Signs of Life in Global Resources

Quarterly insights from Global Resources Portfolio Manager Shawn Reynolds, featuring his unique views on natural resources and commodities. An expanded PDF version of this commentary, including fund specific information can be downloaded here.

Oil Strength and A Late-Quarter Rally Lift Resources

Geopolitical conflict and the specter of ongoing weakness in the Chinese economy continued to have an outsized impact on commodity prices for most of the quarter. Persistent inflationary pressure and a lack of clarity of U.S. rate policy also swayed investor sentiment. With the exception of Oil & Gas, many resource sectors actually struggled for the first two months of the year, before finally exhibiting some signs of life by mid-to-late March (most notably, copper).

Oil & Gas

Oil demand is expected to reach an all-time record high in 2024. Demand growth still projects to be strong as well, reverting to pre-pandemic levels. Escalating Middle-East tensions, including Houthi attacks on Red Sea shipping, contributed to much of the market’s supply concerns in the first quarter. Additionally, OPEC+’s announcement of planned extensions to its production cuts has further aided prices.

Renewables & Alternatives

High financing costs and struggles to prove commercial viability have weighed on renewables. More recently, oversupply risks are also starting to impact profitability and share prices. Industry-wide, deal volumes are down as revenue volatility and fluctuating electricity prices have deterred long-term arrangements. Despite marginally slowing growth rates, electric vehicle sales in the U.S. and rest of the world continue to climb. Nevertheless, returns from battery and component material producers remain lackluster.

Base & Industrial Metals

Many miners were beneficiaries of iron ore’s rally in the fourth quarter of 2023. While that rally appears to have stalled, tighter copper supply – primarily due to ongoing mine disruptions – has provided a much-needed boost. On the other hand, “green” metals prices continued their retreat on concerns of slowing demand growth and near-term oversupply, particularly in lithium.

Gold & Precious Metals

Gold continues to rally to new all-time highs on geopolitical concerns and central bank purchases. After failing to match gold’s first quarter moves to new highs, gold miners are now trading at a significant discount. Cost inflation appears relatively subdued, for now, which should allow for further margin expansion.

Agriculture

Chicken demand remains robust, supported by substitution from beef after low cattle herds drove prices substantially higher during the last several quarters. Pre-planting applications in the U.S. (due to warmer weather) have crimped fertilizer supply, adding to recent, mild price increases. An abundant South-American corn and soybean supply, meanwhile, are capping grains early in the year.

Outlook: Synchronized Gains

Performance across the resource equity space has been fairly unsynchronized since late-2021, when a strong run-up in commodity prices contributed to historically-strong inflation globally. However, as inflation levels off, there appears to be several signs we may be reaching another inflection point. At present, we are still seeing tighter-than-average supply conditions across a broad range of commodities—including, most notably, crude oil and copper, but also fertilizers and other manufacturing/production inputs.

 Likewise, we are also seeing sentiment around global growth shifting from one of modest bearishness to modest bullishness with interest rate cuts looming on the horizon. All of this is coinciding with a number of reported supply chain disruptions that are being exaggerated by escalating geopolitical conflict. Further, we believe that the global energy transition – though relatively dormant, conversationally – has not died. If anything, in our view, it has been fervently expanding, as measured by record capital investment, capacity installations and electric vehicle sales within just the last year. Combined – and absent any type of systemic financial risks – resource equity markets appear primed for one of these synchronized bounces off of its lows.

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