ICG Commodity Update – October 2023

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

 

Energy

Crude has had a turbulent October, with prices swinging in a roughly $11/bl range. Oil started the month with a steep plunge on fears of a longer period of hawkish monetary policy. Then Hamas’s attack in Israel on Oct. 7 sent prices surging on the potential for disruptions in the region that accounts for a third of global flows. But with the war’s contagion fears subsiding, the economic concerns are again taking centre stage, sending oil prices to their first monthly declines since May. Signs of lacklustre demand have arisen in recent days, with manufacturing in China falling back into contraction this month and BP saying gasoline and diesel markets are oversupplied. Historically, the market has tended to value the reserve valuation of oil and gas companies with a relatively close correlation to the oil price. However, this relationship has dislocated with the implied value of barrels falling, despite the backdrop of higher oil prices. Therefore, we are not surprised to see M&A coming back so strongly. Chevron said it’s buying Hess for $53bn in stock. The announcement came just weeks after Exxon Mobil announced its purchase of Pioneer Natural Resources for $59bn in an all-stock deal. The two oil giants plan to continue pumping investments into fossil fuels as demand for crude remains strong, especially amid tightening global supplies fuelled by years of chronic underinvestment. Ironically, a day after Chevron announced its acquisition, the IEA released an exhaustive report concluding that demand for oil, gas and other fossil fuels would peak by 2030 as sales of electric cars and use of renewable energy surged. The disconnect between what oil companies and many energy experts think will happen in the coming years has never been quite this stark. In past decades, there were often calls of peak supply, and in more recent ones, peak demand, but evidently neither has materialized. OPEC noted that consistent and data-based forecasts do not support this assertion. The difference today, and what makes such predictions so dangerous, is that they are often accompanied by calls to stop investing in new oil and gas projects. OPEC’s Haitham Al Ghais said ”such narratives only set the global energy system up to fail spectacularly. It would lead to energy chaos on a potentially unprecedented scale, with dire consequences for economies and billions of people across the world.”

 

Industrial Metals

Metals had softened in October largely on concerns over fading demand outside China. Activity inside the world’s biggest buyer of industrial commodities has proved a relative bright spot, and further Chinese stimulus will support that dynamic. 2023 has seen a slowing in global trade, to which China has not been immune. However, the headline 6.2% y/y drop in both exports and imports in China’s September data is very different from those seen in industrial metal raw materials. China’s Q3 imports were up across the board, strongly in certain cases, with 2023 as a whole set to be another record import year for most. While many countries around the world ponder how to access increased metal volumes as global segmentation grows, the data shows China has just moved its traditional commodity model, honed over the past 20 years, up a gear. Adding to signs that President Xi Jinping is keen to shore up the economy and financial markets, he paid his first known visit to the headquarters of the People’s Bank of China in October. According to BlackRock, investors are missing a big opportunity to profit from the energy transition because they have an outdated view of the metals and mining industry. Industry executives, analysts and specialist investors have for several years been predicting a bull market as the shift to a lower-carbon economy drives a wave of demand for the metals needed for electricity grids, electric-vehicle batteries, and solar panels. Yet while prices rallied sharply in the rebound from the Covid pandemic, they have stagnated in the past year. Copper for example is down ~4% YTD and last traded at around ~$8’100/ton. In due course, the copper-hungry energy transition will underpin consumption in the years to come, while the mining industry faces difficulty bringing enough new pits online. That combo will usher in deficits. But for now, short-term concerns determine the price for most commodities. On the company side, First Quantum’s share plunged after Panama’s government said it would hold a referendum on the company’s flagship copper mine to address widespread civil unrest. Since the news, the company lost almost 50% of its market cap. Looking at the bright side, Rio Tinto has exceeded analyst expectations in terms of copper production growth. Additionally, BHP agreed to sell its coking coal mines to Whitehaven for $3.2 billion, and Vale has proposed a payout of $4 billion in dividends and buybacks for its investors.

 

Precious Metals

Gold saw a series of sharp gains in October as investors sought to hedge against a spillover in the Hamas-Israel conflict which could have implications for global energy markets. The metal was up around 8% in October and even surpassed the $ 2’000/oz mark briefly. While the war has so far remained contained, bullion has retained most of its war-risk premium. The World Gold Council published gold demand trends, where the organization highlighted that the year-to-date central bank net buying of gold is 14% ahead of 2022. Central banks have bought a net 800t of gold so far this year, the highest on record for that nine-month period. The council also stated that jewelry demand softened slightly in the face of high gold prices. More recently, the Federal Reserve hinted it may be finished with its most aggressive tightening cycle in four decades. Lower rates are typically positive for bullion, which doesn’t offer any interest. Looking at PGMs, Sibanye-Stillwater said that more than 4’000 employees and contractors could potentially be affected by the proposed restructuring of four shafts at its South Africa platinum group metal operations, and that it will consult with unions and non-unionized employees. PGM miners having a tough year fighting with low commodity prices even though the World Platinum Investment Council forecasts a deficit of over 1 million ounces in 2023, as automotive and industrial demand is expected to grow 27% while total supply should remain flat. It is worth noting the link between platinum and the hydrogen economy. Green hydrogen produced by platinum-containing electrolysers has a significant role to play in the energy transition. While hydrogen-related platinum demand is relatively small in 2023 it is expected to grow substantially in the medium term and could become a proxy for investors looking for exposure to global decarbonization. On the company side, Egyptian billionaire Naguib Sawiris, is eyeing an investment in Barrick Gold’s $7 billion Reko Diq copper-gold project. Reko Diq, in the Balochistan region that borders Afghanistan and Iran, is one the world’s largest undeveloped copper and gold deposits, capable of producing 200kt of copper and 250koz of gold a year for more than half a century. The project is jointly owned by Barrick and Pakistan.