ICG Commodity Update – April 2023

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

 

Energy

The recent banking crisis resulted in a sell-off in risk assets and commodities. Nevertheless, OPEC+’s oil output-cut bombshell at the start of April is widely expected to tighten oil markets further. Experts see the reason behind the cut being more economic than political as they want to keep oil prices at a comfortable level, which most estimate at $80/bl. Analysts expect the 2H of 2023 to show a deficit of >1.4mboe/d on average. Looking into oil and gas companies, first quarter earnings season started well. The two largest US oil and gas companies ExxonMobil and Chevron reported booming profits of $11.4bn resp. $6.6bn. Both companies have posted hefty profits averaging $9-11bn for four straight quarters even as international crude prices slid more than 35% from last year’s peak. Despite increasing dividends and buybacks, spare cash is increasing. Meanwhile, Exxon’s net debt to capital ratio shrank to 4% and has a near record cash pile of $33bn. As companies remain aflush with cash, it is no wonder that M&A rumours are increasing. Most notable was the WSJ rumour that ExxonMobil would be looking into Pioneer Natural Resources to become the Permian champion with a substantial amount of high-yielding und undrilled inventory. However, despite being a much-anticipated target, nothing happened so far. Nevertheless, according to Rystad assets worth $21bn are currently up for sale in the Permian alone. The potential for a string of acquisitions in 2023 is no surprise to us. Another interesting development is the changing investor perception towards the sector as a solution to the energy transition. As the plans to build up low-carbon businesses to achieve scale start to take shape, supported not least by the strength of upstream cash flows and strong balance sheets, we believe the message of the legacy major oil and gas companies as being part of the solution to the energy transition is starting to resonate with investors. Our impression is that the markets’ approach to the energy transition is becoming more balanced and educated, with the major oil and gas companies being more aptly referred to as integrated energy companies. We think that energy companies are key to the energy transition as they understand energy systems with all their operational, geological, geopolitical challenges u.a. and this is still underestimated.

 

Industrial Metals

Last month, coper dropped 4.4%, the most in almost a year, on a dimming global economic outlook including a weaker-than-expected start to China’s peak building season. According to Goldman Sachs, the bearish views on Chinese demand had been misconstrued and it is important to recognize the persistence of a negative shock in mine supply as a tightening effect. The bank said that current demand environment for copper is far from recessionary. Market participant gathered in Santiago in April for “Cesco Week”, one of the copper industry’s biggest conferences. The industry isn’t letting tightening credit and slowing growth kill the fundamental story behind copper. Underpinning the confidence are the lowest stockpiles of the metal in 18 years, standing at less than a week’s worth of consumption. CEO of Freeport, one of the largest copper producers, confirmed that demand for the company’s copper continues to be strong. As new deposits become pricier and tricker to develop, major producers like BHP and Glencore are turning back to deal-making for growth – as seen recently, when Glencore offered to buy Teck Resources for $23bn. The controlling shareholder has said the company will be up for sale, but only after separation, but the board withdrew its separation proposal ahead of its AGM due to lack of support. The company is set to pursue a simpler and more direct separation, which is the best path to unlock the full value according to the CEO. Most analysts expect a revised offer from Glencore, who is willing to present its takeover offer directly to shareholders if the board doesn’t come to the negotiating table. The deal is also closely watched by politicians, Canadian Prime Minister Trudeau said that any takeover bid for Teck will have to get through a rigorous process to win government approval. Looking at lithium, Chile, the No. 2 lithium producer globally, is transforming its model for production and is seeking majority stakes in new contracts with private companies. Although the royalties and taxes paid to the government are already by far the highest globally, Chile also wants direct ownership – with risking to lose investments and market-share to other lithium-rich destination like Argentina or Australia. The news dragged down shares of Albemarle and SQM, even as the government has vowed to respect existing arrangements. SQM’s contract expires in 2030, Albemarle has more flexibility with its expiration date only due in 2043 – both are encouraged to enter talks with the government though.

 

Precious Metals

Gold futures have ended April only modestly higher than in March and moved around the $2’000/oz mark throughout the month. Analysts think that many of the key drivers behind gold prices rising past $2,000 are still present, including persistently higher inflation in many countries, the likelihood of a U.S. and global recession, the U.S. regional banking system getting wobbly, and instability caused by war, but the relative strength of the U.S. dollar has been a drag on even higher gold prices. Gold as a hedge against uncertainty is regaining more and more attention, particularly since the U.S. banking issues of late, which are in addition to the de-dollarization rhetoric coming out of the BRICS nations, which include Russia. Especially since the seizure of Russia’s foreign exchange reserve, central banks view gold as a safe haven and spur demand. Looking at PGMs, new emission standards in China due from July will spur demand from new models – according to BMO, vehicle sales were strong year-over-year in developed world and increasingly in China. Going forward, the heavily concentrated supply risk should keep all PGM balances tight, although markets suffer from the electric vehicle narrative and the associated lower demand. Some analysts predict the PGM demand for fuel cells in hydrogen are set to replace the missing future catalysts demand for traditional ICE vehicles.

 

Also, Independent Capital Group visited this year’s Denver Gold Group Forum in Zurich in April. As the industry is struggling with an ageing asset base, lower grades as well as declining production, it seems that companies are slowly bringing their focus back to growth. Interestingly, companies currently prefer organic over inorganic growth. Nonetheless, balance sheets remain clean and offer plenty of room for shareholder returns. Companies are aware that the industry still has some work to do to gain back the trust of generalist investors – the best way to get the trust back is through dividends and shares buyback. Please find the full report about the Gold Forum on our blog.