The recent slump in electric vehicles (EVs) demand has left many green energy-related commodities, such as lithium, on the floor. At the same time, copper prices spiked (although they have since corrected), and strong demand sent the price of gold to record highs.

Additionally, there’s been potential mega M&A activity in the sector – notably, BHP's failed attempt to buy Anglo American, a move aimed at strategically increasing its copper exposure. The deal is now off the table, although BHP, in partnership with Lundin, has revived its copper ambitions with a US $3 billion deal for mining firm Filo.

With that, we delve into these key commodities’ current trends and dynamics, offering insights into the forces shaping their markets.

What’s causing copper to surge?

Copper has become a significant commodity in the mining sector, driven by its crucial role in the energy transition. The metal's price increase in recent years is primarily due to growing tightness in supply and accelerating demand. Supply issues stem from years of underinvestment in new mines, the depletion of existing ones, and cost inflation across the industry. Futhermore, even with rising prices, bringing new supplies online remains challenging due to lengthy permitting processes and infrastructure requirements.

On the demand side, appetite seems unlikely to abate over the short to medium term. The push towards electrification and green investments – such as EVs, renewable energy, and grid upgrades – has bolstered copper demand. These factors, coupled with traditional uses in manufacturing and construction, are driving robust growth. As a result, we expect to see a structural deficit in the supply of copper. This scenario suggests a prolonged period of high copper prices as the market struggles to balance supply with burgeoning demand.

Is lithium’s star fading?

Unlike copper, the lithium market has been a rollercoaster ride. A relative newcomer to commodity markets, lithium experienced a dramatic price surge years ago to nearly $80,000 per tonne of lithium carbonate equivalent, before recently falling to around $12,000. This decline is attributed to a robust supply response to the previous demand short squeeze and the fact that lithium is not a particularly scarce resource.

We believe the long-term demand for lithium remains strong, driven primarily by the growth in EVs. However, a lack of transparency on pricing and the value chain within the industry may make it difficult to have a strong conviction on its future price direction. This is exacerbated by China's rapid EV adoption which contrasts with slower growth in Europe and North America, leaving no clear path for a crucial industry for lithium from a demand perspective. China's rapid EV adoption is compounding the situation, contrasting with the slower growth in Europe and North America. This creates uncertainty in the demand trajectory for the crucial lithium industry.

That said, it remains an exciting market with select opportunities for lithium-exposed equities where price assumptions remain overly conservative.

Gold’s surprising rally

Gold has seen an unusual rally this year. Traditionally, gold prices move inversely to the strength of the US dollar and interest rates. However, the recent price surge has been driven by central banks diversifying their reserves away from the US dollar, typified by the People's Bank of China. As such, the gold price has been moving upwards despite a ‘higher for longer’ rhetoric around US interest rates.

This buying trend also reflects a broader shift towards gold as a store of value amid geopolitical and economic uncertainties, with consumers in Asian markets also buying more physical gold. Interestingly, while gold prices have surged, the share prices of gold mining companies have not seen a corresponding rise. This divergence highlights the different dynamics between physical gold markets and gold equities. The former being influenced by central bank policies and Asian consumers, while the latter are driven by western sentiment.

Uranium’s rise from the ashes

Uranium is also gaining attention, particularly regarding nuclear power's role in meeting growing (clean) energy demands. Following a prolonged bear market that began with Japan's 2011 Fukushima disaster, uranium prices are rebounding. The market's oversupply, driven by stockpiled inventories, is dwindling, leading to concerns about future supply.

Primary uranium supply has been slow to recover, with major producers like Kazakhstan facing challenges in ramping up production. Due to its zero-carbon baseload generation capability, the supportive policy environment around nuclear power is bolstering expectations for future uranium demand. We believe this confluence of factors suggests a positive outlook for uranium prices, as supply struggles to keep pace with demand over the long term. Encouraging more production to come online without a higher incentive price will also be challenging.

Navigating political risks

Added to the supply/demand complexities, investing in mining companies often entails navigating political risks, particularly in regions where governments are less predictable. Countries such as Chile and Peru, which have established mining traditions and economies reliant on mining, tend to balance industry interests and government revenues. However, unexpected regulatory changes, such as those seen in Panama, can disrupt operations and investor confidence.

Monitoring political developments and understanding the regulatory landscape are crucial for assessing investment risks in the mining sector. While stable jurisdictions offer some reassurance, emerging markets and less established mining regions can pose significant challenges.

Final thoughts...

The commodities markets are witnessing dynamic shifts driven by supply/demand imbalances, geopolitical factors, and strategic moves by major players. Copper's robust demand, lithium's market volatility, gold's unexpected rally, and uranium's resurgence highlight these markets’ diverse and evolving nature.

Understanding the underlying trends and maintaining a keen awareness of political risks are essential for navigating the complexities of the commodities landscape. As the world continues its energy transition and grapples with economic uncertainties, these commodities will play pivotal roles in shaping the future.

You can listen to Tiago and Ben discuss this topic and more on a recent episode of The Emerging Market Equities podcast with Nick Robinson.