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Financial and commodity markets continue to grapple with uncertainty around the prospect of a global recession, the inflation-fighting actions of the US Federal Reserve, and war in Ukraine. Throw in the looming northern hemisphere winter, energy shortages, a dysfunctional UK Tory party, inflation, and a belligerent and unpredictable China, and you have a heady cocktail of risk factors to occupy investors’ minds.
Pilbara Minerals has hit an all-time share price high this week after revealing the extent of its staggering cash build. Improved production from the Pilgangoora operation and rising lithium prices have generated A$783.7 million for Pilbara during the September quarter. The company closed the quarter with a cash balance of $1.375 billion and was in a net cash position of $1.2 billion – making it a cash cow.
Lithium prices have defied the sceptics as the demand side remains constrained, even amongst equity market volatility. The near-term outlook remains strong, as the supply side is struggling to grow as fast as demand is growing. Asia remains the biggest market for Australian lithium, but demand is growing in Europe and the US as carmakers there accelerate the switch to EVs. Lithium is on track to become Australia’s fifth-most valuable export commodity, surpassing beef and wheat, and on par with copper and crude oil. Exports of the battery metal are forecast to reach A$13.8 billion this financial year, a more than tenfold rise over two years.
Whilst lithium remains the stand-out in the resource sector, many other commodities are confronted with major supply-side issues and ultra-low inventory levels, which in turn is providing downside price protection. Copper is a great example, it’s fundamental to the world economy, yet despite historically strong copper prices, mining project approval rates have dwindled to cyclical lows. The world needs a new La Escondida, the world’s largest copper mine by a country mile, into production each year.
There are drastic shortages of the metal at present, with the amount of available copper in the London Metal Exchange’s warehouse network halving over the past fortnights. Headline stocks of 139,000 tonnes may look healthy enough but a string of daily cancellations means that 48% of that tonnage is now awaiting physical load-out, leaving just under 73,000 tonnes of live stocks. One of the major reasons for the shortage lies in China, where a squeeze on the Shanghai Futures Exchange has generated a scramble for metal. As the graphic shows, Shanghai copper stocks have fallen from a high of 700,000t at one point back in 2014 to just 25,000t currently.
The energy sector will likely gather more momentum, mainly because of all the supply headwinds being thrown in its path, whilst demand remains robust as winter approaches in the northern hemisphere. Importantly from a price perspective, OPEC+ is doing its best to counter market uncertainty by committing itself to output cuts, of 2 million barrels per day, which is equal to 2% of global supply. The latest production cuts are based on existing baseline figures, which means the actual cuts would be less deep because OPEC+ fell about 3.6 million barrels per day short of its output target in August.
Gold seemingly remains unloved – but only if you look at it in US terms – in all other major currencies it’s outperforming. Gold has rebounded from recent 2-year lows as both the US dollar and Treasury yields have eased, on expectations that major interest rate hikes by the Federal Reserve may soon be over. The Fed’s relentless monetary tightening to fight inflation this year has sent bullion down about 20% from its March peak, but a more optimistic tone is emerging in the market.