Energy Transition Materials ETF Monthly Report | January

30 January 2024

Energy Transition Materials ETF Key Takeaways | January

The Sprott Energy Transition Materials UCITS ETF rose 8.01% in December. Resource commodity assets rallied due to a sharp fall in USD and bond yields as consensus shifted towards a soft-landing scenario and the end of the Fed’s rate hike cycle. However, commodity demand was negatively affected in 2023 due to the economic struggles in China and the Western world, exacerbated by the highest interest rates over two decades. Uncertainty remains as the markets await the effectiveness of Chinese stimulus measures and the timing of the anticipated rate cuts by the Federal Reserve. Despite the broader economic challenges, certain stabilizing factors exist such as lean inventories, geopolitical risks, high extraction costs, and supply constraints. A soft landing, geopolitical tensions in the Middle East, the Russia-Ukraine war, and disciplined output control by OPEC+ are likely to underpin prices. 

As economic conditions ease and interest rates decrease, a rally in commodity prices is anticipated, signifying a positive shift in the sector. Concurrently, the burgeoning energy transition is projected to significantly amplify the demand for critical minerals, further tightening the market. Additionally, industrial users' restocking activities and speculative investments are expected to contribute to this upward trajectory, aiding in the recovery and the resumption of the uptrend in the energy transition space.

2023 saw a significant drop in the lithium spot price, falling -81.95% and ending at $6.16, contrasting with lithium miners, which saw a had a smaller decline of -20.15%. The lithium spot price has exhibited extreme volatility, evident not only in its descent from unsustainable highs but also in its standing, still 2.4 times higher than the low point in 2020. Inventory destocking and lower-than-expected electric vehicle (EV) sales have driven the immature lithium market down. Crucially, the slowdown of electric vehicle sales is a deceleration of strong growth as opposed to an outright decline. 2023 global electric vehicle sales are estimated to be 14 million, an increase of 40% from 2022. Whereas 2024 is still forecasted to have strong growth in the sector to 18 million, or 29%.

In December, this precipitous decline in the lithium spot price has halted as the price intersects further into the cost curve. The current lithium spot price now poses a threat to higher-cost projects under development and the higher-cost low-grade lithium supply from China (lepidolite). Looking into 2024, both supply and demand are forecasted to increase significantly. However, as the decade progresses, the long-term fundamentals remain intact, as meeting the ambitious demand requirements to meet Net Zero by 2050 will be challenging.

Considering the anticipated conclusion of spot price declines, we believe lithium miners are poised to benefit, especially in the context of reshoring and friend-shoring spurred by deglobalisation. Both China and the West need to invest in their supply chains to secure future supply. For example, the U.S. Inflation Reduction Act (IRA) incentivizes the production of lithium in North America and friend-shoring by providing tax incentives and funding sources for companies. Weakened lithium prices can also propel robust mergers and acquisitions activity to continue into 2024. Further, the likelihood of a restrained rise in the spot price and the prospect of lower rates assisting the capital-intensive sector may bolster the sector. Despite the recent spot price decline, the lithium market's long-term fundamentals remain robust, and we believe lithium miners are in a favorable position.

 

ESG Copper Miners ETF Key Takeaways

In 2023, the copper market fluctuated throughout the year but ultimately maintained its value and closed with slightly positive growth of 1.19% to end at $3.84 per pound. Copper demonstrated remarkable resilience compared to other commodities like lithium and nickel, holding up well despite economic challenges.

Economic challenges, such as 2023’s weaker-than-expected performance in China and rising interest rates, have traditionally had significant impacts on the copper price. However, these effects have been mitigated by the growing demand in the energy transition sector. Copper demand from the electricity grid, electric vehicles, and renewable energy deployments have become the primary growth drivers for the copper market and have diversified copper from solely being a barometer of the global economy. Going forward into 2024, we anticipate this to accelerate as the previous commodity supercycle, led by the industrialization and urbanization of China, gives way to the energy transition-led commodity supercycle. 

The current outlook for copper supply presents a stark contrast to the robust growth observed on the demand side. Latin America, the largest producing region globally, particularly grapples with acute supply pressures. The challenges stem from slower-than-expected new builds and capacity expansions, coupled with the depletion of copper reserves from aging assets. Notably, despite plans for increased production, Codelco, the largest copper miner in the world, is experiencing its lowest production levels in 25 years. This predicament is exacerbated by the simultaneous global decline in ore grades, intensifying the supply challenges.

In addition to these inherent difficulties, disruptions in copper supply have been on the rise, from historically hovering around 5% of supply. Recent events have further escalated the issue, notably with the shutdown of a significant mine in Panama, accounting for 1.5% of the copper mine supply. Furthermore, operational issues have led Anglo-American to curtail its copper production. Collectively, these disruptions have tilted the copper market from a projected slight surplus to an impending deficit for the year 2024. The combination of production struggles, declining ore quality, and unexpected shutdowns underscores the vulnerability of the copper supply chain.

The looming copper supply-demand deficit coincides with notably low inventories in the market. The existing minimal buffer in current inventories heightens the risk of a sudden surge in prices should buyers make large drawdowns to secure supplies. The potential for a more accommodative macroeconomic environment further fuels the outlook for copper and creates opportunities for copper miners that provide leverage to the spot price. Furthermore, the potential for mergers and acquisitions within the mining industry, with many large miners prioritizing copper as a strategic focus, adds an additional layer of optimism for copper miners.

 

Source of all performance data: Bloomberg / HANetf as of 31.12.2023. 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.

 

Please remember that when you invest in ETFs, your capital is at risk.

 

Energy Transition Materials ETF Performance
 
As of 31/12/2023

 

1M

3M

6M

YTD

12M

SI

Sprott Energy Transition Materials UCITS ETF

8.01%

-4.17%

-16.30%

-19.48%

NA

-19.48%

The Nasdaq Sprott Energy Transition Materials Ex Uranium Index

7.89%

-4.19%

-16.26%

-18.34%

-18.34%

-19.28%

 


 Please note that all performance figures are showing net data.
 Source: Bloomberg / HANetf. Data as of 31/12/2023

Performance before inception is based on back-tested data. Backtesting is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such a strategy would have been. Back-tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. When you invest in ETFs and ETCs, your capital is at risk.

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