Energy Transition Materials ETF Report | May 2024

Energy Transition Materials ETF Key Takeaways

The Energy Transition Materials ETF rose 6.88% in April. Copper miners posted another solid month while uranium miners continued to hold a high-level consolidation trade range. Nickel miner stocks are now following rebounding nickel prices. Lithium miner stocks remain very oversold but are showing signs of basing. With the main index groups either advancing, rebounding or consolidating, there are signs that the underlying index is emerging from its lengthy consolidation.

April witnessed stronger-than-expected U.S. economic data (non-farm payrolls, core CPI, retail sales, etc.). As a result, the market lowered its expectations for U.S. Federal Reserve interest rate cuts in 2024 from three cuts to fewer than two. The 10-year U.S. Treasury bond yield rose to close the month at 4.68%, near its high in the fourth quarter of 2023. Unlike late 2023, when yields moved higher due to persistent fears of funding stress, challenging most assets, the current rise in yields reflects persistent economic growth alongside sticky inflation.

Commodities and resource equities performed well in April due to their leverage as reflationary assets and inflation hedges. Conversely, the S&P 500 Index declined -4.16%, its most significant monthly decline since September 2023, as the rise in the U.S. dollar and U.S. bond yields caused market multiples to compress, especially in rate-sensitive long-duration sectors such as technology.

The lithium spot price was up 2.59% in April, extending its rebound and leading to a 12.30% year-to-date increase. Following a period of extreme volatility, lithium has stabilized and may be set to emerge from unsustainable lows. Lithium miner stocks fell -0.21% over the month and remain oversold, although with signs of basing.

The rally in the lithium spot price has taken it to levels last seen in November 2023 on the back of supply curtailments, an environmental crackdown in China, and investors covering short positions. However, even with the recent increase, we believe lithium’s current price remains below a sustainable level to incentivize new supply in the longer term, and it will need to rise.

Electric vehicles (EVs) remain the driver of increasing lithium demand. Global EV sales are expected to power through 2024, reaching approximately 17 million units sold. The IEA predicts that, by 2035, every other car sold globally will be electric. Nations continue to commit to electric vehicles to decarbonize transport. In China, new subsidies for trading in new energy vehicles, along with steep EV price cuts, are set to provide additional lithium demand. Notably, 60% of electric cars in China are less expensive than equivalent cars with internal combustion engines. Additionally, China EVs are having an impact on other emerging markets, with sales picking up in Vietnam and Thailand. The U.S. also further incentivized the EV industry by loosening some EV battery rules, making more EVs eligible for tax credits.

In a dramatic turnaround from March’s weakness, the nickel spot price climbed 15.07% in April to end the month at $8.65 per pound.  Nickel mining stocks also gained ground in April, rising 9.88% during the month. For the first time in nearly a year, investment funds turned positive on nickel on the back of improving macroeconomic sentiment fueled by positive March manufacturing reports out of China and the U.S. In addition, a new ban on Russian metals in April supported nickel’s price move. On April 12, the U.S. Treasury Department announced that the U.S., along with the UK, would ban the import of Russian-origin aluminum, copper, and nickel produced on or after April 13, 2024, and limit the use of these metals on global market exchanges and in over-the-counter derivatives trading.

This new ban was a collaborative move by the U.S. and the UK, both of which had previously imposed sanctions on Russia’s metals in December 2023. The London Metal Exchange (LME) stopped accepting Russian metal deliveries into its warehouses, and nickel prices responded positively. These new sanctions are not expected to cause any hardship to the U.S. economy or the nickel market as a whole. While Russia supplies approximately 20% of the world’s Class 1 nickel and 6% of total nickel, the U.S. imports less than 1% of its nickel from Russia.  Many believe that this ban provided just a short-lived price catalyst given that China seems eager to fill the buying gap left as Western countries shun Russian metals.

China continues to dominate the global market for refining EV battery metals. This includes nickel processing, which it has achieved mainly by building industrial processing plants in Indonesia, the world’s top producer of nickel. To combat this dominance, the U.S. and the Philippines, the world’s second-largest nickel producer, have recently engaged in talks to create a rival battery powerhouse. The talks include a possible trilateral arrangement in which the Philippines would supply the nickel, the U.S. would provide financing capital, and a third country would offer smelting and refining technology (possibly Japan, South Korea or Australia). Nickel is key to the Biden Administration’s support for greener energy and its desire to secure better access to critical materials with U.S.-based supply chains. To further bolster these goals, the U.S. Treasury released new guidance on rules incentivizing manufacturers to not use critical materials that are owned or controlled by a Foreign Entity of Concern (FEOC), which includes China, Russia, Iran and North Korea.

ESG Copper Miners ETF Key Takeaways

The copper spot price rose 12.84% to $4.49 per pound in April, breaking through the $10,000 per metric ton level on April 29, before settling slightly lower at month-end. Copper mining stocks gained 9.38% in April following March’s increase of 17.99%, resulting in a year-to-date rise of 27.24%. Copper junior mining stocks fared similarly, increasing 9.45% in April.

The copper markets have ignited as multiple tailwinds simultaneously came together. Kicked off by supply disruptions, the copper market is in a supply-demand deficit, and market tightness can clearly be seen in rising copper prices and plummeting treatment charges.

Treatment charges are the fees smelters charge miners, and a lower fee means a smaller margin for the smelter and a tighter mine supply. These treatment charges have collapsed from >$90 per metric ton to less than $5 per metric ton. As a result, Chinese smelters, which account for around half of global refined copper production, have been moving closer to a 10% production cut. Further, it is reported that China’s copper smelter capacity was inactive on average 8.5% of the time during the first quarter of 2024.  This represents a significant increase from 4% in the first quarter of the preceding two years.

Smelters in Zambia are also being disrupted as the country is in the midst of an El Niño-induced power crisis and has been rationing electricity. Also, Zambian copper miners were served with notices of force majeure on the supply of electricity from Zambia’s state power utility (threatening an additional squeeze on the market).  Finally, South Korean smelter LS Metals and Materials announced a cut in copper smelting output of 40,000 metric tons per year.  With less smelting activity and a tight market for mined copper, refined copper prices have been pressured to the upside.

The next tailwind for copper prices was the U.S. Treasury Department’s aforementioned announcement that the U.S., along with the UK, would ban the import of Russian-origin aluminum, copper and nickel produced on or after April 13, 2024. It would also limit the use of these metals on global market exchanges and in over-the-counter derivatives trading. Prices responded positively as Russia accounts for 4% of global copper production, which will likely mainly go to China.

BHP, the world’s largest miner, then targeted Anglo American in a $39 billion bid, representing a 14% premium to the company’s stock price. If successful, the acquisition would create the world’s largest copper producer controlling roughly 10% of global copper supply. BHP’s bid follows recent operational difficulties at Anglo American which forced the company to reduce guidance for future copper production. Anglo American rejected the bid, saying it significantly undervalued the company, but an improved deal from BHP is widely expected to follow, and other competing bids may as well (for example, Glencore was reported to be studying an approach).

If completed, this would be the first mega-deal in the sector in over a decade. That said, it does follow other multibillion-dollar copper mining deals such as BHP’s $6.4 billion acquisition of Oz Minerals Ltd. at a 49% premium in 2023 and Rio Tinto’s $3.3 billion acquisition of Turquoise Hill Resources Ltd. at a 67% premium in 2022. It may also reinvigorate M&A activity in the copper mining space and create a tailwind, especially for pure-play copper miners (those that have >50% exposure to copper). Ultimately, when the largest miner in the world makes an unsolicited bid for increased copper mining exposure in the amount of $39 billion dollars, it builds stronger sentiment for the long-term fundamentals of the copper industry.

We believe that the copper markets are entering a new supercycle. A supply-demand deficit from increasing AI needs (see above) along with energy transition and increasing supply disruptions, have set up a positive fundamental backdrop. Further, the markets have the potential to be catalyzed by an expected pivot to easier monetary policy and a brightening outlook for the global economy. As a result of this increasingly strong outlook, we believe copper prices have more room to rise and will ultimately benefit copper miners.

Source of all performance data: Bloomberg / HANetf as of 30.04.2024. 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 30/04/2024

Sprott Energy Transition Materials UCITS ETF6.88%19.08%14.34%2.10%-15.10%N/A-17.79%
The Nasdaq Sprott Energy Transition Materials Ex Uranium Index7.39%19.36%15.07%2.72%-14.48%-10.99%-17.08%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 30/04/2024

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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