Energy Transition Material ETF Report | June 2024

Energy Transition Materials ETF Key Takeaways

The Energy Transition Materials ETF rose 5.21% in May. The underlying index has now posted three straight months of 5%+ returns and appears to be breaking out of its two-year-long consolidation. Copper continues to lead—during the month, it climbed closer to an all-time high of $4.90 per pound before retracing to its breakout level. Copper mining stocks made new all-time highs during the month.

Spot uranium continued to consolidate in May, while the uranium miners sector rallied almost  to an all-time closing high mid-month. Nickel miner’s stocks posted strongs gain in May (and April) as the group rebounds from extreme oversold conditions. Lithium miners, while continuing to lag, are attempting to carve out a low.

The S&P 500 reached an all-time high in May despite anticipated rate cuts by the U.S. Federal Reserve being pushed out. The market is well-supported in general—financial conditions are loose (at the lows of a 10-year range), and earnings revisions are moving higher. With favorable market conditions and improving global growth expectations, the rotation to commodity resources is advancing and broadening.

The lithium spot price declined -4.53% in May but still held above recent floors. By end-May, lithium was up 7.20% year-to-date.  Mining stocks, however, showed signs of basing, increasing 1.61% in May.

The U.S. announced tariffs on many Chinese products in May, including electric vehicles and lithium-ion batteries. The tariffs increased from 25% to 100% on passenger EVs and 7.5% to 25% on lithium-ion batteries. The 100% tariff on EVs effectively makes it not economical for Chinese EVs to be sold in the U.S. despite their cost advantages. These higher tariffs do not imply demand destruction as the U.S., unlike the EU, imports almost no Chinese EVs today. However, the U.S.’s push to reshore supply chains may create new opportunities for increasing investment in other regions.

It remains vital for governments worldwide to obtain a secure supply of lithium for the energy transition. To that end, South Korea is allocating $171 million to secure critical minerals, planning to spend most of it building lithium reserves to counter upcoming shortages amid heightened geopolitical tensions. China continues to try and scale its domestic lithium production but has had to rely primarily on lepidolite. Lepidolite ores are a much lower grade than spodumene and are much more expensive, putting much of China’s lepidolite production at uneconomical levels. Lepidolite accounted for almost half of China’s lithium output in 2023.

Canada’s Standard Lithium soared in May on news that Equinor, a Norwegian state-owned energy company, had agreed to acquire a 45% share in Standard Lithium’s two U.S. lithium projects located in Southwest Arkansas and East Texas. Equinor, an international energy company with an $87 billion market capitalization, has significant capital to devote towards lithium production. Measured by market capitalization, Equinor is larger than all current lithium miners combined. This deal followed an announcement last November by ExxonMobil that it aims to become a leading supplier of lithium by 2030. Big Oil’s push into lithium provides evidence that the future of energy is lithium-dependent and showcases the long-term opportunity in lithium mining.

On the heels of its big move in April, nickel climbed higher in May, gaining 2.05% for the month. Year to date, nickel was up 18.81% by end-May.  Nickel mining stocks gained even more ground in May, increasing 9.47%; however, they continue to lag the metal year-to-date with a return of 8.66%.

Continued unrest in New Caledonia put the world’s third-largest nickel producer in the spotlight in May. The turbulence helped push nickel to a new high price during the month. New Caledonia has been under French rule since 1853, and May’s violence was sparked after France moved to reform the electorate by broadening voting for the non-indigenous population. The turmoil has somewhat thwarted President Emmanuel Macron’s wish to put New Caledonia at the center of France’s efforts to secure resources to promote clean energy and support its electric vehicle industry. New Caledonia’s nickel mines, which employ nearly a quarter of its population (270,000) and account for 90% of its exports, have virtually shut down, exacerbating long-standing economic strains within the territory and creating a volatile situation.

Despite New Caledonia’s impact on global nickel supply, the market remains in surplus, given a glut of production from Indonesia and soft demand from China. China’s struggling economy has reduced nickel demand for both stainless steel and EV batteries. However, nickel miners in the West will likely get a boost from new U.S. guidance, starting in 2025, that incentivizes car manufacturers to avoid using critical materials owned or controlled by a Foreign Entity of Concern (FEOC).

These FEOCs include China, Russia, Iran and North Korea. On May 3, new rules were released stating that any company with at least 25% ownership held directly or indirectly by a FEOC would be ineligible for the Inflation Reduction Act’s $7.5K tax credit for EVs. Some 23% of mined nickel properties in Indonesia have China-based ownership of 25% or more, making it harder for U.S. manufacturers to source nickel from Indonesia, which accounts for 12% of global production.  Adding China (3%) and Russia (6%) results in a sizeable 20% of the global market.

Ultimately, the world’s shift to policies that impede globalization is inflationary for nickel prices. We believe this may provide a tailwind for nickel miners not from or owned by China and Russia.

Source of all performance data: Bloomberg / HANetf as of 31.05.2024. 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.

ESG Copper Miners ETF Key Takeaways

The copper spot price rose 0.21% to $4.50 per pound in May. Copper mining stocks gained 5.15%, culminating in a total year-to-date rise of 33.79%. Copper junior mining stocks fared similarly, increasing 3.91% in May. The copper market saw continued momentum in May, building upon the robust tailwinds that emerged in early 2024. Supply disruptions continued to be a primary driver, exacerbating the supply-demand deficit and tightening market conditions. This was evident in the persistent upward trajectory of copper prices and the sharp decline in treatment charges.

Treatment charges, indicative of smelter margins and mine supply tightness, plummeted from over $90 per metric ton to below >$10 per metric ton. This drastic reduction compelled Chinese smelters, responsible for roughly half of global refined copper production, to consider a production cut of around 10%. Zambian smelters faced similar disruptions due to an El Niño-induced power crisis, with electricity rationing by the state power utility putting additional strain on the market.

The month of May also witnessed significant corporate activity as BHP walked away from its bids for Anglo American. This proposed acquisition, aiming to create the world’s largest copper producer, underscored the potential for consolidation in the copper sector. Although the deal was not completed, the copper mining space remains ripe for further M&A activity.

These developments, combined with increasing demand driven by AI applications and the energy transition, suggest the copper market is poised for a new supercycle. Expectations of easier monetary policies and a brighter global economic outlook further bolstered confidence in copper’s prospects, signaling continued price upside potential in the long term.

Source of all performance data: Bloomberg / HANetf as of 31.05.2024. 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 31/05/2024

1M3M6MYTD12M3YSI
Sprott Energy Transition Materials UCITS ETF5.21%23.65%16.02%7.42%-5.33%-29.17%-13.51%
The Nasdaq Sprott Energy Transition Materials Ex Uranium Index5.38%24.49%16.78%8.25%-4.46%-28.45%-12.63%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/05/2024

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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