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Resource sector sentiment remains dominated by two key players – the US and China – in terms of near-term direction. Markets are continuing to watch developments with respect to the US Federal Reserve for guidance on the trajectory of interest rate increases, and are also watching China just as closely for any perceived easing of Covid-zero restrictions. Developments on both the US and China fronts can be potentially meaningful for commodity markets, especially precious metals, iron ore and copper.

Along these lines we’ve seen positive recent moves in precious metals, iron ore and copper and moves in the equity prices of the big miners. This issue now is based on how far markets have moved recently, with a 20-30% rally in the major miners, how much is already priced in?

It seems as though there are two different perspectives here. Hedge funds with a shorter-term time horizon seem more inclined to sell take profits as the market has moved too far too fast, China reopening will not be a quick process and real demand is unlikely to improve until H2 2023. On the other hand, those investors with a longer-term horizon are less keen to sell the rally and don’t want to miss out on the China reopening trade.

ASX Exploration Spending at Record Levels

ASX exploration companies spent a record $1.07 billion on exploration during Q3 2022, which is the largest amount since business advisory firm BDO began tracking the junior resources sector in 2013. The level of spending was even more significant given it was achieved despite a 39% drop in financing inflows. What’s interesting about the data overall is that many companies are still very well-funded compared to long term average funding levels, and it was more difficult to raise funds for certain commodities during the most recent quarter. Overall, 38% of companies did not raise any funds during the quarter, which is the highest proportion for two years – which might be due to many already having sufficient cash, whilst others may have struggled.

Iron Ore

Iron ore is basically an option on China’s property sector, and we’ve seen prices fall from a record of $240 a tonne back in mid-2021 to a recent low below $80 a tonne (a fall of two-thirds), due to weakness in China’s construction sector, but accelerated by Chinese authorities’ attempts to cool iron ore prices. Importantly, the fourth quarter of the calendar year is seasonally when we see Chinese buyers restocking ahead of peak industrial demand recommencing during the first quarter of the new calendar year, so we will likely see a continuation of the iron ore price momentum generated by a possible easing of China’s covid-zero policy. Incentives and stimulus measures implemented by Chinese authorities will provide an additional boost.

Precious Metals

There is little doubt that the market is taking a more positive view on precious metals as we head into 2023, with the view based on the fact the worst is likely behind us with respect to the dual negatives of interest rates and the dollar. We’ve seen Q3 2022 central bank gold demand at record levels and US gold coin purchases this year at record levels. But it’s not just gold that is set to benefit, with demand for silver picking up and the Silver Institute predicting a 16% rise in global silver demand this year, creating the biggest deficit in decades.

And if we look at platinum, the World Platinum Investment Council (WPIC) expects the market to fall into deficit during 2023, as demand is forecast to rise by 19% to its second-highest level in history. Vehicle industry demand is being boosted by rising vehicle production and tighter regulations requiring more metal in exhaust systems to neutralise emissions. This should further boost sentiment for an emerging domestic producer like Chalice Mining Limited (ASX: CHN), with its Julimar project in the spotlight and corporate interest continuing to grow.

Perth Basin Gas Corporate Activity

Just how important energy is in the current environment is reflected in the ongoing battle for control of Perth Basin gas play, Warrego Energy (ASX: WGO). This is also positively impacting the performance of our coverage stock, Strike Energy (ASX: STX), which also has major exposure to the Perth Basin and is a project partner with WGO. What was initially a takeover battle between Strike Energy and Beach Energy for control of Warrego has now seen Gina Rinehart’s Hancock Energy enter the fray.

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