Unveiling the latest trends in global commodity markets - March 2024

As the first quarter of 2024 comes to a close it is worth recapping the main themes and events that influence commodity moves. January's inflation figures from the US surpassed forecasts, injecting uncertainty into the metals markets. Initially, expectations for near-term interest rate reductions were quelled, putting short-term pressure on gold prices. Yet, the anticipation of future rate cuts led to some upgrades to consensus price forecasts.

In a similar vein, industrial metals prices felt the pinch from a temporary dip in manufacturing activity in China, attributed to the Lunar New Year celebrations. However, with the global economy expected to bounce back in the coming year, spurred by a surge in artificial intelligence speculation (resource intensive), electric vehicle production (resource intensive), and the shift towards renewable energy (resource intensive), the overall average price predictions for metals saw a positive revision.

In February, the dynamics of the metals markets were once again influenced by macroeconomic developments in the US and China. The release of the US inflation report for January revealed a Consumer Price Index increase of 3.1% from the previous January, tempering hopes for imminent US interest rate reductions and leading to higher Treasury yields and a stronger dollar. Despite a mix of outlooks, the varied US economic indicators throughout February swayed market sentiments, and escalating geopolitical tensions drove up gold prices in the latter half of the month.

Conversely, China witnessed its consumer price index decline by 0.8% year-over-year in January, marking its most significant drop in 15 years. Following this, the financial troubles of Evergrande came to a head when a Hong Kong judge mandated the liquidation of the troubled real estate behemoth due to its failure to manage its debts.

Strategic Outlook & Summary

As we move forward, the global economic indicators, Federal Reserve policies, and geopolitical events will continue to play pivotal roles in shaping market sentiment and commodity prices. Investors are advised to remain vigilant when navigating the current economic landscape and undertake appropriate risk analysis before embarking on their next trade. Now for the data:

Equity and Commodity Markets: An Overview

• U.S. Equity Markets: Propelled by the "Magnificent 5" megacap tech stocks, including Nvidia and Microsoft, the SP500 experienced a robust increase, soaring over 7% in the reviewed period.
• ASX 200 Resources Index: Recorded a gain of 2.7%, reflecting a positive outlook in the resources sector.
• Interest Rates: The Federal Reserve maintained steady rates, with Chairman Powell indicating the possibility of three rate cuts within 2024, keeping market participants on alert.
• US Dollar Strength: An appreciation of 1.4% in the dollar index highlights the enduring allure of the US economy.

Precious and Industrial Metals: A Spotlight

Gold: 

• March concluded with gold reaching an all-time nominal high, underpinned by a bullish trend that captivated the market. The yellow metal has broken out of Its 4 Year price consolidation with a strong “cup & handle” formation underway, mainly driven by monetary demand (store of value). 
• A softer US Dollar in March supports the price - the London Bullion Market Association (LBMA) gold price hit a new high of $2,180/oz on Mar11, with surging demand fuelled by elevated geopolitical risks and an uncertain economic backdrop.

Silver:

• Silver demand is heavily influenced by industrial demand (most conductive metal) i.e. solar PV, semiconductors. 
• Monetary demand is anticipated to increase when (if) Gold has a sustained breakout.

Copper and Nickel: 

Copper prices surged following production cut agreements among major Chinese smelters, while nickel rallied amidst production quota concerns in Indonesia and anticipations of US rate cuts.

• COPPER: Softer US Dollar in March supports Cu price. Investors went long on copper after 19 major copper smelters in China agreed on production curtailments March 13. 
• The LME Cu price to $9,083/t ton March 18, the highest since February 2023. 
• Elevated copper prices have slowed the seasonal recovery in copper demand as downstream consumers postpone placing orders. 
• In China, cathode stocks at the Shanghai Futures Exchange (SHFE) continued to climb rapidly. 
• Outside China, supply-side disruptions also provided support to copper prices (Zambia, Panama, Chile, Germany).
• NICKEL: The Ni Market is expected to remain oversupplied in 2024 on expectations that downward pressure on Indonesia's primary nickel output will ease as more quotas are approved. 
• The price dropped to $16,640/t on March 26, largely erasing the gains made during February and March's short covering rallies, partly due to news that the Indonesian government is working to accelerate the approval of mining licenses.

Lithium: 

• Lithium prices faced a downtrend due to a surplus in China's inventories and subdued demand for EVs. A major correction in prices has occurred since late 2022’s peak “frenzy” due to excessive stocking by OEMs. 
• Prices inched up in March, supported by production cuts, auction results and improved sentiment in traction battery demand. Prices rose 5.1% and 2.1%, respectively (carbonate) CIF Asia. February passenger plug-in electric vehicle (PEV) sales across top markets dropped 30.8% month over month, pulled down by a 42.1% decline in China. 
• Li producers are returning to auctions to discover a "true" price, as the speed of price recovery in the first half of the month has disappointed after a series of supply cuts.

Iron Ore: 

• The IODEX 62% Fe fines benchmark dropped to $100.20 per dry metric ton on March 15 from $129.50/t on Feb. 14 as sentiment cooled on changing expectations regarding the China demand outlook. 
• Steel market fundamentals have deteriorated in China, with oversupply driving inventories up and prices and profitability down. Nevertheless, China's iron ore imports increased a robust 7.9% year over year in January-February combined to 209.5 million metric tons. 
• Strong imports have fuelled stocks at China's ports, which rose to 138.2 MMt on March 8, helped by slower offtake from domestic steel mills. Prices appear poised to head below $100.00/t in the near term. 
• While a seasonal pickup in construction activity in China will help bolster prices, price forecasts remain subdued.

Uranium

• Uranium prices have consolidated in recent weeks, yet the outlook is still very promising based on supply/demand fundamentals.
• The recent significant uptick in yellowcake (U₃O₈) spot price has been driven by a continued decline in mobile uranium inventories. A structural supply shortage is projected over the next 10 years with limited scope for a near-term supply response.
• The decline in mobile uranium inventories is underpinned by many factors, including: COVID-19 pandemic production declines, the advent of the Sprott Physical Uranium Trust (SPUT), and strategic acquisitions by junior U companies to support future project financings.
• Recent price increases due to reduction in production targets for the World's largest producer (Kazatomprom) (due to acid shortages/price increases, recovery decline from existing ILS mines & likely deliberate move to influence price upwards. Similar situation from Cameco (second largest global producer).
• Significant resurgence in global interest in nuclear power due to its low carbon emission intensity and practicality for achieving “net zero” targets by 2050.
• Several new nuclear reactor builds underway (dominated by China) and also, restarts in USA, Japan & Europe.
• Major demand anticipated over coming years from AI & datacentre boom (highly energy intensive), with major tech companies seeking reliable base load power and a low carbon dioxide emission footprint.
• Term contracting (volume & price) increases since mi 2023 – signalling contracting has returned to fundamentals.
• Chinese demand for nuclear energy expected to grow from 18% to 35% of global uranium requirements by 2040.
• COP28: 22 countries have launched a declaration to triple nuclear energy by 2050 (Recognised as a 'green' source of energy)
• Uranium ETFs: Sprott Uranium Miner ETFs displayed a significant uptick in volumes, driven by the anticipated demand surge from the tech sector's expansion and a global pivot towards nuclear energy.

Energy Sector Dynamics

• Oil & Natural Gas: Oil markets rebounded with OPEC's production strategies and ongoing geopolitical tensions, whereas natural gas prices showed a diverging trend with a decrease in both North American and international markets.

Lead & Zinc: 

Market adjustments saw zinc prices rebounding, while lead demand remained tepid amidst a slower-than-anticipated economic recovery.

Lead

• Given the current macroeconomic environment, lead demand growth remains subdued compared to 2021.
• Demand subdued mainly from slower than forecasted recovery in Chinese economy

Zinc

• Tightening supply has driven the London Metal Exchange three-month (LME 3M) zinc price to $2,561 per metric ton on March 15, triggered by Young Poong Corp. curtailing production at its Seokpo smelter in early March.
• Glencore PLC's Nordenham zinc smelter in Germany has resumed operations partially, but given curbed production at Seokpo, we expect a more sedate rise of 2.4% in global refined zinc supply in 2024.
• China's economic targets for 2024 were announced in the recently concluded parliamentary Two Sessions meeting, including a 5% GDP growth target. Zn consumption forecasted to grow at 2% in 2024

Chart of the Month - Copper - Bullish Outlook Based on Fundamentals

• The shift toward decarbonisation will require vast amounts of Cu to extend transmission lines, install new wire in renewable power sources, and electrify existing appliances and cars. Despite this, the mining industry has spent the past decade moving much of its profits away from finding and developing major new copper projects.
• The preference for safe, short-term returns has led to a massive underinvestment in new copper mines and exploration, jeopardizing the metal-intensive energy transition.
• ⇒ COPPER PRICES ARE EXPECTED TO INCREASE OVER THE COMING YEARS TO INCENTIVISE NEW SUPPLY

References:

S&P Global Capital IQ, Bloomberg, Incrementum AG, Numerco