ICG Commodity Update – May 2023
The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.
Economic growth concerns continue to weigh on cyclical assets, including energy prices. Crude has retreated 17% in the past six weeks to trade near $72/bl. Disappointing Chinese economic indicators and fears of a US recession have emboldened bearish speculators and the short interest increased. The debt ceiling deal passing the House provided some support. Nevertheless, prices remain under pressure ahead of this weekend’s OPEC+ meeting. Experts (25 out of 31 traders and analysts surveyed by Bloomberg last week) expect OPEC+ to focus on establishing a strong commitment to the deeper production cut started in May, rather than making another round of reductions. Russia also said OPEC+ is unlikely to take any further measures at its meeting, undercutting Saudi Arabia’s warning to oil short sellers to “watch out.” Despite Russia having previously pledged to reduce output, its crude oil flows to international markets show no substantive sign of the curbs. However, Russia no longer publishes oil-related data, therefore market participants have switched to another metric to measure the production cut: crude exports via tankers. Interestingly, the energy agencies IEA, EIA and OPEC recently made positive changes to their oil demand growth forecasts, which still suggest robust growth this year. The IEA projects the highest absolute demand of 102Mb/d. The IEA expects global demand to exceed 103Mb/d in 3Q23, with 4Q demand further expanding supported by non-OECD countries. A key observation from the Oil Majors’ 1Q reporting was that they hold close to $150bn in cash reserves, almost twice the historical average. Additionally, the Oil Majors’ net debt-to-equity ratio reached record-lows. These observations indicate that the majors are ready to increase investments as their finances are strong. However, regarding organic investments, the companies are guiding for modest growth from 2023. The key question pertains to how the majors will allocate the capital in these substantial cash reserves. One possibility is an increased focus on acquiring new assets or companies. This will be an increasing trend, we think. This month we had Chevron announcing the acquisition of PDC Energy in an all-stock deal that values the company at ~$6.3bn. This was already the 2nd M&A position in our current ECF portfolio this year.
Metals suffered in May as investors cooled on the prospect of a robust economic recovery in China. Copper has tumbled below $8’000/t for the first time in 6 months in the face of disappointing economic data from the world’s top consumer. Poor domestic demand has forced smelters to ramp up exports that have helped replenish inventories elsewhere. Commodity bull Goldman Sachs on the other hand said commodities prices would come back should concerns over a global recession turn out to be misplaced. Although copper dipped last month, the supply side tells a different story. Supply of metals is increasingly likely to come from mines which are expensive, technically complex, and outside traditional jurisdictions. According to analysts, most metals markets are currently balanced, but it will be hard to supply the amount demanded in the next 10 years to drive the energy transition and carbon zero. Wood Mackenzie estimate a greener world will be short of about 6mt of copper by 2030, meaning over 4 new Escondida mines, the worlds largest, need to come online within that period. BloombergNEF estimates appetite for refined copper will grow by 53% by 2040, but mine supply will climb only 16% – a huge gap to fill. The world’s largest miners aren’t standing idly by. After more than a decade of repenting for the excess that followed the China-led boom in demand in the 2000s, deals are back and M&A momentum is building, with green metals in buyers’ sights. The looming shortfall has encouraged Glencore to move on Teck Resources, long a coveted copper target, and top gold miner Newmont’s record bid for Newcrest Mining, a deal that will add bullion but also copper to its production profile. BHP Group has just completed the acquisition of copper producer Oz Minerals, its largest deal in over a decade. Building mines, as opposed to buying them, is still too painful a headache. Prices are not shiny enough to cover rising costs, and risks abound – although exploration has ticked higher of late, spending remains far short of what is required. Lithium markets are also showing activity – from US miner Albemarle’s 3 unsuccessful bids for prospect Liontown Resources, to Tianqi Lithium’s failed attempt to buy Essential Metals. More recently, Allkem and Livent decided to merge in an all-stock deal that values the combined entity at $10.6bn, creating a leading global integrated lithium producer.
China added to its gold reserves for a sixth straight month, extending a flurry of purchases as central banks around the world expand their holdings of bullion amid escalating geopolitical and economic risks. Total stockpiles now sit at about 2,076 tons, after China increased reserves by about 120 tons in the five months through March. Central banks have purchased large amounts of gold in the past year to diversify assets, as well as to protect reserves from the impact of a weakening dollar and rampant inflation. While inflows moderated in the first quarter of 2023, volumes were still at historically elevated levels, according to the World Gold Council. The voracious appetite for gold has helped prices scale near-record highs as markets fret over a slowing US economy and signs of persistent credit stress. On the company side, Newmont, the world’s biggest gold producer, plans to invest a total of $540 million to extend the life of a key mine in Argentina. Last year, the project generated more than $500 million in exports, making it the most important mine in Santa Cruz. This news came after the company sealed its $19bn Newcrest takeover. The transaction, now unanimously approved by Newcrest’s board but pending regulatory approval, is the gold mining sector’s largest deal to date, surpassing Newmont’s purchase of rival Goldcorp in 2019. The PMC took part in the deal as it was invested in Newcrest when the deal was announced. Looking at PGMs, the platinum market was strongly undersupplied in 1Q23, registering the first deficit since 2Q21, according to UBS. South African mine production fell as the country suffered from power outages, while autocatalyst, industrial, and investment demand was strong, tightening the platinum market. The autocatalyst demand benefited from rising palladium to platinum substitution and higher platinum group metals loadings, because of tighter emissions norms. The Financial Times also recently forecasted global platinum demand to surge 28% this year and is expecting the markets to chalk up its largest deficit since records began in the 1970s. The demand for palladium from autocatalysts on the other hand fell to 8.45mn ounces year-over-year, the lowest level since 2017 according to Johnson Matthey – indicating substitution programs are progressing rapidly. Please find the full report about the Gold Forum on our blog.