If you are a mining investor pondering what would be the circumstances to make you happiest over the next year, think no more as broker Jefferies has done the work for you.
The US broker has published a list of ten possible surprises that might be in store in 2023, all of which bode well for the mining sector.
Before it moves to the list, Jefferies sets out its stall by commenting that it believes consensus predictions for commodity prices and mining share price performance over the next year are too low.
“Our preferred commodity for a 12+ month horizon is copper, but we believe the sector, in general, is poised to materially outperform the broader equity markets once again,” it adds.
Number one on the list is a recovery in Chinese property markets.
While Jefferies does not argue against the view that Chinese housing is in structural decline, a policy-driven recovery is increasingly likely as the government step in.
"A recovery in housing starts would blindside the markets and would be very bullish for mining".
Number two also relates to China and is the level of pent-up demand released as consumers come out of lockdown.
“Yes, the propensity to spend in China is not what it is in the US/Europe, but surely there must be some pent-up demand from the hundreds of millions of consumers who have been severely impacted by lockdowns.
“Consumer demand is not necessarily metals intensive, but a strong recovery for the Chinese consumer would be bullish at the margin.”
A third possibility is a 'New Industrial Revolution' in the US sparked by onshoring of manufacturing and leading to a metals-intensive capex boom there.
The US is also the focus for number four, which is an end to Fed rate hikes leading to a weaker dollar, which would be a clear positive for prices of metals and other mined commodities.
Alternatively (five), predictions of a deep recession in the US might not materialise with a soft landing or shallow recession a positive surprise.
Number six relates to copper itself and the squeeze in coming for the metal.
“Most investors are bullish copper for the long term, but very few believe the next bull market has begun yet.
There should be signs of this in the second half of 2023, Jefferies believes, as copper benefits from some recovery in Chinese demand, the ongoing global buildout of renewable power and growing demand for electric vehicles.
“We place a relatively high probability (~50%) of copper breaking out to new highs in the second half of 2023."
Coal Strength is number seven. "The market is pricing in a significant decline in seaborne coal prices in 2023. We model this as well, but risk to this assumption is to the upside, especially if the war in Ukraine continues".
M&A makes an appearance at eight.
“Every mining cycle has major M&A. This one will be no different, in our view. Does the large-scale M&A begin in 2023? The likelihood of large M&A in mining increases if/when China recovers. “
Nine is the possibility of an end to the war in Ukraine, which would be negative for coal prices, but a positive for demand for base metals and steel though the reverse is true if the war escalates.
Finally, supply growth of most major mined commodities surprises to the downside once again, ie is worse than expected. The impact of supply constraints in an environment of growing demand would be higher prices.
Unsurprisingly, given the bullish tone of the note, there are plenty of buy recommendations for specific companies with all of the European majors Rio Tinto (current price 5,663p), Glencore (548p), Anglo American (3,124p). BHP (2,535p), Antofagasta (1,519p) and South32 (224p) in favour.