ICG Commodity Update – June 2023
The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.
Many people think oil prices are low because oil demand is weak. While demand growth in OECD countries has been lackluster in 1H23, this has been offset by strong demand growth in China, India, and the Middle East. Despite the solid demand recovery, global visible oil inventories did not fall in the first four months of this year because supply growth was also solid. Besides higher supply from Russia, US production also surprised to the upside. Also, production in countries exempted from OPEC+ production cuts is running higher despite US sanctions. Production in Iran is close to 3mboe/d, the highest level since late 2018, while Venezuelan production at 0.8mboe/d stands at early 2020 levels. Therefore, the extension of Saudi Arabia’s 1mboe/d cut was no surprise to the market. The Saudi effort will be assisted by Russia, which will reduce oil exports by 500kboe/d in August. For the 2H of 2023 there is a widespread consensus that oil markets will be tight. The industry’s general view is embodied by the IEA, which predicts that global oil demand will exceed supply by roughly 2mboe/d in the last six months of 2023 as Asia’s recovery gathers pace. Nevertheless, current positioning is extremely short with combined money-manager net-longs for Brent and WTI falling to the lowest in more than a decade. Nymex WTI outright shorts were the highest since 2017. In natural gas, China is on track to be the world’s top importer of LNG in 2023. The country is looking well into the future to avoid a repeat of energy shortages, while also seeking to fuel economic growth. The nation’s LNG imports could rise to as high as 138mt by 2033, about double current levels, according to Rystad. The 2023 Statistical Review of World Energy showed that despite the largest ever increase in renewables capacity of 266 GW, fossil fuels still account for 82% of worldwide energy supply. There were quite some M&A deals in oil and gas recently from mid-sized players that didn’t get much attention, as mostly privately- or private equity-owned companies were involved in the transactions. There was an interesting statement from the CEO of Civitas about his $4.7bn entry into the Permian basin. He didn’t bother investors with the typical patter about cost synergies and operational efficiencies. He got right to the point “stated simply, scale is an effective hedge against many of the risks in our business.”
Heightened global macroeconomic concerns from markedly higher interest rates and a relatively anemic recovery in post-lockdown Chinese demand, combined with a strong U.S. dollar and elevated geopolitical uncertainty from Russia’s war on Ukraine, continue to overhang the near-term outlook for commodities – ongoing supply-side challenges have served to maintain surprising tightness in some markets, most notably copper. In the medium to long term, analysts continue to anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts which is amplified by the impact of severe underinvestment in new production capacity. According to billionaire mining financier Robert Friedland, copper is heading for a “train wreck” and fears prices could jump tenfold. A combination of factors suggests supply won’t keep pace, as deposits are getting pricier and tricker to find and dig up, funding is scarce, and societies have yet to grasp mining’s role in the shift from fossils. Friedland, who made his fortune from Canadian nickel and spearheaded massive copper finds in Mongolia and the DRC, has long championed the importance of the metal used in everything from wires to weaponry. Some analysts share his concern about a looming copper crunch, but consensus is for far more gradual price gains in the coming years. Friedland points to very low physical inventories of copper coinciding with historically low relative valuations of mining companies. Large premiums paid in recent acquisitions indicate the industry understands where the market is headed, although consolidation won’t solve the dilemma of how to boost production. Friedland points to other commodities as examples of what may be in store for the copper market. Chinese prices of molybdenum doubled from August to February amid supply disruptions and growing demand from the renewables and military sectors. China is a dominant player in the processing of nickel, copper, cobalt and other resources that are key to economic growth and clean-energy technologies. With initiatives such as the Inflation Reduction Act, the US is seeking to curtail global dependence on China as competition increases. The EU has already proposed classifying copper and nickel as critical raw materials in legislation designed to bolster supplies, alongside other metals key to the energy transition.
Overall, it’s been a painful quarter for gold prices. With equity markets going into overdrive and recession nerves calming, demand for safe haven assets suffered. The sharp rally in real yields didn’t do gold any favors either. According to analysts, warnings from central banks, including the Federal Reserve, that they would push interest rates even higher to try and tame inflation more quickly, pressured gold prices. Looking at silver, changes to solar panel technology are accelerating demand – a phenomenon that’s widening a supply deficit for the metal with little additional mine production on the horizon. Silver, in paste form, provides a conductive layer on the front and the back of silicon solar cells. But the industry is now beginning to make more efficient versions of cells that use a lot more of the metal, which is set to boost already-increasing consumption. Solar is still a small part of overall silver demand, but it’s growing. According to a report from The Silver Institute, it’s forecast to make up 14% of consumption this year, up from around 5% in 2014. The trouble for silver buyers is that cranking up supply is far from easy, given the rarity of primary mines. About 80% of supply of the metal comes from lead, zinc, copper, and gold projects, where silver is a by-product. In the PGM markets, hedge funds are lining up to short palladium as weak global demand points to a potential oversupply of the precious metal. Palladium, a metal used primarily in catalytic converters in car exhausts, slid more than 30% in the first 6 months of 2023 as global economic headwinds threatened to cut demand from automakers. While traders initially expected blackouts in South Africa, the world’s second largest mining nation, production there has held up better than expected. Prospects of supply outpacing consumption have been underlined by the shift to cheaper platinum in gasoline-powered vehicles, as well as the increasing adoption of electric vehicles. On the M&A front, Kinross Gold rejected a takeover approach from Endeavour. West Gold and Ramelius are both battling for Musgrave Resources and First Quantum recently rebuffed an informal approach from Barrick Gold as the company is seeking to diversify into copper, according to Bloomberg.