Outlook 2024
By Peter Kennedy
As investment strategists roll their forecasts for 2024, markets are engaged in a non-stop debate over the likely extent and timing of a fresh round of interest cuts in the U.S. The impact of high global interest rates is hampering demand for industrial metals and suppressing prices despite disruptions and the likelihood that China will take more steps to revive its growth, analysts say.
Copper, the most liquid of the major base metals, has begun the year on a downward slide as worries about global manufacturing and construction activity weigh on sentiment. Analysts say the red metal is likely to trade near US$8,500/tonne through January before moving lower.
A year ago, fixed income strategists were predicting that the Chinese economy would be in recovery mode. They also assumed that interest rates would be heading down a whole lot faster.
But much of what was expected to happen in the U.S. in 2023 did not occur, said Jack Manley, Global Market Strategist at JP Morgan Asset Management during a recent interview.
“The U.S economy is not in a recession. The U.S. Federal Reserve continued to raise rates through July 2023, and the Chinese economy has sputtered,” he said.
Now traders are growing increasingly concerned that the ongoing resilience of the U.S. economy will prompt the Federal Reserve to hold off from cutting interest rates.
Christian Nolting, Global Chief Investment Officer with Deutsche Bank said the first rate cuts by the Federal Reserve and ECB should come at some point this year. But he is telling investors not to expect many. However, Nolting said it isn’t just monetary policy that investors should be concerned about.
Geopolitical challenges will remain high on its watch list. They include the Russia-Ukraine war and its impact on global food and energy security, Israel’s war against Hamas and possible impacts on oil production in the region, the tension between China and Taiwan, the world’s most important producer of computer chips, as well as the ongoing battle between China and the U.S. for technology leadership.
Deutche Bank notes that important elections are scheduled in a total of 40 countries around the globe with a combined population of more than 3.0 billion people in 2024. These countries account for 42% of global gross domestic product. The uncertain outcomes of elections in the U.S., India, Russia and the EU, for example, are a major source of additional risk, especially as domestic political developments in many countries appear to have an increasingly tangible impact on their respective foreign policy decisions.
What will this mean for the various asset classes is a key question as the new year starts to unfold.
Copper
RBC Capital Markets said the prospects of a higher-for-longer interest rate environment and slow economic growth in 2024 are expected to constrain the price of copper. China accounts for roughly 50% of net demand and we expect the Chinese housing market to remain tepid due to inflation, higher borrowing costs, and the travails facing many developers, RBC said.
Furthermore, RBC is projecting a global supply surplus in 2024 that will grow into 2025.
Oil
Oil markets, meanwhile, have seen a turbulent few months. Following significant increases over the summer and prices of more than US$90 per barrel in September, prices for Brent and WTI benchmarks fell sharply and fluctuated in November. The reasons cited for the downward trend included forecasts by the U.S. government that per capita demand from U.S. citizens could fall to its lowest level in 20 years in 2024, while U.S. oil production may have already peaked. The lifting of U.S. sanctions on imports from Venezuela oil in the wake of electoral reforms by the Venezuelan government under Nicolas Maduro is also likely to have supported the price trend. In addition, the feared supply shortfalls following the Hamas terrorist attack on October 7 – which had initially sent prices rising again for a few days – did not materialize.
RBC said any escalation in the Israel-Hamas conflict could drive oil prices higher because global inventories remain tight by historical standards. However, it said the durability and sustainability of such a rally could be short lived when one takes into account spare OPEC+ capacity and the possibility that a modest surplus materializes in the first half of 2024.
Gold
In contrast to the oil price, the price of gold reacted to the conflict in the Middle East with a significant rise over several weeks. The precious metal has thus confirmed its role as a safe haven in times of economic and political crisis.
In its January 4 edition, Metals Focus Precious Metals Week, predicted that after an exceptionally strong finish to 2023, gold prices are in for a modest retreat in the first half of 2024, as central banks keep rates steady for longer than current market consensus. “That said, we believe the downside will be limited and temporary,” Metals Focus said in its report. Metals Focus is a London-based independent precious metals consultancy covering gold, silver, palladium, and rhodium.
“Once the interest rate cutting cycle starts, most likely in mid-2024, gold will receive a strong boost in the latter part of the year,” it said. Deutche Bank expects the price of gold at the end of 2024 to be US$2,250 an ounce.
Metals Focus expects silver to broadly shadow gold. That said, despite a persistent structural deficit, sizeable above-ground stocks and concerns about the Chinese economy will continue to restrain investor interest, leading to a further rise in the gold:silver ratio. Meanwhile, for PGMs, platinum will continue to trade broadly rangebound within a band similar to 2023. By contrast, palladium and rhodium prices are expected to remain under pressure.
Other key issues that remain top of mind in the investing sector are the risks and opportunities provided by ongoing structural economic change that is being driven by technology and environmental concerns.
The energy transition is already showing how these two issues of technology and the environment are closely intertwined, said Nolting.
Energy Metals
However, published reports say a meltdown in some of the most hyped energy transition metals is wreaking havoc across the mining world, stalling projects, skippering deals and triggering a scramble for cash that promises to reverberate through the industry for years.
Much has been written and said about the need to produce lithium, a key ingredient used in the production of electric vehicles. But the price of lithium has plunged more than 80% from a late 2022 record, amid concerns about surplus inventories. The price of nickel and cobalt have also fallen due to an influx of new production and concerns that the shift to electric vehicles may not occur as quickly as expected.
The drop in prices is making it more difficult for miners to secure financing from traditional sources at a time when the industry is grappling with rampant inflation, a scenario that is increasing the cost of building new projects.
Iron Ore
Rio Tinto Plc [RIO-NYSE] expects to begin infrastructure work on the massive Simandou iron ore project in Guinea this year after 27 years of setbacks and scandals. The British-Australian mining giant hopes the US$20 billion Guinea iron ore, rail and port plan will pave the way for a ‘new era’ of mining. As reported by the Financial Times on January 6, 2023, groundworks have already started along the rail corridor and once Beijing approves Chinalco’s investment, Rio Tinto plans to begin mine construction. The first or is expected to be shipped in 2025, ramping up to full production of 60 million tonnes a year by 2028, representing about 5.0% of the global seaborne iron ore market.
Uranium
The price of the nuclear fuel has reached its highest level since 2007, a move that was recently driven by demand from utilities, according to a U.S. brokerage report that was also published in a Scotiabank investment newsletter. Utilities signed contracts for nearly 160 million pounds of the commodity last year, the highest annual volume since 2012, according to UxC. It’s a tight market. Spot uranium was priced at US$91 a pound in December 2023.
Commercial reserves of uranium held by U.S. utilities have been declining since 2016, according to data from the U.S. Energy Information Administration. In the European Union, they have been declining steadily since 2013, according to the Euratom Supply Agency.
However, the global nuclear fuel market could be upended this year by one increasingly likely scenario: the possibility that Moscow cuts off all nuclear fuel supplies to the United States in retaliation for a bill expected to pass this month in U.S. Congress. That bill could ban imports of Russian low-enriched uranium with waivers through 2028, but U.S. nuclear operators fear it would prompt more immediate Russian retaliation, which would in turn have far-reaching effects on the global nuclear fuel sector and leave US utilities in a precarious position whether or not they were reliant on Russian fuel. US utilities are unlikely to have to actually stop operating reactors due to lack of available fuel, but sources expect such a scenario to push further north already high prices for uranium, conversion and enrichment.
Meanwhile, the Financial Times has highlighted the change in perception for nuclear from negative to positive over the past several years. However, there are some structural problems when it comes to the nuclear market, that were noted in the Financial Times article which is referenced in a Scotiabank investment newsletter. They include a structural global deficit in uranium production, a choke point in enrichment (the process that turns that raw material, U3O8, into usable fuel), and the fact that agents of chaos have snatched the keys to the nuclear power kingdom.
It is worth noting that Kazakh-origin uranium, either directly or indirectly, covers 40% of U.S. utility needs – 44% for the EU. Russia owns some 25% of Kazakh uranium deposits and has rights to a further 22% of annual production; China National Uranium Corp. (CNUC) and its confreres hold rights to almost 60% of future Kazakh production; and after 2028 when the new supply contract kicks in, Western nuclear utilities will have to replace approximately 40 million pounds of uranium concentrates annually that are currently sourced from Kazakhstan.
Notably, shares in uranium miners jumped (during the week of January 9, 2024) globally after the U.S. said it is soliciting bids to boost domestic production of the nuclear fuel in an effort to bolster national energy security. The U.S. Energy Department is requesting proposals from U.S. companies to produce a type of fuel known as high-assay low-enriched uranium (HALEU). It plans to invest as much as US$500 million in the projects and other ventures to convert HALEU into chemical precursors for nuclear fuels.
Major projects to watch
After releasing 2024 production guidance for its the Kamoa-Kakula Copper mine complex in the Democratic Republic of Congo (DRC), Ivanhoe Mines Ltd. [TSX-IVN; OTC-IVPAF] said it will soon provide further guidance on Kipushi (zinc-copper-geranium-silver mine in DRC) and Platreef (palladium-nickel-platinum-rhodium-copper-gold project in South Africa), which are expected to be commissioned in the second quarter and third quarter of 2024 respectively.
Ivanhoe is targeting production of between 440,000 and 490,000 tonnes of copper in concentrate at Kamoa-Kakula this year.
First Quantum Minerals Ltd. [TSX-FM] will continue to be in the spotlight this year after the company was recently ordered by the Panamanian government to close its Cobre Panama copper-gold mine in the wake of country-wide protests.
First Quantum has said it remains committed to Panama even after Panama’s top court ruled that the operating contract for the company’s flagship Cobre Panama copper-gold mine is unconstitutional. Cobre Panama ranks as one of the world’s largest and newest copper projects.
First Quantum has filed two notices of arbitration over the closure of the mine, but said it prefers to engage more with Panamanians in a bid to stress the value of the mine to the wider public.
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