Yiannis Mostrous

Although we first recommended copper here four years ago, it was not until 2021 that we identified it as one of the main metals to benefit from the ongoing move toward decarbonization.

As long-term readers may remember, we are not in the camp that believes the “Net zero by 2050” campaign will be successful. We still think that the goals are too ambitious and the road map not well thought out. Moreover, it’s based on a multitude of simplistic assumptions as to how the real world and its economies work.

China, which is far ahead in this game, has a net zero target by 2060. This should be taken as the best-case scenario and more achievable, even though we still think it is fairly ambitious.

Why is China our standard for reasonable analysis of decarbonization? Mainly because its investment in the energy transition currently represents around 50 percent of the world’s total. This number becomes more impressive still when one considers the world’s second largest economy represents no more than 18 percent of the global GDP.

China now accounts for more than half of global demand for commodities. That makes correctly assessing the direction and the magnitude of Chinese economic growth the biggest piece of the investing puzzle for metals.

Up until the latter part of October, China’s outsized role in global demand had been mostly a negative for metals prices and mining stocks in 2022. But peering into 2023, the country is likely to be the only major economy engaged in meaningful easing of fiscal and monetary policy, while much of the world is tightening.

That’s a very big positive for metals investing. In fact, the expectation here is that the Chinese economy will be in a position to support global growth, domestically picking up speed in the second half of the year as overall consumption accelerates.

One reason we see this as a high probability bet is for the past two years locked in Chinese households have not been spending much. As a result, household bank balances have increased by more than 40 percent since 2020. In terms of dollars, this increase is around US$4.8 trillion—or more than the entire GDP of the United Kingdom.

The Information Age has transformed the impossible to the possible and even likely. But even the most sophisticated 3-D printer can’t create out of thin air the metals that are essential to the transforming 21^st century global economy. And therein lies the long-term bull case for key resources from iron ore and copper to lithium, nickel and battery materials.

We don’t expect the Chinese economy to deliver the “around 5.5 percent” economic growth rate that the country’s leadership had hoped for this year. In fact, the country’s GDP growth should be at least a percentage point lower, even if there are no further negative surprises.

When it comes to metals demand, nothing is as vital as the health of the Chinese economy. And this year, the country’s lockdowns to control a suddenly acute wave of COVID-19—especially stepped up restrictions imposed in Shanghai and neighboring cities—are already taking their toll on both the domestic economy and industrial production.

At this point, it looks like Chinese authorities will stick with the “Zero Covid” strategy for the foreseeable future. The main reason is it’s become clear that Shanghai’s attempt to deal with the outbreak in a more “surgical” way did not produce the desired results.

To put what’s happening in perspective for metals demand, Shanghai is a city of 25 million people and China’s financial center with the busiest port in the world. The cities adjacent to it are the world’s most important manufacturing hubs for a wide range of vital components for a massive range of products including all things electronic.

Highlights

• Currencies around the world are being debased as central banks increase money supply to stimulate economies. This is a strong positive for hard assets.
• There’s a lack of visibility in the Chinese policy making process. China is the world’s largest market by far for most metals, making sector investing a tricky game short-term.
• The Chinese economy has slowed from its immediate post-pandemic recovery pace. That makes demand for steel, iron ore, copper, and aluminum highly uncertain for at least the next three months.
• Global Electrification is driving demand for a wide range of metals, particularly those used in batteries. That has strongly bullish implications for copper, nickel, aluminum, lithium and steel as the main drivers of global decarbonization.

Mining is an expensive business: The annual tab for producing the copper, iron ore, nickel, rare earths and other vital resources needed to run the world is estimated at $1 trillion. It’s also a highly capital and energy intensive industry that leaves significant environmental and climate footprints.

That makes cost control a critical element of mining companies’ success. And finding new ways to improve operating efficiency and diminish environmental impact is a central objective of management teams around the globe, especially for the large global mining companies that increasingly dominate this business with scale.

Deep Dive Investing members know the view here: These companies have dramatically improved environmental practices in recent years. And as the hunt for the growing pile of dollars invested on environmental, social and governance criteria heats up, they’ll continue the push, which will remain the main way of extracting resources from the earth in order to fuel economic growth, green or otherwise.

President Biden’s infrastructure plan has been revealed, and now Congress will have its say. As we noted here almost a year ago, an infrastructure plan has been on everyone’s agenda, with the main disagreement being how it would be financed. The secondary issue was what part of the infrastructure was to be improved or build anew.

As expected, the Biden plan is to be financed from higher corporate and other taxes. The plan has also modernized and expanded the definition of infrastructure as was understood until now. The chart below shows the breakdown of how the money is to be spent.

A lot of easy money has been made in the markets so far this year. Although we are positive on 2021, a rigorous investment process remains as important as ever. Deceleration in global liquidity is, in our view, the main risk to equity markets.

China will be again one of the two most important pillars of global economic growth, and the single most important economy for metals. This should come at no surprise to observers of global economic developments, as the current rate of capital formation in China is, after all, unprecedented in human history.

Metals have performed strongly, overall, this year and so have done mining companies stocks. Such performance has attracted a lot of speculative buying in the sector, but this is to be expected. The pretext has been China’s strong economic rebound after the pandemic related demise in the early part of the year.

Mining stocks are the quintessential macro-driven or “cyclical” investment. When the global economy is running
white hot, demand for key resources soars. And so do the earnings and share prices of the companies that seek
out an extract everything from iron ore and copper to platinum group metals (PGMs).
Conversely, when there’s a downturn, demand for metals and minerals is one of the first things to plunge. And
the deeper the economic trough, generally the worse the prognosis for miners’ earnings and investment returns.
Here in mid-2020, the global economy is looking down the abyss of the biggest recession in living memory.
Measures taken to curtail the COVID-19 pandemic have slammed the brakes on activity across a wide swath of
industries.
Only unprecedented monetary and fiscal stimulus has prevented an accompanying calamity in the financial markets
so far. But with unemployment soaring, demand plummeting for many products and credit markets tightening,
Q2 is shaping up as the worst period for global growth at least since the Great Depression of the 1930s. And
prospects for a recovery in the second half of the year—or even in 2021—are still highly uncertain.