Energy Transition Materials ETF Report | March 2024

Energy Transition Materials ETF Key Takeaways

The Sprott Energy Transition Materials UCITS ETF rose 1.32% in February. Lithium carbonate prices had their first monthly increase since June 2023, helping lithium mining share prices to rally from extremely oversold conditions. Nickel prices also posted their first monthly increase since July 2023, but nickel mining shares posted their seventh consecutive down month. Copper commodity and copper mining stocks were relatively flat, and both continue to consolidate sideways as long-term copper fundamentals remain buoyant.

As measured by the S&P 500 Index, the broad equity market reached another all-time high in February, led by blowout quarterly earnings from NVIDIA and the continued explosive growth outlook for AI (artificial intelligence). In the U.S., the consumer price index (CPI) and producer price index (PPI) came in higher than expected in February. However, their impact was moderated by a flat reading from the personal consumption expenditure price index (the Federal Reserve’s preferred inflation measure) and other economic data indicating that inflation was not getting ahead of the Fed’s target. In all, expectations remained in place for a soft landing for the U.S. economy, at least three upcoming Fed rate cuts and strong performance by the largest technology stocks, lifting risk assets higher.

The lithium carbonate spot price rose 5.99% to $6.40 per pound in February, and shares of lithium miners rose by 10.44%. Lithium prices have been whipsawing over recent years on inventory destocking amid unsustainably high prices. However, destocking is now easing, and buyer interest has begun to pick up, fueling the recent gains in the lithium markets.

The lithium spot price remains at a relatively low level and continues to intersect with the cost curve, leading some miners to reduce capital expenditure budgets and announce production cuts in high-cost operations. However, these supply curtailments contrast with an expected significant supply-demand deficit in the future. By 2030, lithium demand is expected to be 3.5 times larger than it was in 2023.  A higher incentive price may be justified because current market prices do not support higher-cost lithium operations.

As the lithium price skyrocketed in previous years, China turned on the supply of lithium from lepidolite, a lower-grade and higher-cost source. Much of this supply is no longer profitable in the current market environment. In February, China also launched an environmental probe into its top lithium production region, Jiangxi.  This threatens to further curtail lithium supply in the short term and has supported the recent price rally.

We believe the fundamentals will remain intact in the long term, and lithium miners may be well positioned to benefit. Albemarle Corporation, the world’s largest lithium miner, recently called current prices “unsustainable” and noted that prices must rise to meet long-term demand growth.  Despite the weak current price environment, many lithium miners and other industries remain convinced of the need to produce tomorrow’s lithium. For example, oil and gas behemoth ExxonMobil Corporation affirmed in February that it is expanding into lithium and plans to bring its first lithium project online by 2027.

The nickel spot price rose by 10.34% to $8.01 per pound in February, while shares of nickel miners fell by 6.11%.  The nickel spot price rebounded largely due to the Indonesian government’s delay in issuing production quotas, known as RKABs.  Miners need RKABs to operate in Indonesia, so some Indonesian companies have been forced to halt their nickel mining operations. Consequently, smelters have been forced to rely on inventories, and the uncertainty has bolstered the nickel spot price.

Indonesia is the largest nickel-producing country in the world, and the rising Indonesian supply has been the main driver of the previous weakness in nickel prices. In 2020, Indonesia’s government banned unprocessed nickel exports and attracted massive Chinese investment into its nickel sector. This and some major technological breakthroughs put the country at the forefront of nickel mining. Notably, Indonesia’s President Joko Widodo, who implemented the country’s resource nationalism, is reaching his maximum term as president. Indonesia held a presidential election in February (which was a factor in delaying the issue of production quotas). The apparent winner of the election, Prabowo Subianto, has publicly supported Widodo’s resource nationalism policies and will likely continue on the same path.

Elsewhere in the world, higher-cost mines have announced they will suspend operations. In February, BHP reported a $2.5 billion impairment charge for its Australian nickel business.

Like lithium, nickel’s long-term fundamentals are strong—significant amounts of nickel will be needed in future years to reach net-zero emissions targets. Addressing this short/long dichotomy, Australia classified nickel as a critical mineral in February. This designation is more than just symbolic, as it gives Australian miners access to financing under the country’s A$4 billion Critical Minerals Facility, which offers low-interest loans and related grants. The Australian government followed up by announcing its Nickel Financial Assistance Program, which offers a 50% rebate on royalties paid on nickel sales for 18 months when nickel concentrate prices are below $20,000 per metric ton. Like Australia, almost all big economies have listed nickel as a critical mineral.

ESG Copper Miners ETF Key Takeaways

The copper spot price fell -1.16% to $3.81 per pound in February, while shares of copper miners rose by 0.11% and shares of copper juniors fell by -1.06%. The copper markets have been relatively flat year-to-date as macroeconomic headlines have been mixed but fundamentals remain strong.

February saw the release of slightly higher-than-expected U.S. inflation data as measured by the CPI, at 3.1% year-over-year versus the expected 2.9%. As a result, the market pared back its expectations for Fed rate cuts in 2024 to three by the end of the year compared to the six cuts it was expecting last month. Higher rates for longer have traditionally been a headwind for economic growth (and for copper). Still, as growth remains strong in the U.S., the effect of higher rates on the price of copper has been somewhat mitigated. Copper’s diverse demand profile—it’s used in everything from consumer electronics to HVAC to construction and more—makes it a bellwether of the global economy.

Investors’ expectations for China’s economy have also been affecting copper prices. China is the world’s biggest copper consumer and is expected to account for 56% of world consumption in 2024. Economic data from China continues to be weak given the government’s cautious stimulus measures, which are less than what is needed to revive domestic demand meaningfully, revitalize the property market and arrest the deflationary trend.

These headlines from China and the U.S. have affected day-to-day copper prices, but we believe the burgeoning demand from the global energy transition will likely alter the copper market’s fundamental drivers in the future. Energy transition is emerging as a structural tailwind for copper, and as the energy transition sector grows, it is likely to mitigate copper’s sensitivity to overall economic conditions.

Despite mixed economic signals, copper market fundamentals strengthened in February as strong demand from energy transition and supply disruptions resulted in a very tight market. The closure of First Quantum Minerals’ Panama mine, which provided approximately 1.5% of global copper supply, and production cuts (for example, from Anglo American plc) have flipped the 2024 copper market forecast from a small surplus to a deficit. Events like these have tightened copper mine supply and made it difficult to keep up with increasing demand. Codelco, the Chilean state-owned copper miner and the world’s largest copper producer, is a good example. In February, Codelco announced that 2023 production fell by 8.3% versus 2022 and confirmed that this current copper production is the lowest level in 25 years.

The looming copper supply-demand deficit and the possibility of looser monetary policy support what we believe is a positive outlook that is likely to benefit copper miners ultimately. The current copper shortage has yet to increase the copper price materially, but its effects can still be seen. Bloomberg reported in February that treatment charges to turn copper concentrate into refined metal have plunged to their lowest levels in more than a decade. Treatment charges are the fees smelters charge miners, and a lower fee means a smaller margin for the smelter and a tighter mine supply.

Source of all performance data: Bloomberg / HANetf as of 29.02.2024. 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 29/02/2024

1M3M6MYTD12M3YSI
Sprott Energy Transition Materials UCITS ETF1.32%-6.17%-23.36%-13.13%N/AN/A-30.05%
The Nasdaq Sprott Energy Transition Materials Ex Uranium Index1.03%-6.19%-23.32%-13.05%-32.46%-26.76%-29.81%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 29/02/2024

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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