ICG Commodity Update – March 2023
The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.
OPEC+ has changed the narrative in global oil markets over the weekend. Things had been starting to look a bit gloomy for crude in recent weeks. Prices slumped to a 15-month low near $70/bl in late March as the banking crisis added to concerns over a worldwide supply surplus and stubbornly resilient output from Russia. However, nine members of OPEC+ announced yesterday a surprise “voluntary” collective output cut totalling 1.66mboe/d which will take effect from May till the end of 2023. Russia cuts would also extend into 2H 2023. Saudi Arabia led the cartel by pledging its own 500kboe/d supply reduction. The move is a surprise given previous messaging (as recently as Friday) suggesting they would hold output steady. The Saudi Arabian Ministry of Energy official emphasized that “this is a precautionary measure aimed at supporting the stability of the oil market”. This announcement represents further evidence of Saudi Arabia and their allies’ new oil policy since last summer to prioritize prices over volumes. Most analysts think this announcement will improve the oil market from a large oversupply to close to breakeven in the second quarter while expanding the deficit in 2H23. However, spare capacity will also increase to +3mboe/d in the near-term. On the company side its interesting to see, that upstream investments may hit pre-Covid levels in 2023, according to Rystad Energy. They have tracked 70 companies so far that are guiding for $165bn in investments in 2023, which makes up around one-third of total upstream investments. The spending increase among the various company segements is, however, different. Majors are on the conservative side, with an average growth of 11% this year. Shale companies are guiding an average increase of 16%, while all other companies are guiding average growth north of 20%. For the ‘others’ group, Equinor and Petrobras are the main drivers of growth. Another observation is that the growth in investments this year with +15% will be slower compared to last year – in 2022, upstream investment growth for this full set of companies was +30%. Indeed, many producers were left more exposed after they had rolled back hedges. Top listed shale producers have locked in prices for only about 27% of their output for 2023 at an average price of $66/bl, down from over 40% they hedged last year. By the way, we noticed that our peer group in Switzerland fell significantly. There are just 8 mutual funds in the energy space left.
Last month, the EU published its “Critical Raw Materials Act”, amid the growing battle for security of raw material supply. In it, the EU has admitted that full raw material self-security is impossible, and thus it wants to establish a ”critical raw materials club” with like-minded countries. Notably, some support to mining will be provided, while copper, nickel and manganese have been added to the critical raw materials list. By 2030, the EU is targeting domestic extraction to be 10% of annual EU consumption of strategic raw materials, refining/processing to be 40% and secondary material to be 10%. Meanwhile, no more than 65% of consumption at any stage of the process should be imported from a single third country. It is worth putting China’s share of metals and energy transition materials into context. China is now almost 60% of global steel and aluminum production, and ~50% of all other base metals. For refined battery raw materials, this goes up towards 70%. However, there is a weak spot, in that China is reliant on raw material imports in many areas. Also, South American nations are stepping up efforts to propel themselves further down the EV-supply chain by leveraging their vast mineral wealth, expanding processing capacity, and targeting vehicle manufacturing. Argentina, Chile, Bolivia and Brazil plan to coordinate action on turning more mined lithium into battery chemicals, as well as moving into manufacturing of batteries and EVs. Looking at copper, according to Trafigura, the global inventories have dropped rapidly in recent weeks to their lowest seasonal level since 2008, leaving little buffer if demand in China continues to pace ahead as strongly as it did in February – Chinese copper demand was up 13% year-on-year last month, after activity picked up following the lunar new year. Goldman Sachs expects the world to run out of visible copper inventories by the 3rd quarter of this year and expects new highs. On the company side, Teck Resources rejected a proposal from Glencore to buy the company and then spin off their combined coal businesses, in the latest sign of dealmaking heating up across the mining industry. It shows how large producers of coal are grappling with the future of this business. Mining companies are seeking to focus more on metals that will benefit from the clean-energy transition, and yet coal still remains a big profit driver.
Gold rose 7.8% in March, its biggest monthly gain since November, and closed at one of the highest prices per ounce it’s ever been at the end of a quarter, as turmoil in the banking sector spurred haven demand and diminished expectations for more monetary tightening. Those concerns have since dissipated after swift action from the US and Swiss authorities, though gold is holding most of its gains. Also, gold edged higher as markets were rocked by a surprise oil production cut by OPEC+ that threatens to add to global inflationary pressures. Treasury yields rose after the cartel’s announcement, putting pressure on non-yielding gold, though support came from the dollar weakening. Swaps traders slightly upped their bets on another Federal Reserve hike to curb inflation. Focus is now turning to economic data for signs the economy is beginning to slow under the Fed’s rate hikes. Most analysts think that heightened uncertainty will continue to fundamentally support gold over the coming months – Goldman Sachs for example raised its gold price forecasts, describing it as the best hedge against financial risks, and reiterated its bullish view on commodities as a banking crisis has yet to spill over into physical markets. It hiked its 12-month gold price target to $2,050 an ounce from $1,950, joining others such as Citi, ANZ and Commerzbank in raising forecasts. On the company side, Gold Fields and AngloGold Ashanti have proposed a joint venture in Ghana that would create Africa’s largest gold mine. Gold Fields would hold two-thirds of the venture that would combine the operations of its “Tarkwa” mine with those of AngloGold’s neighboring “Iduapriem” – both companies would benefit from synergies and cost savings. Gold Fields and AngloGold have shifted their focus to more profitable mines in Ghana, Australia and Latin America as the sector in South Africa dwindles. The joint venture follows gold industry trends for deals that provide scale, unlock synergies, and prolong a mine’s life.