Market Commentary - Metals Team, August 2022

15 September 2022

By Mark Smith & Georges Lequime

Uncertainty is predictably the new normal

Europe, the UK, China, Japan and the US are all slowing, though some more intentionally than others. With so much market uncertainty, we read with interest a release (in August) from the world’s largest mining company (BHP) on the economic and commodity outlook. In a nutshell, short-term cautious and longer-term positive. On the economic side, BHP see ex-China economic pressure partly offset by sequential improvement in China. Moreover, the trend towards decarbonising power has been given a boost with the global strive for greater energy independence, however metal supply to meet demand is woefully inadequate.

In summary here is their pearls of wisdom:

• An ex-China economic deceleration, US might avoid a 2023 recession, but Europe will struggle. Emerging markets accounting for 30% of global commodity demand face pressing challenges.
• Reasonable confidence in China with a 3.25% 2023 growth rate.
• The mining cost curve has steepened in recent months, with 10-15% cost increases on a unit basis
• Political and policy uncertainty are key risks to base metal supply.
• Potential supply constraints. It’s unclear where the raw materials required to fuel the energy transition will come from. BHP estimates that in order to fulfil a plausible upside case for copper demand, for example, capex of a quarter of a trillion dollars would be required, but even through the recent bull cycle, investment has not materialised.
• EV sales are expected to reach 13% of global auto sales in 2022. Lower than expected sales in the US and Europe are likely to be bolstered by a 52% y/y increase in Chinese sales to 10.3 million units. Looking forward BHP see the evolution of subsidies in other developed economies, increasing battery raw material costs, increasing vehicle range and battery chemistry speculation to be key themes in the space.

The Amati Strategic Metals Fund is positioned well to deal with the above mentioned scenarios, given that our exposure to battery metals is hedged to some degree by our precious metals investments. However, mixed signals from the Fed on the size of the next interest rate increase weighed on the gold price in August, with bullion slipping below $1,750/oz as the U.S. Dollar Index rose to over 108. Fed Chair Jerome Powell’s speech at Jackson Hole was hawkish (as expected), signalling another 75 bp to come in September. Powell did comment that it would be appropriate to slow down the pace of increases at some point; however, the Fed is willing to risk a recession to fight inflation. This has yet to be tested and we are not selling out precious metal investments just yet.

We are visiting Vulcan Energy in Germany in a few days, to review the geothermal and lithium brine potential of the Upper Rhine valley. Shortly after we are attending the Precious Metals Summit in Colorado - the world’s premier independent investment conference focused on explorers, developers and emerging producers of gold, silver and platinum group metals. This will certainly generate investment ideas. Thereafter we are visiting I-80 Gold in Nevada, to see the potential of our investment. We will provide a full site visit feed back with the launch of our Amati Site Visit Series.