I had the opportunity to discuss the current situation with respect to some key commodities. Please click on the link below to access and watch the interview:
Commodity markets have endured a tough week, which pretty much mirrors what’s happened in global equity markets. Investors have become more cautious about the near-term outlook due to the impact of higher-for-longer interest rates, and the impact on inflation and end-user demand – especially base metals, crude oil and iron ore. Gold too is being impacted by runaway bond yields.
Base metal markets are characterised by tepid demand, weak near-term growth prospects (especially from China), and growing stockpiles in metals warehouses. A high-profile example of these factors at work can be seen in the nickel market, where demand-supply fundamentals are weak, which means that the current surplus of metal is expected to grow next year – from 223,000 tons this year to 239,000 tons in 2024. This is based on data from the International Nickel Study Group. Not surprisingly, all of this has translated into weak nickel prices, which are down 38% this year. ne of the key factors is Indonesia, which is continuing to grow its output of what is known as nickel pig iron, as well as its new high-pressure acid leaching (HPAL) plants, which produce mixed hydroxide precipitate (MHP), which is a nickel intermediate product that is used as a primary feedstock in the production of nickel sulfate, which is crucial to the lithium-ion battery supply chain.
The $90 per barrel mark has proven to be a crucial threshold for oil, in terms of market psychology. There were indications that the oil market was in overbought territory, which is how have things have played out over the past week or so. The fundamentals for oil still remain strong, however there is a game of tug-of-war taking place at present between tightness in the physical market, against rising yields and a strong US dollar. With OPEC+ capping supply and inventory levels in the US remaining low, the supply side looks okay – it’s really the demand side that we’re focusing on and where there is some emerging weakness in the US.
Gold in A$ terms is down 2.5% over the past week, compared to a 4.1% fall in US$ terms, which means Australian producers are to a large degree insulated by the weaker A$. What we are seeing overall in the gold market is price volatility within an overall uptrend, which is something that’s been common throughout this rate raising cycle – and gold bulls won’t be shaken by this. Importantly, the key themes remain in place – central bank buying, strong Chinese demand, escalating debt and costs of servicing that debt.
The key factor that has driven gold over the past couple of decades has been the correlation with the growth of debt worldwide, which has skyrocketed, especially in the post-covid and post-GFC environments. In the US, servicing debt repayments now represents 2.5% of GDP and growing, so by 2028 it will exceed defence spending. This growth in debt has led to a decline in the value of virtually all currencies, including the US dollar. Central banks recognise this, and it’s no surprise that they have turned from being significant net sellers of gold 25 years ago, to strong net buyers of gold now. In fact, they have been buying at record levels in recent years.
The one real bright spot in the commodity space, uranium prices are up 38% YTD and have reached their highest level since the Fukushima nuclear disaster in 2011, on the back of rising demand and a slew of supply challenges, with futures trading around $73 a pound. Uranium and uranium mining stocks posted their best month in two years during September. Positive sentiment toward nuclear power is growing, and the WNA estimates that uranium demand will double by 2040. Western nations are strategically manoeuvring to reduce their dependence on Russia for both uranium supplies and related services.
Uranium fundamentals are the least exposed to China’s economic cycle and secular and cyclical challenges. At the same time the demand outlook is brightening, as governments re-embrace nuclear power to facilitate the shift away from fossil fuels. There have been unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds, which in turn means that utilities are accelerating their purchases under long-term agreements, which are on track to exceed last year’s 10-year high. Increasing contracting from utilities, as opposed to financial entities, has been the primary driver for the rise in the uranium price year to date.