ICG Commodity Update – December 2023

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

 

Energy

Crude oil experienced its first annual decline since 2020, witnessing a drop of over 10% last year. Throughout December, the Brent futures curve displayed a bearish contango structure, with near-term barrel contracts trading at discounts compared to later ones. In 2023, speculators displayed the most bearish sentiment towards the commodity in over a decade. Non-commercial players’ net-long positions across major oil contracts reached the lowest levels on record, dating back to 2011. The diminishing confidence in OPEC’s ability to balance the market was exacerbated by the surge in algorithmic trading, accounting for nearly 80% of daily oil trades and causing price fluctuations independent of fundamentals. Despite this, supply remains a significant factor, with record production in the US reaching 13.3mboe/d last month. Increasing output from non-OPEC+ nations, such as Brazil and Guyana, has contributed to a global glut, despite OPEC’s efforts to curb supplies. OPEC recently released a statement affirming its commitment to “unity, full cohesion, and market stability”. On the demand side, there are varying expectations for 2024. According to the IEA, global consumption growth is expected to slow as economic activity weakens, with a forecasted demand increase of 1.1mboe/d for the year. While this is less than half of the 2023 growth rate, it remains high by historical standards. In contrast, OPEC maintained its demand growth forecast at 2.2mboe/d in its December report, which some analysts consider optimistic. Analysts continue to be cautious of geopolitical risks. Especially the recent attacks in the Red Sea by Yemen-based Houthi militants and the ongoing conflicts between Russia and Ukraine and the Middle East. The energy industry witnessed notable takeovers in 2023, with Exxon Mobil, Chevron, and Occidental Petroleum completing blockbuster deals, pushing the total value of announced M&A to $346.2bn. This marked an 80% increase from the previous year and ranked only below the values recorded in 2014 and 2018. Despite this, the S&P 500 Energy Index fell 4.8%, ranking as the second-worst performer among the 11 S&P 500 industry groups. In contrast, the Energy Champions Fund closed the year in positive territory, outperforming most of its peers once again.

 

Industrial Metals

In 2023, the commodities market experienced significant challenges, marked by a nearly 10% decline in the Bloomberg Commodities Index. Various commodities, including oil, gas, base metals, and grains, recorded declines, contributing to the overall downturn. However, copper prices saw a marginal increase during this period, driven by expectations of another deficit year. The market witnessed a deficit in 2023 due to robust demand and weaker-than-anticipated supply, contrary to initial projections of a surplus at the year’s outset. Forecasts indicate that these deficits are likely to expand in 2024 and 2025, primarily due to downgrades in several producer-related aspects. Fitch Ratings predicts a 2.7% increase in global copper consumption in 2024, attributing it to the metal’s role in the ongoing energy transition. Looking ahead to 2050, S&P anticipates annual copper demand surpassing the cumulative consumption from 1900 to 2022. Surprisingly, uranium emerged as the top-performing commodity in 2023, reaching a 16-year high of over $90/lb. Unlike previous spikes in 2007 and 2010 driven by specific market shocks, the current momentum is fueled by diverse factors, including climate change considerations, increasing acceptance of nuclear energy, advancements in reactor technologies, and geopolitical uncertainties affecting both demand and supply. A notable development is China’s decision to halt the export of certain rare-earth technologies, potentially complicating efforts by the US and other Western nations to secure strategic raw materials. Meanwhile, lithium faced a significant price decline, with spodumene prices plummeting by 80% over the past year, leading to the suspension of mining activities by an Australian producer. The lithium market struggled with a global supply glut in 2023, coupled with lackluster growth in battery demand and the impact of higher interest rates on global electric vehicle sales. In the realm of M&A, Nippon Steel announced its acquisition of United States Steel for $14.1bn. The acquisition price, at approximately 8 times US Steel’s 2024 EBITDA, exceeded the typical 4–6x valuations for major global blast furnaces. Additionally, it is said that Barrick Gold initiated discussions with First Quantum Minerals shareholders regarding a potential M&A transaction. According to S&P, the positive outlook for the mining industry is supported by the expected entry into production of at least 38 mines in 2024 all over the world.

 

Precious Metals

Geopolitical risks have consistently fueled safe-haven demand for gold, resulting in the metal reaching a record high in early December and closing 2023 with a 13% gain. Despite facing four interest rate hikes, in addition to seven the previous year, gold demonstrated unexpected resilience. Recently, gold experienced a pullback following a late-month rally, driven by expectations of rapid monetary loosening in response to a cooling economy. Attention is now focused on U.S. data, which will guide the pace of the Federal Reserve’s rate cuts. As we venture into 2024, the outlook for gold seems increasingly favorable, primarily shaped by the anticipated shift in interest rates. On the flip side, platinum group metals (PGM) faced a challenging year. Platinum recorded an 8% loss, while palladium plummeted over 38% in 2023. Several factors contributed to the decline, triggering negative speculative investor sentiment. After years of existing in a structural deficit, the palladium market is now experiencing structural oversupply. This shift is primarily attributed to palladium’s heavy reliance on catalytic converters in gasoline-powered vehicles, constituting about 90% of total demand. While gold miners celebrated the precious metal’s historic high, they are redirecting much of their windfall into copper. Interestingly, copper, previously downplayed by gold-mining executives, is gaining importance as investors recognize the growing competition for copper supply amid the global shift towards electrification and away from fossil fuels. The traditional premium of gold stocks over companies mining various metals is evolving. Barrick Gold, for instance, aims to transform into a “major-league copper producer” as revealed by CEO Mark Bristow in November. There are now rumors that Barrick has initiated discussions with First Quantum shareholders for a potential M&A transaction. Another major gold producer, Newmont, anticipates an increase in its copper revenue from 10% to 20% or more, following the takeover of Newcrest and the development of planned projects. About 30% of Newmont’s reserves are now in copper. Analysts observe positive signs in the macro backdrop for miners. S&P supports this positive outlook, highlighting the expected commencement of production in at least 38 mines worldwide.



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