Energy Transition Materials ETF Report | February

Energy Transition Materials ETF Key Takeaways

Despite ongoing stimulus measures, continuing weakness in China has cast a pall over most metal miners despite signs of a soft landing in the US and, possibly, globally.

The copper spot price rose slightly by 0.43% to $3.86 per pound in January, shares of copper miners fell -1.52%, and copper juniors fell 3.69%.  Increasing expectations of U.S. rate cuts had benefitted copper in recent months but remained relatively flat in January, with the market still pricing in 6 rate cuts in 2024. The copper spot price has also been fluctuating with investors’ expectations on Chinese economic data. The copper price gained on China’s CPI release, denoting the worst deflation streak in 14 years, thereby increasing hopes for Chinese stimulus.

Despite China facing deflation, the red metal has shown resilience of late compared to other critical minerals. As of late, copper has been held down by negative Chinese economic data weighing on the construction and manufacturing industries. Notably, China accounts for around half of global copper consumption and, therefore, does have a sizeable impact on the copper market. That said, the weakness in Chinese demand in industries like real estate has been more than offset by demand from the energy transition, where 2023 represented a 5% increase in total Chinese copper demand.

China’s 2023 energy transition data has been notable. China installed new solar capacity increased by 146% (greater than the amount installed in the last four years combined). New wind capacity increased 96%, and electric vehicle sales rose 37.5%. Outside of China, the energy transition is also ramping up. At COP28, the declaration to triple global renewable capacity by 2030 will require significant investments from the West. Evidently, in order to achieve these energy goals, copper demand from the West will have to grow significantly.

The lithium carbonate spot price fell by -1.97% to $6.04 per pound in January, and shares of lithium miners fell 26.14%. The lithium carbonate spot price appreciated 442.80% in 2021, another 72.49% in 2022 and then fell -81.95% in 2023. However, the 2023 plunge has stalled out, and the spot price has remained relatively stable since mid-December. The current price is now similar to prices seen in the first half of 2021, and inventory destocking pressures have subdued so far in 2024, stabilizing the price.

Lithium prices are now supported via supply cuts to high-cost operations and delays/pauses in expansions and new projects. As the lithium price skyrocketed in previous years, China turned on supply from lepidolite, a lower-grade and higher-cost source of lithium. Today, much of this supply is no longer profitable in the current market environment. Further, the current low lithium spot price is also spurring actions such as reductions in capital expenditures and workforce cuts. The culmination of these effects spurred the January downturn in lithium miners.

As a result of this downturn, lithium miners’ prices are now at levels seen at the beginning of 2021. This significant sell-off reflects the immaturity of the market. The recent lows in this cycle may likely be unsustainable, given that the current lithium pricing environment is not only not incentivizing future supply to meet forecasted deficits but also constraining supply response further. Benchmark Minerals noted in January that $28/kg is their expectation of an incentive price required to close the 2030 lithium supply-demand deficit. This represents a $12.70 per pound price and a 110.19% increase over the January month-end price.

There is no real alternative for lithium for electric vehicles and energy storage systems. Despite a perceived slowdown in electric vehicle sales, global electric vehicle sales increased from 10.5 million in 2022 to 14 million in 2023. They are further forecasted to increase to 16.7 million in 2024. Ultimately, we believe electric vehicle penetration rates may be likely to continue to rise, thereby increasing the demand for lithium and ultimately benefiting lithium miners.

The nickel spot price fell slightly by 2.21% to $7.26 per pound in January and shares of nickel miners fell 6.64%.  The nickel price is now representing a cyclical low as the industry goes through structural changes. The drawdown in nickel prices comes as lower-cost Indonesian supply is ramping up and gaining global market share. Outside of Indonesia, the current nickel price is intersecting further down the cost curve and has led to multiple mine suspensions. So far, 2024 has announced mine suspensions totaling 2% of the 2023 nickel mine capacity. This may likely help bring the market closer to balance and help stabilize the price.

ESG Copper Miners ETF Key Takeaways

Meanwhile, supply disruptions have flipped many forecasters’ 2024 copper market balances from surplus to deficit. Supply disruptions may likely keep the market in deficit due to strikes, slow-ramp ups, ore grades, weather, technical issues, and more. For supply growth in 2024, the world is most heavily reliant on the Democratic Republic of the Congo and Chile. Chile’s supply increase, in particular, may prove to be susceptible to further disruption given that in January, Codelco indicated a copper output decline in Q4 2023 from the year earlier.   This is of significance, as it puts Codeclo’s copper production at the lowest level in 25 years. Going forward, the industry may be further reliant on Codelco. On the back of rising taxes and regulatory uncertainty, projected private investment in copper mining has fallen 36% from 2019, when the price of copper increased by 42%.

Copper supply troubles threaten to inhibit the industry’s ability to meet astonishing long-term demand, where the cumulative demand for copper to 2050 is greater than the total produced copper over the course of human history. Meeting this demand will require massive upfront investments, and although copper miners have healthy profitability at the current price, a higher incentive price will be needed for the next generation of new mines. We believe that increasing copper market fundamentals and a more supportive traditional economy may likely be bullish for both the copper spot price and copper miners.

Looking at the shorter term, inventories are critically low, currently at 3 days of inventory versus a long-term average of 13 days. Limited inventories raise the risk of a sudden price increase if buyers make large drawdowns to secure supplies. Further, treatment charges have plunged to their lowest level since 2021, when the copper spot price was trading at a higher range. Treatment charges represent the fees miners are charged by smelters. The lower fee represents a smaller margin for the smelter and a tighter mine supply.

Source of all performance data: Bloomberg / HANetf as of 31.01.2024. 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 31/01/2024

1M3M6MYTD12MSI
Sprott Energy Transition Materials UCITS ETF-14.26%-3.98%-31.72%-14.26%NA-30.96%
The Nasdaq Sprott Energy Transition Materials Ex Uranium Index-13.94%-3.59%-31.48%-13.94%-40.03%-30.53%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/01/2024

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.