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.