflected diminishing geopolitical risks as attention shifted to weakening fundamentals. Concerns about slow demand growth in China alongside rising oil inventories in developed countries, have pressured prices. Consequently, OPEC+ decided on Sunday to extend the 3.66mboe/d cuts by a year until the end of 2025 and to prolong the voluntary 2.2mboe/d cuts by three months until the end of September 2024. Starting in October 2024, OPEC+ will phase out the voluntary 2.2mboe/d cuts gradually over the following year, contingent on market conditions, with the possibility of halting or reversing the increases if market fundamentals deteriorate. Goldman Sachs viewed the decision as bearish due to a recent rise in inventories, while UBS and RBC remained confident that the alliance will continue to manage the market effectively. Morgan Stanley suggested that a seasonal demand upswing might push the market into a renewed deficit over the summer. Many analysts had predicted that OPEC+ would face challenges setting targets for 2025 due to unresolved individual capacity targets for each member, a previous source of tension. However, OPEC+ postponed the capacity discussions until November 2025. Instead, the group agreed to a new output target for the UAE, allowing it to gradually increase production by 0.3mboe/d, up from the current 2.9mboe/d. OPEC+ decided to use independently assessed capacity figures as a guideline for 2026 production, thus delaying a potentially contentious discussion by a year. M&A activity in 2024 is expected to remain high and could surpass the 2023 level of $258bn, according to Rystad Energy. Barron’s magazine noted that a series of M&A deals resemble the reassembly of Standard Oil, which was broken up by the Supreme Court in 1911. Standard Oil of New Jersey became Exxon, which merged with Mobil in 1999, and Exxon has recently merged with Pioneer Natural Resources. Chevron is attempting to merge with Hess, and last week, ConocoPhillips announced its merger with Marathon Oil for $23bn. Additionally, Saudi Aramco’s $12bn share sale sold out shortly after the deal opened on Sunday, with the government receiving demand for all shares within a few hours. These developments indicate a resurgence of investor interest in the energy sector.

Industrial Metals

The global copper market is gripped by fears of a shortage, propelling prices to record levels and sparking a $49 billion takeover battle between BHP and Rio Tinto. However, the battle is over for now, as BHP walked away, cheering investors eager for proof that the miner will not pursue deals at any cost. BHP was forced to abandon its audacious takeover plan to create a global copper giant after Anglo American rebuffed repeated approaches from the world’s biggest miner during a five-week saga. A successful conclusion to the $49 billion all-share attempt would have been the industry’s biggest deal in more than a decade. Nevertheless, BHP’s Australian shareholders saw good news in the failure. Meanwhile, copper smelters in China had pledged to reduce capacity after their fees collapsed due to a supply squeeze on the imports of ore they use as feedstock. The prospect of insufficient copper in China was one of the pillars supporting a rally that took the metal above $11,000 a ton for the first time in May. However, the cuts haven’t happened, and China’s faltering economy isn’t able to absorb the excess, with prices retreating to just above $10,000 a ton. Although that’s still an 18% gain for the year, it suggests that as long as China remains oversupplied, copper will struggle to make further headway. Despite the price pullback, copper mining equities have been resilient. A trend to watch for industrial metals investors is the power consumption growth in China, expected to grow 6% year-over-year in 2024 and with a CAGR of 5% from 2023-2030. Additionally, China’s grid capital expenditure is expected to grow 5-10% year-over-year in 2024. Industrial metals such as copper, zinc, and iron ore tend to move in tandem with electricity production. This trend could eventually replace the demand from the struggling Chinese real estate sector. Power demand worldwide is in general a critical factor for metals demand. AI is an overarching theme in the market today, and power is potentially the bottleneck. According to Goldman Sachs, driven by data centers, AI, and the electrification of everything, Europe’s power demand could grow by over 40% in the next ten years. Combining the increasing demand for additional electricity generation with the adoption of renewable energy technologies—both of which are highly metals-intensive—creates a strong long-term fundamental case for industrial metals.

Precious Metals

Gold had another positive month closing above $2’300 an ounce. Data last week showed a slowdown in the Fed’s preferred measure of underlying inflation. Traders are looking for more confirmation from US policymakers on the rate trajectory, with the focus turning to the next Fed meeting that starts June 11. Fed officials may keep borrowing costs elevated for longer until there is more clarity on whether price pressures are making a sustained move toward the central bank’s 2% target. UBS strategists in a note recently raised their forecasts for gold to $2,600 by year-end. The bank’s bullish outlook is owed to stronger Chinese demand, on top of a series of soft U.S. data in April, which has driven some repricing of expectations for U.S. Federal Reserve rate cuts. Goldman joins UBS in raising price forecasts and expects gold at $2’700 an ounce by year end, mainly driven by solid demand from emerging market central banks and Asian households. For equities, there is an improved optimism on operating cost inflation control which is supporting the interest in equities as investors are looking for leverage to gold – according to analysts, the market sees a bias towards the low risk, large, liquid companies. Looking at silver, the metal had a good run as of late and is currently trading over $30 an ounce. According to the Silver Institute, the market is headed for its 4th year of deficit, driven by record use of silver in industrial applications, which set a new high in 2023 at 654.4 million ounces. Ongoing structural gains from green economy applications underpinned these advances. Higher than expected photovoltaic capacity additions and faster adoption of new-generation solar cells raised global electrical and electronics demand by a substantial 20%. At the same time, other green-related applications, including power grid construction and automotive electrification, also contributed to the gains. This year is expected to be a solid year for total silver demand, which is forecast to grow by 2%. Industrial fabrication should post another all-time high, rising by 9%, propelled by an anticipated 20% gain in the PV market and healthy offtake from other industrial segments. Nevertheless, compared to the historical average gold to silver ratio of 61x, the metal has still some catch up to do, as the ratio is currently standing at almost 77x.