ICG Commodity Update – February 2025

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

 

Energy

Crude oil prices have declined since mid-January due to weak demand and U.S. trade concerns. New 25% tariffs on imports from Canada and Mexico, except for a 10% rate on Canadian energy, have added uncertainty. In a move that surprised many market participants, OPEC+ confirmed an increase in crude oil production of 138kboe/d starting in April. This marks the first in a series of planned monthly hikes aimed at gradually restoring 2.2mboe/d of production by 2026. Some producers, such as Kazakhstan, have already ramped up output, while additional barrels from Iraq’s Kurdistan region could enter the market. This may contribute to inventory builds in the 2Q, depending on geopolitical developments, including increased pressure on Iran and the revocation of Venezuela’s export licenses. Historically, OPEC miscalculated market conditions in 1998 and 2014, leading to higher inventories and lower oil prices. However, today’s backdrop is different, with crude oil and petroleum product inventories remaining below average. On the other side, China’s energy demand remains a crucial factor in global markets. According to the Sinopec chairman, the country’s oil demand has not yet peaked, with petrochemical growth offsetting declines in diesel and gasoline consumption. Additionally, China is expected to announce a major economic stimulus at the National People’s Congress to counteract rising trade tensions with the U.S.. Natural gas prices in North America have surged in recent months due to increased winter demand and expectations of rising North American exports. Indeed, Shell’s LNG Outlook 2025 projects that global demand for LNG will rise by ~60% by 2040. This growth will be driven by economic expansion in Asia, the rise of AI, and efforts to reduce emissions in heavy industries and transportation sectors. The OPEC+ production increase negatively impacted energy stocks, with the S&P 500 Energy Sector Index declining by as much as 3.8%. Most shale producers saw their shares drop by over 5%. However, analysts believe this decline presents potential opportunities. While some companies may restrain production in response to an oversupplied market, the pullback could incentivize another round of M&A among public energy firms.

 

Industrial Metals

The global commodities market is undergoing significant shifts, with key developments in aluminum, iron ore, cobalt, lithium, and nickel. The reintroduction of a 25% tariff on aluminum and steel imports by President Trump has disrupted trade flows and is expected to increase costs for US manufacturers, particularly in aluminum. This decision, part of a broader trade strategy, has analysts predicting higher prices and changes in sourcing regions, as the U.S. becomes more reliant on materials from the Middle East and Europe. Meanwhile, Mitsui & Co. has made a $5.3 billion investment in the Rhodes Ridge iron ore project in Western Australia, marking its largest ever investment. This project, which will start production in 2030, is seen as a key move in securing high-quality iron ore for green steel production, a growing demand driven by the push for decarbonization in the steel industry. The investment reflects major shifts in the iron ore market as China’s economy slows, and steelmakers face increasing pressure to decarbonize. In the financial world, Glencore is reconsidering its primary stock listing, potentially moving from London to the US in search of better capital valuation. This comes as other major companies, including Shell and BHP, are also contemplating shifts due to the UK market’s struggles with limited investor appetite for fossil fuels. The decision to move reflects the changing landscape of global markets, where many companies are looking toward the US for deeper liquidity and higher multiples. In the cobalt market, the Democratic Republic of Congo (DRC) has suspended cobalt exports for four months to curb the oversupply of the metal used in electric vehicle batteries. The DRC, which produces around three-quarters of the world’s cobalt, aims to stabilize the market after production outpaced demand, causing prices to fall below $10 a pound. This move is expected to drive prices higher, and analysts predict it will have a significant impact on the global market. The lithium and nickel markets are also facing challenges, with prices plummeting over the past year. Lithium prices have dropped more than 80% since 2022, while nickel prices have halved. This downturn has led to substantial losses for major miners, such as IGO and Mineral Resources, and forced them to focus on cost-cutting measures. Analysts predict further consolidation in both sectors as companies look to weather the storm, with some even considering M&A to navigate the current market instability.

 

Precious Metals

Gold has surged close to $3,000 per ounce, driven by strong demand from gold-backed ETFs and a 9% rise in retail demand for jewelry. Central banks have been major buyers, particularly after geopolitical tensions, including the freezing of Russian assets, prompted increased purchases. Currently, central banks are buying about 1,000 tons of gold annually, further boosting prices. China has also encouraged insurance funds to stockpile gold, and concerns over tariffs have created a short squeeze, driving prices higher. The positive correlation between equities and gold suggests global liquidity is being channeled into gold, further strengthening its price. Gold has risen for eight consecutive weeks, the longest streak since 2020, with Goldman Sachs raising its year-end target to $3,100 due to central bank buying and ETF growth. Geopolitical uncertainties, such as US trade policies and military aid to Ukraine, are pushing investors to view gold as a safe-haven asset. A weaker US dollar and expectations of Federal Reserve rate cuts also support gold’s appeal as a non-yielding asset. Retail demand has been bolstered by investment interest, particularly from Europe, contributing to the inflow into gold-backed ETFs. In the precious metals mining sector, companies like Harmony Gold and Fresnillo have posted strong results, benefiting from the high gold price. Harmony Gold saw a 38% increase in pretax profit, driven by higher gold prices, despite a slight dip in production. Similarly, Fresnillo’s earnings soared, with a jump in pretax profit to $743.9 million. Both companies have returned substantial amounts to shareholders, with Fresnillo’s total shareholder returns hitting a record $547.5 million. These results highlight the positive outlook for precious metals mining stocks, which have lagged behind the rise in gold prices but may now be due for a catch-up. While gold has rallied, silver has underperformed, largely due to weaker demand from China’s industrial sector, but there are expectations it could rebound if global economic conditions improve. Mining companies are focusing on capital allocation and increasing returns to shareholders, with recent M&A activity targeting cash-generating assets. The continued demand from central banks, geopolitical tensions, and inflation expectations should support the strong outlook for precious metals, particularly gold.