April’s deep dive into commodities and market movements

Tech Titans Wobble, Markets Tremble

The downturn was inevitable. Following a five-month period of uninterrupted growth, culminating at the end of 2023 and continuing into the early months of 2024, the US equity markets experienced a decline over the past month. This shift was driven by a combination of uneven earnings reports, uncertainty regarding the Federal Reserve's forthcoming decisions, and volatile market sentiment, which collectively pressured stock prices downward yesterday. Meanwhile, 2-year Treasury yields have reached their highest levels since November, surpassing the significant 5% threshold.

April saw the S&P 500 and the Dow Jones drop by 4.0% and 4.4% respectively, largely due to mixed earnings reports from the dominant forces in tech, dubbed the "Magnificent 7" MegaCap stocks. This month, the spotlight shone unevenly across these tech giants. Alphabet excelled with record quarterly net income, leading to a 10% surge in its stock price, while Microsoft also enjoyed gains after robust earnings reports. Conversely, Tesla faltered on revenue forecasts, despite a bounce from news of cheaper models and AI innovations in the pipeline. Meta, despite a significant earnings increase, saw its shares decline following announcements of heavy investments in AI, which have yet to turn a profit.

Inflation and Interest Rates: A Tightening Grip

A surprise uptick in March inflation cast a long shadow, tempering the earlier enthusiasm for potential rate cuts by the U.S. Federal Reserve. With the Federal Reserve likely to maintain the status quo on interest rates amidst stubborn inflation and a strong U.S. economy that missed Q1 growth expectations slightly, investor sentiment has shown signs of caution.

Commodity Markets: The Real Asset Rally

April was a month of ascendance for global commodity indices, with the S&P GSCI climbing by 1.5% and its agricultural counterpart seeing a more modest rise of 0.3%. This rally was underpinned by a notable surge in gold, which broke past the $US2400 mark, setting a new nominal record before experiencing a minor pullback. 

The base metals sector also saw impressive gains with zinc and copper prices climbing by 18.3% and 13.2% respectively, driven by robust demand from improved manufacturing activities in the U.S. and China, and by ongoing supply disruptions.

Interestingly, in April, futures prices for copper are now surpassing spot prices, resulting in the largest contango seen in more than two decades. This is very bullish for the red metal.

Spotlight on Precious Metals: Gold and Silver Shine

Gold's performance was particularly stellar, rallying 20% in two months amid high real bond yields and a strong U.S. dollar — factors that traditionally restrain its ascent. This paradoxical rise is attributed to heightened safe-haven demand amidst global geopolitical tensions and increased central bank purchases. Silver, while lagging behind gold, still shows potential for a significant revaluation, indicated by an historically low silver-to-gold ratio.

Energy and Industry: The Fuel of Conflict and Growth

The energy sector felt the heat from ongoing geopolitical conflicts, particularly affecting oil and natural gas prices. The conflict in the Middle East has led to volatile LNG prices, driven by supply concerns and strategic route changes for shipments avoiding conflict zones. In base metals, nickel surged approximately 13% due to sanctions impacting Russian supply chains, coupled with heightened Chinese demand.

Manufacturing Pulse: PMI'S in Expansion

The Global, U.S., and Chinese Manufacturing Purchasing Managers' Index (PMI) readings all remained above the critical 50 mark, signifying continued expansion in manufacturing — a key driver for the commodity price surge.

Looking Forward: Caution Amidst Growth

As April ends, the market landscape presents a complex tapestry of growth tempered by geopolitical and economic uncertainties. Commodity prices continue to benefit from a mix of supply constraints and vigorous demand across various sectors, setting the stage for a potentially turbulent but opportunity-rich May. Investors remain watchful, balancing the allure of commodities with the overarching uncertainties that loom large on the economic horizon.

Some significant news events from the sector: - Market Dynamics and Corporate Actions

BHP & AngloAmerican potential mega merger 

The global copper market is currently facing a significant supply crunch, exacerbated by a heavy reliance on older mines with diminishing ore grades. This situation has become increasingly acute as data reveals that the top 20 copper mines, most of which are over a century old and predominantly located in South America, are struggling to keep up with demand. This backdrop of constrained supply provides a compelling explanation for BHP's aggressive move to acquire rival AngloAmerican.

BHP's bid is strategically focused on securing AngloAmerican's valuable copper assets, which are crucial at a time when copper demand continues to rise amidst a push for green technologies and electrification. Should this acquisition succeed, BHP is poised to not only secure its supply of copper but also to ascend as the world's leading copper producer, surpassing its competitors by a substantial margin of over 30%. This strategic manoeuvre highlights BHP’s ambition and foresight in securing a dominant position in the copper market to meet the future demands of a rapidly evolving global economy.

Nevertheless, the $39 billion offer has not yet persuaded Anglo American to proceed with a sale, and it is expected that this narrative will persist over the coming months. Additionally, South African regulatory authorities are likely to scrutinize this transaction meticulously, considering Anglo American's significant importance to the nation's economy.

Chart of the Month - Copper supply crunch

The world now depends more than ever on older mines with declining ore grades

In 2023, the top 20 copper mines by production were predominantly composed of older, established mines, some of which were started over 200 years ago! BHP's rationale is becoming clearer. Anglo's current "pounds in the ground" valuation is low due to poor equity performance over the last few years. Couple this with the excessive time, money and effort required to discover, permit, build and operate a major copper mine, BHP's bid seems very shrewd and opportunistic and my signal a bottom in the commodity market.

OTHER NOTABLE NEWS FROM THE SECTOR

Energy Fuels and Base Resources Merger: Energy Fuels recently announced its acquisition of Base Resources, where Base shareholders will now own 16.4% of the newly formed entity. This strategic merger is set to enhance Energy Fuels' capabilities in producing Rare Earths concentrates by utilizing the significant monazite resources Base held in Africa, primarily at its White Mesa mill. This move signifies a strategic realignment to capitalize on the increasing demand for rare earth minerals critical for various high-tech applications.

Australian Government’s Financial Backing: In a significant push to bolster the national critical minerals sector, the Australian government has rolled out A$585 million in loans to` facilitate the development of critical minerals projects. This funding includes A$400 million directed towards Alpha HPA to establish a high-purity alumina production facility in Gladstone, and A$185 million to Renascor Resources for setting up a graphite concentrator in Eyre Peninsula. These projects are expected to strengthen Australia's position in the global critical minerals market and reduce dependency on imports.

Gina Rinehart's Investment in Lynas Rare Earths: In a recent notable market move, Gina Rinehart's Hancock Prospecting acquired a 5.82% stake in Lynas Rare Earths. This acquisition has sparked discussions about possible sector consolidation, especially considering Rinehart's recent investments in the Australian lithium market and historical merger talks between Lynas and MP Materials. This could potentially reshape the competitive landscape in the rare earths sector.

Zijin Mining and Regulatory Challenges: Zijin Mining, a major player in the copper and cobalt market, recently faced a suspension of its license after shipments from its Congolese project were returned due to excessive radiation levels. This incident has prompted an ongoing investigation and highlights the regulatory and environmental challenges facing mining companies in resource-rich but sensitive areas.