It’s been a tough start to 2024 for most major miners except those operating in the uranium space with commodities yet to record a winning week within the Bloomberg Commodity Index.
The index tracks the performance of 24 major commodity futures spread almost evenly between energy, metals, and agriculture trading lower by about 1% so far this month.
While gold made a notable move in 2023 reaching record highs, last year saw key commodities indexes posting their largest losses in 5 years, with Saxo Head of Commodity Strategy Ole Hansen noting losses in grains, industrial as well as precious metals only partly offset by gains in energy and soft commodities.
The Bloomberg Industrial Metal index trades down 5% on the month with losses being led by aluminium and zinc.
Saxo’s Head of Commodity Strategy says the market’s main focus remains geopolitical tensions in the Middle East, China economic weakness and not least the timing, pace, and depth of US and EU rate cuts in 2024.
He says copper prices remain “mostly rangebound” as China and rest of the world demand worries continue to be offset by miners cutting production forecasts driven by declining ore quality, water restrictions, and increased scrutiny of new permits.
“The combination of supply worries together with a strong push towards electrification, not least in China, continue to provide support in the short-term. However, to see a sustained rally towards a fresh record high, the market will need answers to the questions about the timing of and depth of future US rate cuts. Only then may we see renewed restocking by companies that offloaded metals last year amid the rising cost of financing their stockpiles.”
Recently, Saxo’s strategy team released its Q1 2024 outlook which outlined the reasons Saxo believes 2024 could become the “year of the metals” with focus on gold, silver, platinum, and copper.
Central banks will likely embark on rate cuts in 2024, marking a shift from the tightening stance in the previous year. As such, Saxo says opportunities will therefore arise in precious metals.
Saxo believes the prospect for lower real yields and lower funding costs as central bank rate cuts will drive a revival in demand from interest rate-sensitive investors. Adding to these developments a fragmented world supporting continued demand from central banks and haven demand from others, the potential for a fresh record remains on the cards.
Rate cuts will be a welcome sight as mining companies continue to struggle controlling costs towards labour, fuel, and materials. Hansen notes in addition to this, the sector broadly has been struggling with harder-to-mine deposits and lower ore grades.
According to multinational services and advisory firm EY, accessing capital is a top priority for many resources companies moved as the sector competes for investment and incentives to accelerate exploration and development of minerals and metals vital to the energy transition.
“We’re seeing a shift from a short-term focus on returns to a long-term view of value, encouraged by recognition that longer-term investment horizons are required to meet 2050 net zero goals.
“We’re seeing a shift from a short-term focus on returns to a long-term view of value, encouraged by recognition that longer-term investment horizons are required to meet 2050 net zero goals“
Inflationary pressure has fast-tracked technology development, as miners focus on digital tools that can accelerate productivity. The pace of digital transformation is highlighting the importance of cybersecurity, which is new to the ranking this year. Supply constraints are a catalyst for consideration of circular economy principles, with miners more conscious of minimizing waste.”
Barrick Gold (NYSE:GOLD) is one major to be affected by the current cost environment, plunging in value earlier this year. Saxo’s Hansen says this is the most it’s dropped since August 2020 after the Canadian miner reported higher costs and lower-than-expected gold sales for the past quarter.
“These developments, together with expectations for rising demand in the coming years for precious metals as funding costs come down, and most importantly for green transformation metals as the electrification of the world gathers momentum, basically mean that higher commodity prices will be needed to incentivize higher production. Until such time, the mining industry may struggle to deliver the returns, making the sector attractive from an investment perspective.”
Write to Adam Orlando at Mining.com.au
Images: Barrick Gold
