ICG Commodity Update – October 2024

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

 

Energy

Oil prices saw heightened volatility in October as escalating tensions in the Middle East fuelled concerns over potential disruptions to energy infrastructure. However, skepticism is growing over whether the conflict will meaningfully impact oil supplies. On Sunday, OPEC+ announced it would extend its 2.2mboep/d production cut through December. The group had planned to begin gradual monthly increases, starting with an additional 180,000 bpd in December, but postponed this due to weak demand. Meanwhile, China’s manufacturing sector surprised markets by expanding in October, suggesting some stabilization following recent economic stimulus measures. Residential property sales in China also rose in October, marking the first YoY growth of 2024 and further boosting confidence in its economic outlook. Another factor that may be underestimated is the rapid growth of India’s oil demand. Between 2003 and 2023, India’s oil consumption grew at 4% above the global average, accounting for 17% of global demand growth. Currently, India represents 5% of global oil consumption, with rising demand largely fuelled by a young population and a fast-growing economy. Nevertheless, with limited domestic reserves, India remains heavily reliant on imports, with only 13% of its 2023 crude needs met by local production. This growth in demand is expected to persist through 2040, with the working-age population projected to increase by 63 million annually. This week will be pivotal for energy markets as the U.S. presidential election approaches. Both Kamala Harris and Donald Trump support expanding domestic energy production and keeping prices affordable, though their methods differ. Harris advocates a balanced approach, integrating green energy technologies with current production to maintain price stability. She has reversed her stance on a fracking ban, recognizing the need for stable production during the green transition. Trump, meanwhile, proposes loosening environmental regulations to boost oil and gas output, aiming to grow U.S. market share. Regardless of the outcome, energy companies are calling for consistent, long-term policy to sustain investment momentum. Chevron CEO Mike Wirth recently emphasized that a coherent energy policy is essential to promote investment and ensure affordable, reliable energy supplies.

 

Industrial Metals

Rio Tinto’s recent acquisition of Arcadium Lithium for $6.7 billion underscores a strategic pivot towards bolstering its lithium production capabilities. This all-cash deal, which values Arcadium at a 90% premium, is seen as a crucial move to enhance Rio Tinto’s portfolio alongside its established aluminum and copper operations, facilitating the supply of essential materials for the growing battery market. As global markets focus on achieving net-zero emissions, the demand for lithium, vital for battery technology, is expected to soar. Recent governmental measures in China aimed at supporting its faltering economy are enhancing the outlook for metals. The Chinese government’s pledge to invigorate the property sector, a major driver of metal consumption, combined with hints of increased government borrowing, signals a more favorable environment for commodities. Iron ore prices have already shown resilience, rising following these announcements. Furthermore, the stabilization in copper demand is noteworthy, annual consumption has nearly doubled over the past decade, with a robust structural uptrend evident. Despite challenges from the property market, copper demand remains anchored in traditional sectors like construction, infrastructure, and manufacturing. The shift towards clean energy is significantly influencing copper demand as well. The growth of electric vehicles, projected to make up a significant share of copper consumption, along with substantial investments in solar and wind power, creates a compelling outlook for the market. With copper required for wiring, batteries, and energy infrastructure, projections indicate that renewable energy segments could soon account for over two-thirds of marginal copper demand, bolstering the case for price increases. Amid these dynamics, the aluminum market is also experiencing a tight supply scenario, with alumina prices hitting records due to various supply disruptions, such as those from Guinea and production outages in Australia. The challenges in sourcing raw materials have pressured aluminum producers, further fueling the bullish sentiment in metal markets. In essence, as global economies emphasize sustainable growth and energy transitions, the metals sector stands to gain significantly. Strong demand signals, coupled with strategic moves by major industry players like Rio Tinto, highlight a robust outlook for metals as essential components of future infrastructure and energy solutions.

 

Precious Metals

The outlook for gold, silver, and precious metals remain exceptionally positive, buoyed by robust demand and strategic investor interest. Gold prices have surged more than 30% this year, reaching record highs, with demand hitting 1,313 tons in the third quarter—an increase of 5% year-on-year. This growth in demand has resulted in the total value of gold surpassing $100 billion for the first time, driven by strong inflows into gold exchange-traded funds (ETFs) and increased investments in bars and coins, highlighting gold’s appeal as a hedge against economic uncertainty and inflation. Despite the favorable market conditions, some of the world’s largest gold miners are facing challenges in translating these high prices into profits. Newmont recently revised its operational forecast, reducing expected gold production for 2024 to 5.6 million ounces, down from the prior 6.0–6.2 million ounces range. This decreases, combined with increased contractor reliance (25% of costs) and labor inflation, drove Q3’s all-in sustaining cost (AISC) to $1’611/oz. Looking ahead, Newmont anticipates an AISC of around $1’500/oz and $1.8bn in annual sustaining capex, largely due to complex operational demands at newly acquired Lihir, Brucejack, and Cadia assets. While these assets present integration challenges, Newmont’s strong free cash flow and expanded $2bn share buyback highlight its financial stability, offering some offset to market concerns. These operational hurdles, however, appear unique to Newmont and may not reflect broader sector performance. Meanwhile, the precious metals market is undergoing significant changes that enhance its attractiveness to investors. The gold-to-silver ratio indicates a growing retail interest in silver. Furthermore, ongoing geopolitical tensions and macroeconomic uncertainties continue to bolster the perception of gold and silver as safe-haven assets. In summary, while specific challenges persist for some leading gold producers like Newmont, the overall market dynamics and demand fundamentals present compelling opportunities for investors in gold and silver equities. The sector is well-positioned for potential growth and profitability as it adapts to evolving conditions. It is clear that there is a significant disparity between the soaring prices of gold and silver and the valuations of the companies that mine these precious metals – it should be only a matter of time before share prices adjust.