Commodities: from light rock to heavy metals

In the latest episode of the Emerging Markets Equities podcast, Ben Shrewsbury and Tiago Rodrigues join Nick Robinson to discuss their recent trip to Bank of America's annual metals and mining conference in Miami. Topics include their trip, copper performance, rally in gold prices and more.

Transcript

Nick: Hello everybody, this is Nick Robinson from abrdn and you're listening to the Emerging Markets Equity Podcast, the show that explores the factors that underpin our thinking on emerging markets. We ask our expert guests the big questions, from key individuals to evolving trends, all with the goal to identify and profit from opportunities in the region. So, the last few months have been a busy time for commodities analysts. We've seen a big slump in electric vehicles, yet despite that, copper prices have spiked whilst the other green commodity used in batteries, lithium, is still in a bit of a slump. We've had the gold price rally to record highs, which is excited all the ancient gold bugs out there. And we've also had some potential mega M&A with BHP's attempt to buy Anglo, partly to get some more of that copper exposure. So today we're going to try and make sense of what's been going on in these various commodities markets. I'm lucky enough to be joined by my colleagues Tiago Rodrigues and Ben Shrewsbury. It's fair to say that they are commodities experts, and they've both just returned from Bank of America's annual metals and mining conference, which was held in Miami. Tiago is based in Brazil, so particularly close to companies in the Latam region, whilst Ben is London based. They're both also managers of our new Future Minerals Fund. So, their particularly well placed to give insights on commodities that are important to the energy transition. Guys welcome back to the podcast. 

Tiago: Thanks, Nick. Good to be back on the podcast.

Ben: Yeah, thank you Nick. Good to be here again. 

Nick: Great. So aside from sunny Miami weather and sandy beaches, which I hope you've got a bit of time to enjoy. What were the highlights from the conference for each of you? Maybe Tiago go first. 

Tiago: One of the key takeaways, and there were quite a few, was that the mining sector seems to be on the spotlight with the conference having one of the highest attendances, the very diverse, investor base attending it from specialists, to journalists. I think one of the key takeaways and insights is that everybody loves copper. From big mining companies keen to unlock growth in the copper space to investors keen on being exposed to the metal. I think M&A was also a hot topic with the BHP bid for Anglo taking the centre stage of many conversations between companies and investors. That said, M&A in the sector still, divided opinions with investors, questioning, the rationale for these deals and most mining companies still stating, their preference for building over buying, growth. And I think lastly, I would say another common theme was the energy transition, and implications to the sector. Certainly, there is a focus from companies in the industry to have a high-quality portfolio of assets and projects to be well exposed for the major trends, in the next decade.

Nick: Thanks, Tiago. Ben, was there anything that stood out in particular for you? 

Ben: Yeah, thanks, Nick. I mean, I think just the highlight for me is, is getting a very full update in a short period of time. So, the conference is only two days. But between us, Tiago and I met with 24 companies. And on top of that, you spend, you know, a lot of time speaking to other investors, catch up with sales side analysts and so on. So, you leave this conference with a lot of new information. It's a great opportunity to meet not only companies that we already invested and know well, but also it's the opportunity to meet names that we don't know so well, or just on our radar. And then even speaking to some private companies, sort of at the front edge of, you know, be it novel reaching or using AI in exploration. So there's a lot to, to cover and a lot taken away. And obviously it's also great that it's in Miami, right. Needless to say. 

Nick: Yeah, that helps. I remember I went to that conference in 2007 and I'll share my anecdote from that conference, which was, I guess, in 2007, it was the beginning of, global commodity supercycle, which was driven by this China investment theme. And I saw, I think it was Freeport present. And we went to Q&A at the end of a presentation, and one of the analysts in the audience said, yeah, so what are you going to do with this cash bonanza. The chief executive said, I'm sorry, I didn't hear that question. Do you mind repeating it. And the guy said, yeah, so what are you going to do with that cash bonanza. The CEO said, well, I actually heard that the first time. I just wanted to hear you say cash bonanza again. I think that really captured the mood back then when, there's an awful lot of optimism. And I guess that's normally, you know, something that you see at the peak of markets but actually we had a few good years even after that. So perhaps I'll move on. And, you know, we've talked already a little bit about copper, but it'd be great to just hear a bit more detail about what's going on there, because I know there's been some, supply demand issues within that commodity that's caused it to spike. And it's been a situation that's been ongoing now for a couple of months. So perhaps a bit more colour on what's been going on and how you see that evolving? 

Tiago: Sure. Maybe I will start and, Ben can compliment because we both, cover copper names and, copper is, one of our highest, convictions, within the mining sector. So, think the copper thesis is quite simple. But it's underpinned by a combination of, growing supply tightness and accelerating demand. We have, across desks at abrdn, a decent conviction on some of the companies exposed, to copper. And that companies that are well positioned to benefit from what we believe will be, secular trends, supporting, the metal. This is really a supply story, but from a demand point of view. I think what we're witnessing is, a robust growth, driven by all things related to electrification in energy transition. So green investments in spending such as EVs, renewable energy and grid upgrades have been growing at a fast pace on top of a traditional, source of demand, like manufacturing construction, which typically grows, in line with the global economy. So, these are additional sorts of demand growth on top of, already tight supply is what is causing the perception that we are entering a structural deficit in the copper supply and demand. 

Ben: Yeah. And then on top of that, just to cut the supply side. So, we've seen really years of underinvestment in new mines. And against that we've had growing depletion of the existing mines, falling grade profiles, and also cost inflation, which is just been present really across the mining industry. The challenge for supply now is that even with copper prices up and this growing demand picture ahead of us, it's just really hard to bring new supply online. The permitting process can be really lengthy. And even then, once you pass that stage, it takes a long time to get all the infrastructure in place do all the site preparation, and so on. And so even though we've had this recent copper price spike, it's almost impossible to supply to respond very quickly to that. And then just in terms of that recent price action, this is potentially the start of the structural supply deficit story playing out. The specific trigger in recent of months of last year or so has been on where depletion and or grades have been tough to fight against. Several key players have been having operational challenges. And then specifically a large mine in Panama has been taken offline due to some social and political challenges there. And we really see evidence of this tightness on not just copper price, but also the margin that a copper surplus can make. So, these could TCRC or treatment charges and refining charges and ensure that these are just drastically fallen. And basically what that means is there isn’t enough primary supply from the miners to go around. So yeah, it's interesting times for copper. We may well be at the foothills of this long, extended and expanding supply deficit story.

Nick: Yeah, and that certainly feels like quite an exciting time. And it's interesting you start seeing, you know, more famous investors like Stanley Druckenmiller talk up the copper story. And we're seeing more articles about copper in the FT. So, it's yeah it does seem like there's quite a lot going on there perhaps. Perhaps, you know, on the other green commodity I mentioned at the outset, lithium, I mean, this is quite an interesting commodity with a very flat cost curve across different miners. And yeah, this has been, commodity that has been at a pretty tough market. Yeah, how come there's been such a divergence there? And what do you attribute to that? 

Tiago: Sure. That's, that's an interesting one and I think what we've seen in the lithium market is the, is the typical, strong supply response to a short squeeze that happened a few years back. So, we saw lithium prices rising to very, high levels from the lows around $10,000 per tonne of LCE, up to nearly 80,000. And we've seen those prices, crashing down now, reaching, 14 to 15, level. I think the demand, picture for lithium is clear and strong with potential for nearly, tripling in size, by the end of the decade, largely driven by the growth in EVs. But we've also seen a strong response to these, growing demand. And lithium is not a particularly, scarce resource. So, I think it's a fine balance, for us to see where lithium prices will land. I think, as I said it's an EV story and we've seen a strong adoption in EVs, particularly in China, and coming in above expectations in recent years, while, in Europe and North American markets, the adoption has been slower recently, although still growing at a decent, pace. So, on the supply side, over the last couple of years, we've, seen the rise of supply coming from nontraditional places in from high-cost resources in China, I think it will be key to monitor the discipline in the sector, to understand, to what extent, and what sort of supply is at risk of scaling back, under the new price environment. Now a slowdown in supply as a response to the lower prices that we're seeing could well lead to another, cycle in the lithium market. But this is this is still unknown, I think one of the characteristics of the lithium market is, it's a fairly new, commodity. Some specialists even argue over whether lithium is a specialty chemical or a commodity. And due to the fast, growth and fast changing in this industry, will be growing, substantially over the next years. I think there's still a lack of transparency, both on the pricing side but as well as on the value chain in the industry. So, I think that reduces conviction on what will be the direction in terms of commodity prices. But you still can find opportunities in lithium equities, especially those that are believed to be, well position because they're low in the cost curve, or they're mispriced in the sense that they are pricing in, very conservative and low lithium prices that would make most of the cost curve unprofitable. So, it's still to be seen, what will be the next chapters in lithium, but certainly a very exciting space to monitor. 

Nick: Yeah. Okay. That sounds like it's perhaps, you know, not quite as attractive as copper today but, perhaps a little bit more uncertain. 

Tiago: Exactly. I think there is, certainly higher conviction on copper. Mainly because of the supply story. I think the supply picture is very clear. We're entering a phase where it would be harder to mine copper, and it will take time and will be more costly so that these are all quite supportive for the copper price, whereas for lithium, I think there is still not clear where prices were balanced, because everybody has a different opinion on the shape of the cost curve.

Nick: Thanks Taigo. If we continue our tour around the periodic table, perhaps we'll touch on gold next, you know, I mentioned at the outset that we've seen quite an unusual rally in gold prices this year, which has awakened a lot of, dormant gold bugs. You know, theres been news flow about the Chinese central bank buying more gold, buying fewer dollar-based assets. You know, it's that's something that's been important to that, that price performance?

Ben: Yeah, gold's been an interesting one to watch, Nick I mean, as you know, gold price traditionally moves inversely with the strength of the US dollar in interest rates. And that's because, you know, the yield you can get on treasuries becomes increasingly attractive versus holding gold, which obviously doesn't generate any kind of payment. And as the Fed's been increasing rates in the US and there's been this view of sort of higher for longer on interest rates were more resilient US economy and so what stubborn inflation. Why we would expect gold to be weaker in scenario. But what we've seen is the opposite. And that's mainly because of central banks buying more gold to diversify their reserves away from the US dollar. That's not just been seen in China. There are the central banks doing this as well, but they are the biggest and they come from low base. So around 4 or 5% of the Chinese central bank’s reserves sit in gold. And that compares to a global average in the mid-teens. That buying power has been material and central banks purchased the highest level of gold in the first quarter of the year in 2024 since the year 2000. And the higher prices that we're seeing doesn't seem to be actually slowing them down either. There's then also been a lot of over-the-counter purchases of gold, again, mainly in Asia. And this is where people are seeing as a store of value in uncertain times, namely from a geopolitical risk perspective. But it's also been reflected in a somewhat nervous consumer in China as well, taking more of a risk off attitude. But it's been as an equity investor, it's been really interesting for me to see that the share prices of gold miners, which are usually, you know, really sensitive to the gold price and basically add as a proxy to the metal, the shares haven't moved up like the commodity has. And that's because it's just a different marginal buyer of the stocks compared to the actual metals so yeah, that's been an interesting dynamic in the gold space recently. 

Nick: Right, yeah, that's been something to watch. Well, we're going to take a quick break now, but join us after the break where we're going to discuss uranium and talk a bit about some of the political risks associated with investing in miners. 

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Nick: Welcome back. So now we're going to discuss uranium which has been getting a lot more airtime regarding use in nuclear power and the importance of nuclear power, given the growing demand for power that's being driven by things like AI data centres. So, Ben perhaps you could take us through uranium and, and what you're seeing there. 

Ben: Yeah. Uranium is basically coming off the back of a very long bear cycle that really started in 2011, following the nuclear disaster in Japan. And following that, we had a great deal of capacity taken offline with nuclear power. And with that, a lot of stockpiled uranium was left in the in the market, and the market accordingly became oversupplied. The primary supply from miners was then slashed, and those stockpiled inventories we used, we used to make up the difference on supply versus demand for a number of years. But slowly those inventories have been dwindling down. And with primary supply sitting well below the level of demand, we're now seem to be moving into a point of actually, there’s a concern with the availability of supply of uranium for utilities and there now trying to secure uranium for their reactors. And it's that dynamic that's been putting the upward pressure in the uranium price. And it's really been furthered by primary supply has been quite slow to catch up again. So, Kazakhstan is the biggest producer of uranium, but they're having some issues with getting their supplies back online. And elsewhere, a lot of these sites have been offline for a decade, if not longer. So, you know, it's not a quick supply response to get product back to the market. And maybe just more broadly on the demand side, we're seeing a more supportive policy around nuclear power, it offers a zero carbon, you know, baseload generation, which isn't acceptable to weather like other renewables are So yeah, the demand picture is slowly improving as well. 

Nick: Perhaps also, it's worth just touching on some of the political risk that's associated with investing in mining companies. I mean, if I think back to investing in Brazilian mining companies, it wasn't that long ago that we saw a change in mining regulations to take more royalties. It's certainly a hot topic in places like Peru and Mexico as well, with the changing government there. You know, is this something that's particularly a risk at the moment given some high prices across these commodities?

Tiago: Yeah. That that's an interesting question, Nick. Certainly, I think it's, it's always a risk that when, when the industry is doing well and benefiting from the cash bonanza that you mentioned, Nick, that, governments will go in and try to target, higher taxes and higher royalties. But it's, I think the comfort that one, should take is, when you're investing in traditional mining jurisdictions where there is a a high degree of dependence from the country's economy, in terms of tax sources or growth coming from the mining industry in to quote a few examples, I think Chile's a quite it's a clear one. Where it is a country with the long tradition in mining where the economy, depends on mining and also tax revenues, depend on mining. I think that creates sort of a balance. This is sort of a risk assessment that we make, when we look into the mining companies to understand what sort of, jurisdictions they're exposed to understand if there is a history of, mining, tradition and what are the balance of risks because from time to time you see a lot of noise from everywhere globally, really on, on pressuring, the sector to, to increase taxation. But in, places where you have a good checks and balances in place, a traditional mining jurisdictions, usually, the industry and the sector can negotiate something that is reasonable and that's been the case in places like Chile, Peru, Australia to quote a few countries. 

Nick: Yeah. I feel like the base case is always that, you know, when there's, a dispute on, on royalties, you know, there's generally a workaround, except every now and then you get a kind of tail event like you did in Tanzania or Panama much more recently, where mines, mines get shut down, which is always a bit of a shock. 

Ben: Yeah, Panama is a good one to kind of raise their neck where it came as quite a surprise to see a major copper mine being shut down and, you know, this is where we need to be a bit more cognizant of the risks and as Tiago was mentioning, looking at mining countries like Chile and Peru, they tend to be quite stable and rational actors. Whereas in somewhere like Panama, there's really only one scaled mine there. So, there's less certainty around that. And, and something we have to be monitoring , but it really is a case by case basis. I mean, you know, just adding to that list that Tiago mentioned, South Africa, Zambia have been very stable from this kind of perspective recently, and even Ivanhoe appears to be operating well in the DRC for quite some time now. So yeah, these themes come and go, but certainly something we're always trying to keep on top of. 

Nick: Yeah. Thanks, Ben. Well, I mean, perhaps I'll finish off with, perhaps a bit of a cheeky question that that puts you both on the spot a bit. But as, managers of the Future Minerals Fund. If you were to pick one of the four commodities we've talked about today. So, uranium, gold, copper, lithium. Yeah. Which one would you pick over the next 12 months in terms of best price return? Sorry. It's unfair, isn't it.

Ben: Yeah. I'm going to quickly go first because I know Tiago and I probably can have the same answer here. And as you can tell, we've been very positive on the copper price and the story they're playing out, right. I mean, it feels like we're in the foothills of this expanding, supply deficit coming through. The copper equities have moved quite a lot higher in anticipation of that. But I know maybe on a 12 month view there's a little bit less certainty. But on a two, three plus year view. Yeah, that's really when I'd be parking my money. And where we're most exposed in the future Minerals Fund as well.

Nick: Tiago you concur with that or disagree?

Tiago: Yeah, I fully agree, they're isn’t much to add to be honest. I agree that copper is, where we, we have the strongest conviction, and I don't know where copper price would be the next 12 months. But certainly, over the long term, the reasons to believe that copper price will be well supported. And I think this is, one of the few, commodities where we take and I think people can take a long-term view, given the supply side that looks very, very supportive for higher prices and higher returns in this industry. 

Nick: Well that's great. I always appreciate it when people don't sit on the fence in terms of views so thanks for that. And that feels like a good place to draw the podcast to a close. So yeah, thanks very much Tiago and Ben for joining today.

Tiago: Thanks, Nick. 

Ben: Yeah, cheers Nick, thanks for having us on. 

Nick: And thanks to everyone who took the time today to listen in. If you enjoyed it, then please download our other podcasts from our website or wherever you normally get your podcasts. Watch out for the next episode and tune in.