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Volatility and uncertainty in commodity markets are the key factors at present – with investors concerned about a range of factors including commodity demand, the trajectory of interest rates, and right now the potential for further financial contagion. Oh, and there are still lingering recession fears in some Western economies. So, it’s little wonder that commodities are experiencing a bumpy ride.
We might be faced with a situation this year like we did during 2020 (in the early stages of Covid), where it was China that was left to do the economic heavy lifting, as Western economies struggled in terms of their performance.
And if we look at the resource sector, it appears to be the commodities that are more highly correlated with China, that have performed, like iron ore for example.
Gold, not surprisingly has been a very strong performer, boosted by its safe-haven attraction in what are the most turbulent times in the finance and banking sectors since 2008. We’ve seen gold hit US$2000 per ounce and A$3000 per ounce, on risk and rate concerns. But gold was already expected to perform well in 2023, so the latest factors really are just icing on the cake.
We can see the strong performance of gold in a much broader context when we look at a 25-year chart of gold, with gold up more than 530% over the period and close to an all-time high. One of the biggest catalysts for gold has been investor and central bank buying, which has recently hit record levels. At the same time, debt levels around the world have continued to rise, both in the post GFC environment and the post covid environment, which in turn has impacted the value of currencies, thus encouraging central banks to buy even more gold. The US dollar has not been immune, as banks – in Russia and China – have looked to diversify their foreign reserves.
These are great times for gold producers who can keep their operating costs under control, especially domestic gold producers that are enjoying the benefits of the strong A$ price.
Oil was already oversold in my mind, and it’s been under further selling pressure from recent financial worries. I am positive on oil because it is a highly China-correlated commodity, with China demand set to rise strongly. China is the biggest importer of crude oil and now is close to being the biggest refiner of crude oil. As China reopens, we will see strength in crude oil prices.
I also believe that much of the recent price weakness over the past fortnight is not demand-supply related, rather is more speculator and financially driven, so as fundamentals reassert themselves, I believe prices will rise and stabilise during the course of 2023.
There is solid support for prices on the supply side too. The U.S. Energy Information Agency (EIA) last week released its March Drilling Productivity Report, which shows falling domestic US production. At the same time, we have OPEC+ that has further reaffirmed its commitment to the 2 million bpd output cut that it implemented last November, to the end of 2023. Russia has also said that it will extend its own 500,000-barrel-a-day crude output cut through June.
It looks like we are seeing a broadening of the sector consolidation theme, this time in nickel. So far copper has been the main focus, with major companies like BHP and RIO positioning themselves with major acquisitions worldwide. In the nickel sector, Andrew Forrest has launched a $760 million takeover bid for Mincor Resources, which has ramifications for BHP as it is a key supplier to BHP’s Nickel West business. Mincor has an off-take agreement in place with BHP, but it is not long term and covers only part of production from Mincor’s underground nickel sulphide mines.
Wyloo previously upset BHP’s plans when it beat its bigger rival in a takeover battle for Noront Resources and its high-grade nickel discovery in Canada. IGO, another supplier to Nickel West, owns 7 per cent of Mincor and as part of a joint venture with Wyloo is weighing up whether to build a nickel sulphate plant in Western Australia.
BHP will gain control of the West Musgrave copper-nickel project in a remote part of WA as part of its OZ Minerals takeover, and it could be developed to provide feedstock to Nickel West on top of in-house production Mt Keith and Leinster mines. In the meantime, the lower impurity Mincor ore is regarded as an important part of the Nickel West blend as the re-born BHP entity faces a big decision on whether to replace its ageing Kalgoorlie nickel smelter.