ICG Commodity Update – November 2023
The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.
Brent oil is at $78/bl amid sustained scepticism that the latest supply cuts by OPEC+ will turn the market’s tide. The retreat came even after a difficult OPEC+ meeting last week that saw internal wrangling as well as a delay. OPEC+ oil producers agreed to voluntary output cuts totalling about 2.2 million barrels per day (mboe/d) for early next year led by Saudi Arabia rolling over its current voluntary cut. The market wasn’t enthusiastic in part because the reductions were voluntary, and this implies that any additional cuts become increasingly difficult to implement. Indeed, there is confirmed disunity in the group, with Angola publicly rejecting their quota and stating that they would produce at 1.18mboe/d from 2024. Some investors also expected the additional cuts to be deeper because of the recent large upside surprises to inventories and supply. According to Goldman Sachs, the additional cut’s now lowers 1H24 supply be around 0.7mboe/d and ends in 3Q24, which in theory means we will get a 1.2mboe/d 1H24 deficit. However, Q4 expected deficit was also around 850kboe/d and we’re currently in surplus. While it is hard to measure demand in real time, frequency / mobility indicators have generally met expectations and generally demand has looked “ok” according to Jefferies, but supply was strong. Especially this year we saw strong oil production increases by the OPEC members Iran +430kboe/d, Venezuela +150kboe/d, Nigeria +110kboe/d, Angola +60kboe/d and Gabon +60kboe/d. Meanwhile, Brazil said it would join the OPEC+ alliance next year but won’t take part in any production cuts for now. Ultimately, it is hard to be too bearish on oil prices in the short and medium term given OPEC+’s willingness to actively manage oil markets. On the producer side, M&A activity in the shale patch somewhat slowed in November as operators reported their 3Q23 earnings amid the backdrop of the megadeal frenzy in the prior month. Companies seem intent to stick to their “capital discipline” mantra in 2024, with few producers showing willingness to increase volumes beyond the maintenance to single-digit percentage growth range. Companies instead plan on inorganic growth and gaining the scale necessary to be competitive in the longer-term, signalling that more large deals may be on the horizon.
There are signs of the macro backdrop turning more positive for the miners as markets could be heading into an environment of a weaker dollar, lower bond yields, Fed rate hold/cuts, demand strength in several emerging markets, stability in China, booming demand in India, ongoing energy transition demand for metals, and mine supply constraints. M&A is likely to be a factor in 2024 as well. A key indicator of supply in the global copper market sank to the lowest level since August last year, as the shutdown of a large mine in Panama cuts the availability of ore for next year. The closure of the $10 billion Cobre Panama mine leaves world copper smelters with less raw material than expected to support their rapid expansion in capacity. That’s reflected in the so-called treatment charges for converting concentrated ore into metal, which rise when supply of mined copper is plentiful and drop when it’s getting tighter. Spot fees paid by Chinese smelters have fallen below $70 a ton for the first time since August 2022, Fastmarkets data show. Some analysts have lowered their forecasts for copper demand related to the energy transition as renewable energy projects are being delayed and EV penetration may be slowing, in part due to high costs. A plan to close First Quantum’s major mine in Panama is threatening to upend the global copper market by whipsawing the industry back into a period of tighter supply though. Until recently, the broad consensus among forecasters was that copper would enjoy a comfortable surplus for the next few years, before tightening sharply later in the decade as supply struggles to keep up with surging demand for the energy transition. Now, the news that Panama intends to shut down one of the world’s biggest and newest copper mines threatens to disrupt that trajectory. Copper prices have risen about 6% since the protests erupted in Panama. In general, for the past five years in a row, the mine disruption rate has been above the average of this century – this shows how quickly a balanced market can swing into deficit and how important it is to be diversified – geographically as well as on a commodity basis. On the company side, Glencore will buy a majority stake in Teck Resources coal business, ending a months-long saga that transfixed the mining industry and setting the stage for the commodity giant to exit the coal business itself. Glencore will pay $6.93 billion for a 77% stake in Teck’s business, while Nippon Steel and Posco will hold the rest.
Gold touched an intraday record $2,135.39 an ounce thanks in part to its haven status as the more volatile the world gets, the better gold tends to do. Bullion has rallied almost 16% since early October, a surge that was initially sparked at the start of the Israel-Hamas conflict but has since been driven by bets on the Federal Reserve will shift to monetary loosening early next year. The Fed last week said the central bank’s policy rate is “well into restrictive territory” in comments that are being interpreted as largely dovish by markets. But the precious metal’s strength has been underpinned by a wider array of factors, from a wave of purchases by governments and central banks to geopolitical uncertainty, with 41% of the world’s population due to go to the polls next year. Gold has risen more than 600% since the turn of the millennium, though adjusted for inflation it remains below the high of $850 touched in January 1980, which would be equivalent to more than $3,000 in today’s dollars. Still, many investors have remained on the sidelines as gold has surged higher. Investors in gold via exchange-traded funds, a key driver of previous bull markets in the metal, have been sellers for much of this year, with holdings down by more than a fifth from a high in 2020. Looking at silver, industrial demand is well on track for a new record level, with the Silver Institute numbers showing 632 million ounces this year. Currently ~160Moz of silver is used in photovoltaics on an annual basis, equivalent to ~15% of global demand. BNEF has highlighted that in an effort to increase solar module capacity and efficiency, many Chinese solar companies are looking at new designs including heterojunction and TOPcon cells that are reported to use significantly more silver than incumbent designs. Analysts suggest that these new technologies could be 3 times more silver intensive. On the company side, Sibanye Stillwater, one of the largest PGM producers, said it plans to lay off 575 employees in South Africa following a review of its gold operations in the country. According to Northam Platinum CEO, large swathes of the South African PGM production base are currently loss-making. This is very concerning for the country. The typical miner in South Africa has around eight to 10 dependents, so layoffs will have a profound social and economic ripple effect.