Energy Transition Materials ETF Monthly Report | December

29 December 2023

Energy Transition Materials ETF Key Takeaways | December

The Sprott Energy Transition Materials UCITS ETF rose 3.68% in November. Copper miners lead the index, staging a rally on a snapback on copper prices. Lithium and nickel miners continued to drift lower as lithium carbonate prices fell sharply again, and nickel prices continued to decline.

Violent macroeconomic reversals continued in November as the U.S. dollar and yields fell, sparking a risk-on rally and short covering on hedges. The equity market retraced the entirety of the previous three months of declines. The U.S. Federal Reserve (Fed) and the U.S. Treasury Department sent bullish signals to the market by discussing an end to rate hikes (and possible rate cuts), a lower Treasury quarterly refunding requirement, and a greater proportion of Treasury issuance skewed to the front end. The results were lower long-end yields (and a lower term premium) and a sharp decline in the U.S. dollar. These updates, and their coinciding with the geopolitical containment of the Israel-Hamas war, sent risk assets soaring as underexposed and over-hedged positions were reversed.

The lithium carbonate spot price continued its sharp descent in November, falling -27.57% for the month to close at $7.34 per pound.  Inventory destocking amid lower-than-expected EV sales has plagued the immature and volatile lithium market. The lithium carbonate spot price has fallen to levels not seen since the first half of 2021, near the beginning of its stupendous rally. (Notably, however, the November-end price of $7.34 per pound was still nearly three times the price in 2020.)

Despite the weakness in the spot price, lithium miners continue to show increased optimism. The lithium mining market segment declined only -1.15% over the month as miners ignored short-term price volatility and focused on lithium’s bright, long-term demand fundamentals.1 Driving this home, lithium exploration budgets for 2023 were at an all-time high of $830 billion, a 77% increase from 2022.  Only gold and copper had higher exploration budgets, and lithium beat out budgets in much larger markets such as nickel, silver, zinc and lead.

The miners were not the only lithium players to show confidence. In November, ExxonMobil — one of the world’s largest publicly traded international oil and gas companies — announced it will aim to become a leading supplier of lithium by 2030.    ExxonMobil has significant capital to devote towards lithium production, plus a market capitalization greater than all current lithium miners combined. Bloomberg estimates that ExxonMobil’s planned lithium production would make it one of the top 10 producers globally. 

Much more lithium exploration and development will be needed to meet the EV rollout, as discussed in this report. After its decline, the lithium carbonate spot price is now at a level that threatens some higher-cost projects under development and higher-cost low-grade lithium supply from China. Going forward, we believe a higher lithium price may be needed to incentivize needed supply, and weak current prices may continue to fuel mergers and acquisitions (M&A).

The nickel spot price fell -8.18% in November to $7.46 per pound, dropping during the month to its lowest level since 2020. Shares of nickel miners fell -0.17%.  As with lithium, softness in demand for EVs has weighed on the nickel spot price and squeezed producers' margins.

Another factor weighing on the nickel market is the rising supply from Indonesia, the world's largest nickel producer with 48% of global production. Indonesia was historically a producer of Class 2 nickel (which is unsuitable for batteries) but is increasingly using a processing method first announced in 2021 that turns this into battery-grade nickel. The U.S. and Indonesian presidents met in November, sparking investor concerns about a possible free trade agreement between the two countries. The U.S. Inflation Reduction Act (IRA) provides a $7,500 tax credit for EVs that meet specific sourcing criteria, including that “the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which the United States has a free trade agreement”.  A free trade agreement between the U.S. and Indonesia would give Indonesian nickel IRA compliance and provide additional supply to the U.S. market.

Expectations for EV demand are still sufficient to put the Class 1 nickel market into deficit before the end of the decade and have original equipment manufacturers concerned about the security of supply. To that end, Ford Motor Co. has said it will directly invest in a battery-grade nickel plant now under construction in Indonesia alongside PT Vale Indonesia and China’s Zhejiang Huayou Cobalt Co., with a projected total investment between the three companies of $4.5 billion.

 

ESG Copper Miners ETF Key Takeaways

The copper spot price rose 4.47% to $3.80 per pound in November, and shares of copper miners rose 5.27%.  November’s falling inflation data helped set market expectations that the Fed may not only be finished with its rate hikes but may actually cut rates, leading to greater economic demand for copper. Further, lower contracted copper treatment charges (which suggest supply is struggling to meet smelter demand), a spike in the premium of the Chinese copper price to exchange prices and declines in already low exchange copper inventories all supported the copper price in November.

The copper market is mature, yet supply has been rife with disruptions. Latin America is the world’s largest copper-producing region, and countries like Chile and Peru are struggling to maintain production levels. In November, the market was hit by the closing of a large mine in Panama that had produced about 1.5% of the world’s copper supply. Despite this, Latin America still leads copper’s exploration budget in 2023. Globally, copper budgets increased by the most since 2013. Notably, these budgets are led by the largest major miners investing in late-stage projects.  These large miners have made copper a strategic priority and have also been active in M&A activity, a trend we believe will continue into 2024.

 

Source of all performance data: Bloomberg / HANetf as of 30.11.2023. All performance figures are showing net data. Past performance is not indicative of future performance and when you invest in ETFs your capital is at risk.

Macro Outlook

We believe the post-pandemic era marks the beginning of a new supercycle for commodities, especially for the critical minerals covered in this report. The clean energy transition is just one trend driving demand higher. Geopolitical tensions and conflict are prompting global powers to reshore their supply chains and production to ensure industrial security—an about-face after many decades of offshoring.

These trends are commodity- and capital-intensive, creating a demand shock for commodities. They are also inflationary in nature. We expect a steady increase in demand to drive commodities in the medium term. Meanwhile, the commodity demand shock is colliding with a supply situation that is woefully inadequate. Miners and production facilities have faced a decade of underinvestment caused by the low commodity prices that prevailed during an era of record-low interest rates and the long lead times required—often a decade or longer— to bring new production online. Sanctions on Russia, the world’s largest producers of many commodities, only aggravate the situation—while also fanning the flames of rising “resource nationalism.”

The commodity supercycles of the past arose from varied conditions. In the 1970s, an energy supply shock drove the distress, rooted in OPEC embargoes. In the early 2000s, it was demand shock from an aggressively growing China that underpinned commodity inflation. The emerging supercycle has both supply and demand shocks, prompting heated global competition to secure commodities.

Sign Up to Insights

Tell us how we can help