The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.
Oil prices continued to edge higher ahead of a key OPEC+ meeting that may see some supply returned to a fast-tightening market. However, it’s unclear how robustly the group will act, with the Saudi Arabian energy minister calling for producers to remain “extremely cautious”. Further to that, the surge across commodities from agriculture to oil is spurring a debate about whether the current boom may herald a new super-cycle, as banks incl. Goldman Sachs to JPMorgan stated in recent reports. Energy equities continued to outperform the general market. Reflation and normalization sentiment tailwinds have inflected as has the rotation into value and the reawakening of energy equities. Since November 6th, oil prices have appreciated by 60% and the ECF by 76%. Nevertheless, the SPX energy weighting increased from 2% to only 2.9% vs. a 20-years average of 10%. Companies have had to grapple with the worst aggregate macro conditions this century. The sector has taken impairment charges of over $100bn over the last 2 years. Nevertheless, with oil at $60 the outlook improved a lot. The key 4Q reporting season themes were cautious capex (expected decline of 5% YoY in 2021 after a decline of 26% in 2020), a resulting cautious view on production outlook, more ESG efforts (development of renewables and/or low carbon initiatives), an intent to continue to lower net debt and the reset of distribution policies. Interestingly, most companies have signalled formally or informally that some portion of higher FCF at higher oil prices will go towards debt reduction (providing a future shock absorber in the capital structure). However, the sectors indebtedness is not a concern, we think, especially given interest rates and market liquidity. Nor does it look the case that oil companies are somehow being excluded from debt capital markets, although a more nuanced capital structures will increasingly be the order of the day. The reduced investment program will result in record FCF with the ECF having this year an expected weighted average FCF yield of +10%! Unsurprisingly, the energy transition has garnered ample attention too. Energy companies have still significant work to do but some real progress has also been made. However, companies with big efforts (mainly European Oil Majors) have not been awarded by the investor community so far. Furthermore, there is presently an imbalance with the topic, with the discussion focusing disproportionately on aspired outcomes rather than current-day realities (80% of current primary energy consumption is fossil fuel-driven), and the timelines required to more fully realize the transition from fossil fuels to renewable energy. Conventional energy remains a relentlessly capital-intensive industry and there is a growing belief (and concern) that the oil and natural gas value-chain is underinvesting relative to the likely intermediate-term demand outcomes.
Copper touched the highest since 2011, with Chinese investors making fresh bets that the metal’s torrid rally has further to run as the nation’s economy rebounds. Prices have skyrocketed last month as a raft of measures to boost growth likely will see consumption outstrip supply. Federal Reserve Chairman Jerome Powell provided the latest boost, signaling continued policy support for the economy and expectations of a return to more-normal, improved activity later this year. Investors have piled into copper on optimism over demand. At the same time, possible cutbacks at Chinese smelters could further reduce already tight supplies. Citigroup for example sees more gains, with a push toward cleaner energy sources boosting demand for the metal used in everything from electric vehicles to solar power systems. The surge across commodities from agriculture to oil is spurring a debate about whether the current boom may herald a new supercycle, as banks including Goldman Sachs to JP Morgan stated in recent reports. Industrial metal prices benefited from the story of an economic recovery and the push for greener energy which could unleash vast amounts of pent-up demand. Base metals are essential inputs for batteries and home electronics, post-crisis consumption threatens to outstrip supply. Governments and companies are announcing net-zero emissions goals, Europe is rolling out package of environmental initiatives as part of its growth plan, and Joe Biden has pledged $400 billion on clean energy research and development over 10 years. That’s set to expand demand for metals and is boosting companies across the supply chain. Miners are sounding upbeat about the outlook for raw materials. Also, quite some earnings came in last month with Vale posting a $4.8bn profit in 2020 – the company is in the comfortable situation of deciding what to do with a significant (and growing) pile of cash. At current spot iron ore prices, Vale is estimated to have a 2021E FCF yield of 30%. Same for BHP, which highlights its significant FCF at present in its FH1/21 results. According to the report, the management is willing to pay out this excess cash to shareholders – the FY2021 dividend forecast implies a 7% yield, with potential for further upside if prices remain strong. Rio Tinto on the other hand delivered $23.9 billion of underlying EBITDA in 2020. Further, not to be outdone by its peers, the company declared a better-than-expected final dividend, taking the total for 2020 to $5.57/share for a yield of 6.8% for the year. It seems that the industry is in a sweet spot with low costs and high spot prices, which spurs shareholder returns and increases the confidence in the operational abilities as well as flexibility of mining companies.
Gold steadied at the beginning of the month after its biggest monthly slump since late 2016 as dovish comments from the world’s major central bankers helped curb rising bond yields. Bets on accelerating inflation are raising concerns that there could be a pullback in monetary policy support despite assurances from the Federal Reserve that higher yields reflect economic optimism for a solid recovery. Bullion has had a rocky start to 2021 as the rollout of vaccines worldwide spurred optimism about a recovery from the pandemic, curbing demand for safe havens and boosting bond yields. ETFs backed by the metal recorded a tenth consecutive day of outflows as of last Friday of February. Looking at gold miners, the high level of current gold prices is welcomed. Expected stability of underlying commodity prices and the promise of strong free cash flows through 2021 makes the gold sector relatively attractive to investors. Gold producers have demonstrated a disciplined approach which should ensure limits on spending in 2021. For example, BMO states that forecast free cash flow yields for large-cap gold stocks have reached highs of 7.7% on average, higher than the previous peak of 6.9% in late 2017 and well above the free cash flow yields at the previous high gold price cycle. Miners are expected to sell at high gold prices and to spend minimal growth capital this year. The market’s keen focus on cash flow vs. a pressure to grown in past cycles, will help to ensure that management teams remain disciplined in their capital allocation approaches through 2021. The confidence in gold prices and cash generation has shown in the latest companies’ earnings such as AngloGold Ashanti, which increased its dividend more than fivefold after record gold prices boosted earnings last year. The world’s No. 3 gold producer joins larger rivals Barrick Gold and Newmont in rewarding shareholders. Both companies increased their dividends (or announced special dividends) and now offer yields of close to 4%. The companies of the Precious Metals Champions Fund offer a 2021E free cash flow yield of 12.5% on average as well as a dividend yield of almost 3% – this comes with clean and healthy balance sheets and a net debt to equity of under 10%. Looking at PGMs, Africa’s big three producers last month unveiled production growth plans of up to 1.2mn ounces annually, but the increases are probably insufficient to bring the market back into balance, they said. There are growing deficits for palladium and rhodium and improve prospects for platinum. Demand growth for PGMs from hydrogen technology and fuel cell applications in electric vehicle batteries was behind the deficits. Palladium and Rhodium are both on a multi-year high, while platinum is rising significantly recently and is standing at the same level last seen in 2014.
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The ICG Sustainability Update is our monthly published comment focused on energy-, waste-, raw material-, emission- and water-efficiency.
According to analysts, the green technology and sustainability market is expected to grow from $8.7 billion in 2019 to $28.9 billion by 2024, at a compound annual growth rate of 27.1% during the forecast period. The major factors driving the growth of green technology and sustainability market include the increasing environmental awareness and concerns and the increasing consumer and industrial interest for use of clean energy resources to conserve the environment. The “internet of things (IoT)” technology segment is estimated to hold the largest market size, which is driven by green networks in IoT and will contribute to reduce emissions and pollution, exploiting environmental conservation and surveillance, and minimizing operational costs and power consumption. IoT has broad range of applications including carbon footprint management, green building, water purification, water leak detection, fire detection, and sustainable mining and exploration. The use of green technology and sustainability solution is increasing rapidly especially in the green building application, owing to the growing integration of technology while designing and constructing buildings. Green building considers the classical building design concerns of economy, utility, durability, and comfort. The major considerations include energy and water efficiency, resource efficiency and the building’s overall impact on the environment. North America is expected to be a major revenue generating region for the green technology and sustainability market. The region is considered the most advanced region in terms of technology adoption and infrastructure. Looking at China, the government will soon present climate and energy plans, as the country is responsible for most of the increase in carbon emissions over the past decade. According to climate scientists, over the decade through 2018, emissions increased by 12%, or 4.5 billion tons of carbon dioxide. Breaking out the numbers by country, however, some 89% of the additional greenhouse gases came from just two countries: China, which alone accounted for 69% of the increase, and India. Emissions from the EU, Japan and the US fell, and by 2018 were lower than they were in the 1990s. That’s why the climate and energy plans that will be presented in China’s 14th 5-year plan represent the most important policies being made anywhere in determining the fate of the planet. If they live up to the promise of President Xi Jinping’s pledge to reduce the country’s emissions to net zero by 2060, we may have to start lifting our expectations of what’s possible in terms of decarbonization. The days when China could argue that those numbers were huge only because its population was large, or that they were necessary to catch up with richer countries, are now in the past. The country’s per-capita emissions these days are on a par with most western European countries.
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The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.
It seems to be a good start into 2021 for the energy sector. OPEC+ is trying hard to defend prices and keep the market undersupplied. The surprisingly and unilateral and pre-emptive Saudi production cut for February and March announced at the beginning of the year, backs the Saudi energy minister’s claim of the Kingdom being the self-designated guardian of the oil industry. Indeed, the shift from oversupplied in 1H20 to undersupplied from 2H20 onwards continues to be reflected in the futures curve that is downward sloped (backwardation) and inventories continue to fall. Indeed, visible petroleum inventories fell by 290mboe in 2H20 (1.57mboe/d) according to the IEA showing that the efforts of the market players are quite successful so far despite the complicated market situation. On the demand side, analysts estimate that crude oil is likely to be a key beneficiary of increased mobility once a critical mass of the population is vaccinated this year. However, at the end of the month the broad market suffered its worst week since October 30. For the energy sector it was an even more challenging week with Biden administration’s freeze on new federal oil and gas leases. While the actions resulted in a steep sector selloff, the moves were telegraphed on the campaign trail. The real surprise seems to be that the Biden administration is weighing the possibility of stopping new permits or not allowing permit renewals on federal territory – something the industry hadn’t anticipated. Roughly ¼ of US oil production comes from leases managed by the Department of the Interior. At the same time, it forces a brake on US production growth in a way that should support hydrocarbon prices in the long run. RBC estimates that the production decline from not issuing or renewing federal permits could increase global oil prices by $5/bl over time. As with any sign of danger, the first instinct may be to flee. But sometimes such times call for closer inspection. Interestingly, 2021 is set to be the industry’s best year yet in cash flow terms! Cash flow and earnings growth must be the new priorities. If the discipline sticks, dividend- and value-focused investors could be lured back. Further to that M&A activity is brisk, with $52bn worth of deals done in the US only last year and the consolidation wave is expected to continue. The M&A efforts to achieve adequate size, coupled with the consolidation of weakened companies, will continue to shrink the number of producers. Even two of the biggest players like Exxon and Chevron were said to have considered combining their companies in what could be among the largest corporate mergers ever. Such a deal would reunite the two largest descendants of John D. Rockefeller’s Standard Oil monopoly, which was broken up by US regulators in 1911, and reshape the oil industry. In any case, a more resilient industry is emerging from the ashes that aims to woo investors.
According to analysts, the macro and fundamental backdrop for industrial commodities is robust and supports commodity prices to remain at elevated levels. Especially metals directly exposed to the EV batteries including cobalt, nickel, copper, lithium, graphite and rare earths are likely to experience transformational demand growth that could lead to further price upside or an extended period of elevated prices. Indeed, the renewables and EV thematic are clear positive long-term drivers for copper demand. UBS expects they could add over 5mt of demand (18% of total demand) over the next 10 years. The bank also notes that this demand growth could be, in part, offset by contraction in demand from China infrastructure and construction during the same period. Looking at copper stockpiles, the ones tracked by leading exchanges including the LME shrank by about a fifth last month to the lowest since 2008. That could raise the odds of increased competition for supplies and higher prices in the coming quarters. Also, market watchers sound the alarm about the tightening supply picture. There are holdings of metal outside the exchange system, but overall, the market’s in deficit. In the iron ore market, the steelmaking ingredient had the shakes last week, with warnings of worse to come as prices retreated from multi-year highs. More broadly, there are concerns about a softer stimulus impulse in China, and government orders for lower steel output this year has fueled recent jitters. However, analysts expect world crude steel production to increase by 5% this year with China +2% and RoW +8%. On the other hand, Fortescue’s CEO is confident that Chinese demand will continue to underpin the high prices that have left the iron ore producer and its bigger rivals BHP and Rio Tinto awash with cash and set to deliver returns to shareholders. Fortescue poured cold water on suggestions China was about to scale back steel production, saying the company was not seeing any slowdown in the demand that has put the big three miners exporting from Australia on track to pay bumper dividends. Fortescue, that is a pure iron-ore player, revealed recently that it had raked in more than $940m of net profit in December alone, which prompted the company to issue its profit update. In general, analysts expect the big miners paying out $16.4bn in full-year dividends. Indeed, with over $110bn in EBITDA for 2021E of the big 5 miners (BHP, RIO, VALE, AAL, GLEN) we wouldn’t be surprised to see further increases in dividends or shares buybacks during the year. The average FCF yield for 2021E of these big 5 mining companies is still above 10%!
In a commodities market that has seen significant interest and price action over 2021 to date, one major commodity has been conspicuously quiet: gold. The market price has dropped slightly since the start of the year, underperforming peers, while ETF flows have been extremely muted. With no change in Federal Reserve interest rate policy expected, with another year of relatively flat supply, and with traditional consumer demand recovering, 2021 is looking more like a steady period. Given the availability of above-ground supply available to the market in vaults, as with other commodities demand is the key delta for any gold cycle. Analysts expect 2021 to be a year of normalisation in global gold demand trends. Last year saw the broadest range in terms of y-o-y changes in gold demand since 2013, driven primarily by an exceptional surge in investment (particularly ETF inflows) on the one hand, and the collapse of jewellery demand on the other. This year a reversion closer to recent historical annual demand trends is expected, with the prevailing risk-off environment fading somewhat while the global economic recovery remains on track. According to analysts, a stable year for gold would not be a bad thing, particularly one which, if current levels are maintained, would mark a new record annual average and extremely strong free cash flow at the producer level. Analysts at BMO stated in a recent study that even with relatively flat gold prices, the profitability of gold companies will continue to rise significantly this year. They point out a 50% free cash flow growth, even after a 25% increase in growth capex baked in, the analysts expect the industry costs to remain low, or even falling and margins increase post Covid and post volatile gold prices the world saw in 1H2020. Interestingly, looking at gold supply growth this year, the biggest assets on the list are copper mines. Freeport McMoran’s Grasberg operation will add over 550koz this year (and a further 200koz next) while the Oyu Tolgoi mine in Mongolia is guiding to gold output almost tripling this year to 500-550koz, making it the second-largest individual asset ramp-up. Also, the macroeconomic backdrop undoubtedly remains a precious-positive one, aided by rising inflation expectations amid an ambitious US stimulus plan and interest rates that look set to remain low for some time amid the Fed’s new policy of inflation targeting. Looking at silver, after the recent surge driven by retail investors, the rally lost momentum – the precious metal had hit an 8-year high on the 1st of February. With silver prices, the producers of the metal also soared but pared most of its gains when the rally paused.
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The ICG Sustainability Update is our monthly published comment focused on energy-, waste-, raw material-, emission- and water-efficiency.
Even after Covid-19 has wreaked havoc on almost everything else, the new year begins with surging growth for renewable energy. According to analysts, 2020 was the year of positive surprises for the environment in a way that very few saw coming. It was the breakout year in sustainability and infrastructure. Growth will likely continue into 2021, fuelled in part by last year’s major turning points. China has now committed to reaching carbon neutrality by 2060, putting the world’s biggest market for solar and wind power on the path to ramp up installations as it begins its next five-year plan. Some analysts have started predicting that the US power sector is approaching peak natural gas. That would leave room for solar-panel installations to build on the ongoing boom. Looking at solar in the US, residential installations dropped nearly 20% in the second quarter of 2020. According to Wood Mackenzie, the sector bounced back and the country added 19 gigawatts of total solar power. That is slightly more power than existed in the entire nation of Colombia at the end of 2019 according to BloombergNEF. Also, new battery-storage capacity in the US more than doubled in the third quarter of 2020 from the second – projections in California were a key reason for the surge. But not only in China and the US, also electricity from solar farms in Spain, Europe’s greatest solar potential, was up 60% in 2020 compared to 2019, generating over 15’000 gigawatt hours of power, according to data from the country’s grid manager. While the Southern European country still has about a third of the installed solar capacity as the EU’s leader Germany, Spain’s sector is set to grow at about double the Germans’ pace in the next two years. Overall, about 40% of the electricity in the first half o f 2020 in the EU came from renewable sources, compared with 34% from plants burning fossil fuels. On another note, President Joe Biden, pledges to make the US a global leader in the development and adoption of clean energy technologies. He has vowed to spend $400 billion on clean energy research and development over 10 years and a like amount in his first term on federal procurement of low-carbon technologies. His party’s effective control of both houses of Congress suggests some portion of Biden’s agenda can be enacted. Biden also can make significant policy changes through regulations and orders.
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Analysten, Investmentbanken und Medien berichten in jüngster Zeit vermehrt über steigende Rohstoffpreise – Investoren scheinen den Trend erkannt zu haben und schichten zunehmend ihr Kapital in den lang gemiedenen Sektor. Rohstoffe gehören trotz der kürzlich gestiegenen Preise noch immer zu den günstigsten Anlageklassen weltweit. Über das letzte Jahrzehnt verlor beispielsweise der GSCI Commodity Index über 60%. Analysten sind jedoch überzeugt, dass die Serie von negativer Performance ein Ende erreicht hat, und die Erholung der Preise nicht nur kurzfristig, sondern einen langfristigen Trend anstimmen. Experten zeichnen einen Vergleich zu den nuller Jahren und den Superzyklus von 2003 bis 2011, der auf Chinas Wirtschaftswachstum und dem damit verbundenen Hunger nach Rohstoffen aufbaute. Es gibt tatsächlich einige Anzeichen, die diese Prognose durchaus realistisch aussehen lassen. Einerseits gilt der schwache US-Dollar als treibende Kraft hinter den stark ansteigenden Preisen für Rohmaterialien – dieser hat bis Ende 2020 gegenüber den im Dollarindex enthaltenen Währungen deutlich verloren. Andererseits spielt die schnelle Erholung der Weltwirtschaft eine Rolle. Dank des Impfbeginns steigt die Hoffnung auf ein absehbares Ende der Pandemie, der neu gewählte US-Präsident Joe Biden verspricht weniger Spannungen in der Weltpolitik und hat grosse Pläne die «Green Revolution» kräftig voranzutreiben. Die Energiewende soll vor allem die Nachfrage nach Industrie- und einigen Edelmetallen über Jahrzehnte kräftig steigen lassen (siehe Blogbeitrag «Die Bedeutung der Energiewende für die Nachfrage nach Industriemetallen – ein unterschätzter Megatrend»).
Es gibt jedoch weitere, gewichtigere Faktoren, die einen langfristigen Einfluss auf die Rohstoffpreise haben und die Märkte strukturell verändern können.
In einer kürzlich erschienen Studie von Goldman Sachs beleuchten Analysten den Case einer strukturellen Veränderung der Rohstoffmärkte, die die Phase eines neuen, langjährigen Bull-Marktes einläutet. Die Bank geht davon aus, dass der Aufwärtstrend für Rohstoffe auf drei Säulen beruht:
Für das Jahrzehnt 2020 wird erwartet, dass analog zu den 2000er Jahren ähnliche strukturelle Kräfte eine Rolle spielen könnten. Die massiven Investitionen in die «Green Revolution» dürfte einen vergleichbaren Umfang haben wie die Investitionen in den 1970er und 2000er Jahren.
Zusätzlich gehen Analysten von einem Umverteilungsschub in den entwickelten Ländern und einem starken Anstieg der Verbraucherausgaben in China aus. Darüber hinaus bieten die strukturellen Unterinvestitionen einen guten Nährboden für steigende Rohstoffpreise in den kommenden Jahren. Im Hinblick auf wirtschaftliche Zyklen, haben Rohstoffe besonders in Expansionsphasen besonders hohe Renditen erzielt. Momentan befindet sich die Wirtschaft zwischen Phase 2 (Erholung) und Phase 3 (Expansion) – doch selbst in der vierten Phase, der Abkühlung, haben Rohstoffe einen Vorteil gegenüber anderen Anlageklassen.
Angesichts prognostizierten, steigenden Rohstoffpreisen in den kommenden Jahren befinden sich Rohstoffaktien ebenfalls in einem günstigen Umfeld. Rohstofffirmen haben über die letzten 10 Jahre stark korrigiert und mussten sich neu erfinden. Die Rohstofffirmen haben jedoch während dieser Krise weitgehend ihre operative Widerstandsfähigkeit bewiesen und sind so gut positioniert wie nie zuvor. Die Kostenbasis war dynamischer als erwartet und konnte schnell und effizient reduziert werden. Um ihre Bilanzen zu sanieren, haben viele Rohstofffirmen über die letzten Jahre kaum in neue Rohstoffressourcen investiert. Dies widerspiegelt sich vor allem in den rekordhohen Gewinnen, Margen und im freien Cash Flow. Firmen erhöhen ihre Dividenden sowie ihre Aktienrückkaufprogramme – «Shareholder Return» geniesst bei den meisten Rohstoffunternehmen mittlerweile erste Priorität. Unserer Meinung nach sollte der Sektor nicht ausschliesslich über den Rückspiegel analysiert werden, denn der Wert dieser Firmen widerspiegeln eine Dekade von sehr moderatem Wachstum – die Zukunft ist jedoch vielversprechend. Nicht alleine die Popularität einer Unternehmung sollte den Wert bestimmen, sondern auch die Rentabilität und die Qualität der Erträge, welche generiert werden. Die Bewertung des Sektors ist noch immer auf historischen Tiefstständen und bietet eine attraktive Möglichkeit, vom künftigen Wachstum zu profitieren.
Die Independent Capital Group offeriert Anlegern drei aktiv verwaltete Fonds zu den Rohstoff-Subsektoren «Industrie Metalle», «Edelmetalle» und «Energie». Gerne können Sie über den untenstehenden Button mehr Informationen zu unseren Fonds anfordern.
Sources: Independent Capital Group, Haver, World Bank, Goldman Sachs Investment Research, NZZ
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The ICG Sustainability Update is our monthly published comment focused on energy-, waste-, raw material-, emission- and water-efficiency.
Energy efficiency has struggled to keep its momentum during a global pandemic and an economic recession, however some countries still prioritize energy efficiency as an important resource to help reduce household and business energy bills, create jobs, and reduce emissions. Researchers concluded that adding insulation or installing a new heating system can lower costs but also reduce stress on the grid at times of peak demand. Looking into the New Year, the new president-elect has vowed to re-join the Paris climate accord on his first day at the office, and convene a climate summit of world leaders. He has insisted that he will create a more ambitious national target for cutting emissions that would put the country on a sustainable path to achieve net-zero emissions no later than 2050. At the same time, Biden plans to start a new round of negotiations between the federal government, the US auto industry and California officials to significantly improve the fuel efficiency of cars, pickup trucks and sport-utility vehicles – the largest source of the nation’s emissions. He will expedite federal permits for offshore wind projects planned and seek to stop the expansion of drilling on public land. Also, he has promised to invest around 40% of clean energy funding in historically disadvantaged communities and ensure wider access to everything from safe drinking water to sustainable jobs in neighbourhoods that have long lacked both. On another note, in September last year, China’s president, Xi Jinping, announced that China wants net carbon emissions to peak before 2030 and to be carbon-neutral before 2060. Japan and South Korea followed with their own ambitious commitments. Net-zero pledges now cover almost 60% of the world’s emissions. As a big source of carbon emissions, the various net-zero pledges place coal squarely in their crosshairs. While the commitments are bold, getting to carbon neutrality will be a challenge, especially in China, the world’s largest emitter of carbon. Even with China’s rapid deployment of renewables in recent years and improvements in energy efficiency, it’s still heavily dependent on the burning of coal. About 90% of China’s emissions come from electricity and heat production, industry and transport. With so many details still to be released in terms of how China plans to achieve carbon neutrality, many questions linger over coal’s future in a country where it still accounts for more than 60% of its electricity generation mix. According to analysts, coal demand in China is already flat. It’s likely to remain at a plateau for some years. The country aims to continue quite fast GDP growth in the next three decades, so it means it wants to be richer but also at the same time cleaner, greener and lower-carbon. China needs to decouple GDP growth with its energy demand and its carbon emissions and that will require a very significant transition in its growth engines as well as its energy supply structure.
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The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.
At the end of 2020 Brent crude prices topped $50/bl for the first time since early March. The latest milestone in a remarkable oil-market recovery fuelled by supply curtailments and drivers returning to the road. Its recent rally shows how hopes for coronavirus-vaccine distribution and economic-stimulus programs are helping to heal global energy markets. Indeed, the oil sector has been hit harder than almost any other by the pandemic. Crude prices fell from near $70/bl at the beginning of 2020 to below $20/bl in April as lockdown slashed fuel demand. The crisis reached its crescendo in April, when the US oil price WTI briefly turned negative. After a short but damaging price war, OPEC and Russia enacted record supply cuts to stabilise markets. Companies were forced to rip up investment plans while European energy majors began to look to a greener future. Oil and gas companies wrote down +$150bn combined in the first three quarters of 2020, the most for that nine-month period since at least 2010. Defaults by US oil and gas producers are set to outstrip all other sectors again in 2021 according to Fitch. There are, however, signs of a nascent recovery after the turbulence of 2020. Crude has crept back above $50/bl and some investors are betting that the cycle is turning, even as expectations for peak demand loom over the horizon. On the demand side, oil consumption is expected to rise by the most on record in 2021. The IEA expects demand to rise by almost 6mboe/d but will average 96.9mboe/d, still below the pre-pandemic record of 100mboe/d in 2019. On the supply side, the outlook is more complex. US shale stabilised in the 2H 2020 but the days of gangbuster growth are behind it. Some estimate oil project investment will never fully recover to pre-virus levels. The industry will continue to consolidate to reduce costs and assure investor returns. Finally, most analysts expect the oil market to stay in deficit during 2021. However, the market rebalancing remains heavily dependent upon the output management of OPEC+ and OPEC’s decision to assess the market on a monthly basis will undoubtedly drive volatility. Nevertheless, we are persuaded that investors are still looking to rotate into cyclical commodities such as oil and natural resource equities. Valuations continue to look very attractive with a P/CF of 3.9x and a healthy FCF yield of +10% this year. We think that the reduced cost structures and promised capital restraint should set the sector up well to finally deliver on long-awaited capital return growth in 2021+, and as a result, should drive a further catch-up move in the broader sector.
According to analysts, commodities are predicted to enter a long-term bull market and draw comparison to the last super cycle that started in the early 2000s on a China-driven demand boom. Especially copper, considered an economic barometer, is essential for decarbonization. Electric vehicles use up to four times more of the metal than internal combustion engines, while renewable energy uses at least three times more copper and as much as 15 times more than traditional power production. Copper has posted nine straight monthly gains, the longest run since 1994. Prices have surged about 80% from a low in March, helped by China’s appetite for commodities and supply snags early on in the Covid-19 pandemic. Analysts expect further gains amid a possible production deficit, weaker dollar and the metal’s role in green technology – interest in copper investment increased on the back of the “green revolution” recently, Credit Suisse for example stated the metal is one of their favorite ESG themes and states that mining is one of their strategists’ top three overweight’s. They see demand drivers to remain robust or accelerate for the whole sector into 2021. When looking at commodities demand, there is no way around China. Chinese commodity demand ended the year on some very high notes marking a stunning recovery from the hammer blow of the pandemic that landed in February. Roaring demand and supply constraints in the world’s biggest consumer are feeding a broader turnaround in global prices. Another good example is iron ore, where the market is tight, and the price increased from $86/t at the start of 2020 to >$150/t by year-end. Key indicators in China such as land purchases, infrastructure bond issuances and stimulus for vehicles / white goods provide support for Chinese steel demand, coming from the infrastructure, real estate and manufacturing sectors. Analysts expect Chinese steel production to grow again in 2021, after an already very strong 2020. Analyst expect the iron ore market to stay in deficit during 2021. On top of that, other important iron ore consuming regions like South East Asia and Europe are likely to recover in 2021, given fiscal stimuli and economic normalization post COVID-19. Overall, industrial metals prices are making a buoyant start to the New Year on vaccine rollouts worldwide which brightens outlook for the economy and with that, the demand for metals. All this results in Mining companies having for 2021 record dividend yields (IMC at 3%), record FCF yields (IMC at 8%) and this still with an attractive valuation (EV/EBITDA at 6.2x for the IMC).
Gold lost -5.4% in November as investors bolting out of precious metal exchange traded funds in anticipation of the COVID-19 vaccines have outweighed the impact of a record volume of bonds trading at negative yields. Gold’s current weakness is accompanied by a depreciating dollar, which normally has an inverse price correlation with the yellow metal. Gold has had a stellar year, rising 16% year-to-date. However, the recent fall has been fast and furious but not without precedent. In 2H11, a short-lived revival in US real interest rates, linked to policy uncertainties as well as communication missteps by the Federal Reserve, triggered profit-taking from its then record high. This time, gold prices have sold off on earlier-than-expected COVID-19 vaccine progress. Uncertainty about the Fed’s next steps and improving macro data also played a part. On both occasions, there was one common theme – outflows from exchanged-traded funds, which is a frequent reaction to diminished appetite for safe havens. Also, according to Goldman Sachs, COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during the 1970s and 2000s when oil and gold reached historical highs. In addition, inflation tails risks are greater than at any other time since the 1970s. Similar to after the global financial crisis, gold markets will likely be pulled higher as reflation concerns grow with the recovery and investors look to buy the currency of last resort. Economists believe near-term breakeven inflation has further room to run, supporting higher prices for precious metals and commodities in general. Gold miners suffered this month but we think the investment case remains intact. We had several “virtual” conferences with CEOs und industry experts that agree that the vaccine news should be positive for the economy, the companies and of course for the humans in general. Back to normality also is positive for the precious metals sector. Indeed, most companies still generate record high free cash flow and are distributing decent dividends. This has been visible on the last earning season and we expect the PMC portfolio to generate a dividend yield at least twice the universe going forward.
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The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.
We see a light at the end of the tunnel. Crude oil prices are trading at their highest levels since early March, supported by positive market sentiment as a result of vaccine news and strong oil demand in Asia. Meanwhile, oil markets moved from oversupplied to undersupplied in 3Q 2020. The recent wave of COVID infections sweeping Europe and US has surprised by its intensity, leading to renewed lockdowns. Importantly, this is only a speed bump in the general expectation of a sharp tightening of oil fundamentals through 2021, driven by a recovery in demand boosted by vaccines and rapid testing as well as by the collapse in upstream investment and change in the shale reaction function. The winter COVID wave will delay but not derail the oil market rebalancing. Most analyst expect the market to stay undersupplied during 2021. Further to that, we think that most people underestimate the difficulties to increase the oil market supply chain after years of under-investment. Especially this year and in response to COVID, ESG issues have further reduced investment in the old economy. Goldman Sachs even thinks, that that this recovery in commodity prices will actually be the beginning of a much longer structural bull market. COVID is already ushering in a new era of policies aimed at social need instead of financial stability. This will likely create cyclically stronger, more commodity-intensive economic growth that should create the elusive cyclical upswing in demand. COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during 1970s and 200s when oil and gold reached historical highs. In addition, inflation tail risks are greater than at any other time since 1970s. Looking at the 2020s, Goldman believes that similar structural forces to those which drove commodities in the 2000s could be at play. Energy companies had a superlative month. The S&P 500 energy sector had its best month on record. This lagging YTD performance is driving the “catch up” trade as investors seek out laggard sectors which have not participated in this year’s equity rally. We think the rally may continue into 2021 as most analysts are. Nevertheless, is still a long way to “pre-COVID” levels, but we are persuaded that the whole oil and gas industry will come out much stronger. The oil and gas business has always been full of booms and busts. But this time companies have adapted very fast to the new price environment and there have been also several M&A showing efforts to consolidate and improve operations. Further to that, several oil and gas majors, mainly European, have started to improve its ESG perception and this is also very important and positive.
Copper extended a rally after capping the longest stretch of monthly advances in almost a decade, as China’s recovery continues and supply risks stack up. Caixin’s China November manufacturing purchasing managers’ index rose to the highest in a decade. That’s the latest indicator highlighting the economic strength in the top metals consumer, after the official PMI beat market expectations and showed the nation’s economic rebound is gathering pace. According to analysts, this year’s rally is starting to resemble the spike in prices seen in the early 2000s as a surge in Chinese orders ushered in the start of the commodities supercycle. Metals surged on a wave of bullish drivers including a weaker dollar, vaccine optimism, and a global move toward low-carbon power sources. Risks of supply disruptions in key mining countries also tightened the market, with analysts warning of unmanageable global deficits in the coming years. According to Goldman Sachs, the streak of poor commodity returns has reached an end in the aftermath of the Covid crisis. The bank believes that this recovery in commodity prices will actually be the beginning of a much long structural bull market driven by three key themes. 1) Under-investment in the old economy due to a decade of poor returns, especially in energy where ESG issues have further reduced investment, was accelerated during 2020 due to COVID, leaving inadequate production capacity to meet a V-shaped vaccine driven demand recovery. 2) COVID is already ushering in a new era of policies aimed at social need instead of financial stability. This will likely create cyclically stronger, more commodity-intensive economic growth that should create the elusive cyclical upswing in demand. Three global initiatives have the potential to REV the global demand for commodities: Redistributional policies, Environmental policies and Versatile supply chain initiatives. 3) COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during 1970s and 200s when oil and gold reached historical highs. In addition, inflation tail risks are greater than at any other time since 1970s due to the REV policies above. Looking at the 2020s, Goldman believes that similar structural forces to those which drove commodities in the 2000s could be at play. Not only can the green capex increase be as big as BRIC’s investment 20 years ago, but the redistributive push in DMs, and in China this time, is likely to lead to a large boost to consumer spending, comparable to the lending-fueled consumption increase in the 2000s. Finally, similar to 2000s, there is structural under-investment in supply of almost all commodities.
Gold lost -5.4% in November as investors bolting out of precious metal exchange traded funds in anticipation of the COVID-19 vaccines have outweighed the impact of a record volume of bonds trading at negative yields. Gold’s current weakness is accompanied by a depreciating dollar, which normally has an inverse price correlation with the yellow metal. Gold has had a stellar year, rising 16% year-to-date. However, the recent fall has been fast and furious but not without precedent. In 2H11, a short-lived revival in US real interest rates, linked to policy uncertainties as well as communication missteps by the Federal Reserve, triggered profit-taking from its then record high. This time, gold prices have sold off on earlier-than-expected COVID-19 vaccine progress. Uncertainty about the Fed’s next steps and improving macro data also played a part. On both occasions, there was one common theme – outflows from exchanged-traded funds, which is a frequent reaction to diminished appetite for safe havens. Also, according to Goldman Sachs, COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during the 1970s and 2000s when oil and gold reached historical highs. In addition, inflation tails risks are greater than at any other time since the 1970s. Similar to after the global financial crisis, gold markets will likely be pulled higher as reflation concerns grow with the recovery and investors look to buy the currency of last resort. Economists believe near-term breakeven inflation has further room to run, supporting higher prices for precious metals and commodities in general. Gold miners suffered this month but we think the investment case remains intact. We had several “virtual” conferences with CEOs und industry experts that agree that the vaccine news should be positive for the economy, the companies and of course for the humans in general. Back to normality also is positive for the precious metals sector. Indeed, most companies still generate record high free cash flow and are distributing decent dividends. This has been visible on the last earning season and we expect the PMC portfolio to generate a dividend yield at least twice the universe going forward.
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Das ICG Systematic Equity Fund CH Update ist ein monatlich erscheinender Kommentar über den Schweizer Markt und zum Fonds
