ICG Commodity Update – May 2024

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

 

Energy

Over the past month, oil prices have reflected diminishing geopolitical risks as attention shifted to weakening fundamentals. Concerns about slow demand growth in China alongside rising oil inventories in developed countries, have pressured prices. Consequently, OPEC+ decided on Sunday to extend the 3.66mboe/d cuts by a year until the end of 2025 and to prolong the voluntary 2.2mboe/d cuts by three months until the end of September 2024. Starting in October 2024, OPEC+ will phase out the voluntary 2.2mboe/d cuts gradually over the following year, contingent on market conditions, with the possibility of halting or reversing the increases if market fundamentals deteriorate. Goldman Sachs viewed the decision as bearish due to a recent rise in inventories, while UBS and RBC remained confident that the alliance will continue to manage the market effectively. Morgan Stanley suggested that a seasonal demand upswing might push the market into a renewed deficit over the summer. Many analysts had predicted that OPEC+ would face challenges setting targets for 2025 due to unresolved individual capacity targets for each member, a previous source of tension. However, OPEC+ postponed the capacity discussions until November 2025. Instead, the group agreed to a new output target for the UAE, allowing it to gradually increase production by 0.3mboe/d, up from the current 2.9mboe/d. OPEC+ decided to use independently assessed capacity figures as a guideline for 2026 production, thus delaying a potentially contentious discussion by a year. M&A activity in 2024 is expected to remain high and could surpass the 2023 level of $258bn, according to Rystad Energy. Barron’s magazine noted that a series of M&A deals resemble the reassembly of Standard Oil, which was broken up by the Supreme Court in 1911. Standard Oil of New Jersey became Exxon, which merged with Mobil in 1999, and Exxon has recently merged with Pioneer Natural Resources. Chevron is attempting to merge with Hess, and last week, ConocoPhillips announced its merger with Marathon Oil for $23bn. Additionally, Saudi Aramco’s $12bn share sale sold out shortly after the deal opened on Sunday, with the government receiving demand for all shares within a few hours. These developments indicate a resurgence of investor interest in the energy sector.

 

Industrial Metals

The global copper market is gripped by fears of a shortage, propelling prices to record levels and sparking a $49 billion takeover battle between BHP and Rio Tinto. However, the battle is over for now, as BHP walked away, cheering investors eager for proof that the miner will not pursue deals at any cost. BHP was forced to abandon its audacious takeover plan to create a global copper giant after Anglo American rebuffed repeated approaches from the world’s biggest miner during a five-week saga. A successful conclusion to the $49 billion all-share attempt would have been the industry’s biggest deal in more than a decade. Nevertheless, BHP’s Australian shareholders saw good news in the failure. Meanwhile, copper smelters in China had pledged to reduce capacity after their fees collapsed due to a supply squeeze on the imports of ore they use as feedstock. The prospect of insufficient copper in China was one of the pillars supporting a rally that took the metal above $11,000 a ton for the first time in May. However, the cuts haven’t happened, and China’s faltering economy isn’t able to absorb the excess, with prices retreating to just above $10,000 a ton. Although that’s still an 18% gain for the year, it suggests that as long as China remains oversupplied, copper will struggle to make further headway. Despite the price pullback, copper mining equities have been resilient. A trend to watch for industrial metals investors is the power consumption growth in China, expected to grow 6% year-over-year in 2024 and with a CAGR of 5% from 2023-2030. Additionally, China’s grid capital expenditure is expected to grow 5-10% year-over-year in 2024. Industrial metals such as copper, zinc, and iron ore tend to move in tandem with electricity production. This trend could eventually replace the demand from the struggling Chinese real estate sector. Power demand worldwide is in general a critical factor for metals demand. AI is an overarching theme in the market today, and power is potentially the bottleneck. According to Goldman Sachs, driven by data centers, AI, and the electrification of everything, Europe’s power demand could grow by over 40% in the next ten years. Combining the increasing demand for additional electricity generation with the adoption of renewable energy technologies—both of which are highly metals-intensive—creates a strong long-term fundamental case for industrial metals.

 

Precious Metals

Gold had another positive month closing above $2’300 an ounce. Data last week showed a slowdown in the Fed’s preferred measure of underlying inflation. Traders are looking for more confirmation from US policymakers on the rate trajectory, with the focus turning to the next Fed meeting that starts June 11. Fed officials may keep borrowing costs elevated for longer until there is more clarity on whether price pressures are making a sustained move toward the central bank’s 2% target. UBS strategists in a note recently raised their forecasts for gold to $2,600 by year-end. The bank’s bullish outlook is owed to stronger Chinese demand, on top of a series of soft U.S. data in April, which has driven some repricing of expectations for U.S. Federal Reserve rate cuts. Goldman joins UBS in raising price forecasts and expects gold at $2’700 an ounce by year end, mainly driven by solid demand from emerging market central banks and Asian households. For equities, there is an improved optimism on operating cost inflation control which is supporting the interest in equities as investors are looking for leverage to gold – according to analysts, the market sees a bias towards the low risk, large, liquid companies. Looking at silver, the metal had a good run as of late and is currently trading over $30 an ounce. According to the Silver Institute, the market is headed for its 4th year of deficit, driven by record use of silver in industrial applications, which set a new high in 2023 at 654.4 million ounces. Ongoing structural gains from green economy applications underpinned these advances. Higher than expected photovoltaic capacity additions and faster adoption of new-generation solar cells raised global electrical and electronics demand by a substantial 20%. At the same time, other green-related applications, including power grid construction and automotive electrification, also contributed to the gains. This year is expected to be a solid year for total silver demand, which is forecast to grow by 2%. Industrial fabrication should post another all-time high, rising by 9%, propelled by an anticipated 20% gain in the PV market and healthy offtake from other industrial segments. Nevertheless, compared to the historical average gold to silver ratio of 61x, the metal has still some catch up to do, as the ratio is currently standing at almost 77x.