Energy Transition Materials ETF Report | August 2024

Energy Transition Materials ETF Key Takeaways

The Energy Transition Materials ETF fell -1.87% in July. All main sectors fell in the month, with copper miners showing the best relative strength while others recorded further downsides.

July began with a bounce from June’s oversold conditions. Central bank easing remained on track with stable credit conditions, while the U.S. dollar retreated along with yields, all providing generally favorable conditions for commodities. However, weakness in China continued with disappointing economic data consistent with deflation, while the property and consumer markets were soft. The recent Third Plenum was a disappointment, with no real attempt made to address the problems in the Chinese property market. There was an emphasis on increasing exports, which might lead to more tariffs on energy transition industries. While there was further monetary easing across China’s complex multi-tiered rate regime, there is a growing sense of panic about the state of China’s economy. As China’s domestic economy remains frail, there is an increasing probability of fiscal stimulus, which should boost commodities, similar to 2009 but likely on a smaller scale.

Other factors contributing to the mid-month selling included: the market pricing-in of a possible victory by Donald Trump in the U.S. presidential election (anti-electric vehicle and prior to the Kamala Harris announcement); the U.S. Supreme Court striking down the Chevron deference; some fund de-grossing (both long and short positions were decreased in various CFTC [Commodity Futures Trading Commission] metals); lower growth expectations; and the fading of the yen carry trade on signs of a potential rate hike by the Bank of Japan. Essentially, it was a multi-faceted technical selling wave despite long-term fundamentals remaining unchanged.

The lithium spot price fell -10.35% in July to a three-year-plus low on weak demand sentiment and inventory destocking.  Mining stocks fell 4.10% as equities and commodities generally sold off due to negative economic data, fund de-grossing and the unwinding of the yen carry trade.

Weak demand and EV sales deceleration are overriding absolute growth in the EV sector. Global EV sales growth was up 24% in the first quarter of this year compared to 2023. In China, the largest EV market, that number jumped to 37% over the prior period, making it the biggest year-on-year quarterly leap. Despite negative sentiment, particularly in the U.S., electric vehicles globally remain robust. China has continued to lead the way in this regard, passing a significant milestone in July of having EV sales surpass 50% of total car sales for the first time.

As uncertainty mounts about the upcoming U.S. elections, U.S. government departments are issuing grants and loans already approved under existing laws to bolster the domestic EV supply chain. In July, the U.S. Department of Energy announced $1.7 billion to support the conversion of 11 shuttered or at-risk auto manufacturing and assembly plants to produce and supply electric vehicles.

Given the substantial rise in EV sales over the past three years, and the fact that lithium prices have plummeted to a three-year-plus low, this may be a compelling entry point. With prices now cutting even deeper into the cost curve, we believe the lithium spot price is nearing a floor. A seasonal boost in electronics and EV sales could help markets, starting in September, as would an interest cut by the U.S. Federal Reserve, which could provide a tailwind to capital-intensive industries like mining.

July was challenging for nickel as the spot price fell -4.13% and brought down the year-to-date return to -0.24%.  Nickel miner stocks also lost ground, falling -6.19% for the month, and declining -12.33% year-to-date. Like copper and lithium, nickel was negatively impacted by the general selloff of equities and commodities in July.

Indonesian nickel supply is still flooding the market and pressuring the nickel spot price. This supply overhang and lower prices have led producers to continue curtailing production. BHP announced on July 11 that it would suspend its Nickel West operations and West Musgrave project, both located in Western Australia. Notably, BHP is not exiting the nickel business and continues to reserve optionality on these projects. Australia has been hard hit by the recent round of mine closures, which began in April when First Quantum Minerals placed its Ravensthorpe operations on care and maintenance. Among other notable closures, BASF SE and Eramet SA announced they would abandon plans to build a $2.6 billion nickel-cobalt refinery in Indonesia given decelerating EV sales and weak market sentiment, particularly in the U.S.

On the positive side, nickel suppliers are facing some challenges that have helped curtail production in the short term. These include Indonesia’s RKAB (Work Plans and Budget) permitting initiative, which temporarily pushed down the country’s nickel production, and continued unrest in New Caledonia, a major nickel producer. Although EV sales in the U.S. have weakened, we continue to see growth overall, with Q1 2024 sales growth rising 24% over the same period last year. Notably, however, it is stainless steel that accounts for most of the world’s demand for nickel (70%), most of it from China. Given this, all eyes continue to monitor the health of China’s economy and hope for signs of improvement, which would likely benefit many critical materials.

ESG Copper Miners ETF Key Takeaways

Weaker economic data, a stronger U.S. dollar, the unwinding of the yen carry trade, and disappointing outcomes from China’s Third Plenum have contributed to a broad decline in commodities and equities markets, from which copper was not immune. The copper spot price fell -3.74% in July and copper miners were down -3.11%.  Despite this, the sector remains a standout for the year, with copper and copper miners up 7.54% and 21.5% year-to-date through July, respectively.

Copper market fundamentals continue to strengthen despite the negative macro factors. One market driver is a disruption in mine supply, which led to a shortage in the copper concentrate market. This caused a sharp drop in treatment costs, the fees that smelters charge miners, forcing Chinese smelters (which are responsible for roughly half of global refined copper production) to cut output. China’s copper smelters may now be forced to cut production further. Copper scrap supply—copper collected from products that have ended their useful life—may be in jeopardy. Due to unintended consequences from China’s Fair Competition Review, which takes effect in August, some copper scrap processors have been forced to stop production, and more may be set to do the same. (The Fair Competition Review is designed to curb monopolies and ensure a level playing field for market participants.) This is important, as 30% of China’s refined copper production in 2023 came from copper scrap.  China is not the only region with smelting production cuts. Zambian smelters and miners have faced disruptions due to an El Niño-induced power crisis and state electricity rationing. In July, Zambian mining companies were tasked with doubling their power-saving curtailments to 40%.

More broadly, we continue to see demand from the energy transition sector outweighing weakness from traditional large sources like Chinese construction and industry. For example, the State Grid Corp. of China, the world’s largest single consumer of copper, responsible for 80% of the country’s copper use, announced in July that it would increase spending by 13% to $83 billion this year.  We believe that copper is set to become less correlated to the broader economic health of the world and more to high-growth sectors like artificial intelligence, data centers, air conditioning and energy transition.

Merger and acquisition activity in copper mining continues to advance. After BHP’s failed attempt to purchase Anglo American, BHP and Lundin Mining agreed in July to acquire Filo Mining for C$4.1 billion. This represents a 32% premium to Filo’s 30-day volume-weighted average price (through July 11) and a 12% premium to the latest closing price.  Continued strategic interest in pure-play copper miners adds another tailwind to the space. While M&A may benefit pure-play copper miners, it does not create additional copper supply. As a result, the long-term fundamentals for copper remain strong, driven by escalating supply deficits, and we believe copper miners are set to ultimately benefit.

Source of all performance data: Bloomberg / HANetf as of 31.07.2024. 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.

Energy Transition Materials ETF Performance
As of 31/07/2024


Please note that all performance figures are showing net data.
Source: Bloomberg / HANetf. Data as of 31/07/2024

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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