Natural Resources
Comment
16 January 2023
Spring in the Air?
It's early days but so far it has been a been an impressive start to the year. The S&P 500 and FTSE100 are up ~ 3%. In the mining world gold is up similarly, and copper and mining equities have been on a tear, up ~ 8%. Only four years in the last twenty have seen all three in positive territory by the end of Jan.
It seems that COVID, war and recession fears are giving way to a more optimistic outlook, or at least one where we can see through most of the current problems.
Thumbing through the various editions of the 2023 investment outlook pieces from the global investment banks one feels a growing sense of cautious optimism. Conceivably that’s just human nature at the beginning of a new year or good sales patter, and in any case not difficult to achieve given the generally dire position the world’s been in during most of the last two years. Nevertheless, it does feel, if a tad prematurely, that spring could be in the air.
The short-term positives for miners are perhaps becoming clearer. With hints of economic stimulus as China emerges from its COVID isolation and an early Lunar new year (in January rather than February), prospects of a weakening US$ and global base metal inventories at extreme lows, expectations of a restocking cycle and prospective growth recovery are helping underpin commodity price expectations.
Although the banks disagree on timing, they broadly expect 2023 to see inflation peak, growth to bottom out, supply chain bottlenecks to ease and the FED to go on pause in early Q2.
That is not to say the banks are painting a rosy picture.
There is little disagreement that the period of adjustment after the last 40 years of the ‘Great Moderation’ (40 years of steady growth and low inflation) is with us for some time yet and will be characterised by increased macro volatility in the years ahead.
For 2023 most see Europe in recession and the US flirting with one. Although historically the market only usually bottoms after the FED starts to cut and cyclical stocks tend to want to see signs of growth before they start to perform, the jury is still out on whether stocks and bonds have fully priced in the downside.
However, as JP Morgan writes, this is the most predicted recession in 50 years and so must, to some degree at least, already be “in the price” even if consensus forward earnings expectations are still likely to fall by 10 – 20%.
Meanwhile, almost all point out that the “mega trends” of decarbonisation, supply chain bifurcation and urbanisation (UN forecasts 1 billion people a decade through 2040) will continue and possibly accelerate. All of which have significant implications for metals demand growth on their own.
It may be widely optimistic, but it could be that 2023 will be a year of economic stabilisation and recovery, with 2024 and beyond having the potential for some kind of synchronised global growth.
Back in November S&P Global Market intelligence’s 2023 Metals and Mining Outlook suggested that supply constraints across commodities deemed critical to the energy transition effort are forecast to emerge as early as 2024. We, amongst many others, have made a similar case for copper from 2026.
The broad implications, whatever happens in the immediate term, are that metal prices in general are likely to stay higher, relative to history, and will need to be high enough to encourage additional new capacity to come on stream.
For those miners and copper producers in particular, concerned over the project development pipeline or lack of one, it may be prudent to get their currently well stuffed wallets out sooner rather than later if they don’t want to rely on the drill bit to maintain market share and deliver on time.
Happy New Year!
Charlie Cryer
Head of RFC Ambrian London
+44 (0)20 3440 6834
charlie.cryer@rfcambrian.com