By Stefan Breintner, Head of Research & Portfolio Management, and Manuel Zeuch, Research & Portfolio Management, both DJE Kapital AG
Over the past twelve months, metal producers and diversified mining groups have not been among the favorites on the capital market. The reason for the weaker performance of the commodities sector is ongoing economic uncertainty, in particular fears of a global economic downturn. A possible recession in the USA or worldwide would have a considerable negative impact on the sector. This risk is probably not yet fully reflected in the share price. However, the probability of a US recession is currently estimated at less than 50%.
Cautious optimism among mining companies
At a Bank of America industry conference in Barcelona, the CEOs of the world's leading mining companies recently expressed cautious optimism. The economic situation in China was assessed as more stable than expected and the industry presented itself as resilient despite uncertainties. The conference motto "Navigating Uncertainty" was predominantly answered by the industry with "Resilience", which indicates a robust industry structure despite macroeconomic risks. China, which remains by far the most important single market for commodities, showed robust development in the first quarter. Demand for key commodities such as iron ore and copper is also expected to remain largely stable in the coming months, which supports the fundamental framework conditions for the industry. India is becoming increasingly important for global demand: the country is experiencing an economic upturn with annual growth of around seven percent in steel production, similar to China in the past. This is also increasing India's demand for iron ore imported by sea.
India is also planning to double its coal production by 2030 and will increase the number of its coal-fired power plants from around 280 at present to almost 600. In comparison: China operates over 1,000 coal-fired power plants. Developments in India and other emerging countries are likely to more than compensate for Germany's climate targets to phase out coal by 2030 and becomeCO2-free by 2050.
Tariffs and trade war boost US domestic demand for commodities
At less than ten percent, the USA only makes a limited contribution to global demand for raw materials. Trade protectionist measures such as import tariffs therefore primarily lead to higher costs for domestic consumers and industries, which is reflected in higher price premiums on US trading venues such as the COMEX compared to the London Metal Exchange. Nevertheless, some US commodity producers could benefit from these measures as they strengthen their competitive position domestically and boost demand for locally produced commodities.
Steel and aluminum imported into the US have been subject to a 50 percent tariff since June 4. While the USA is largely self-sufficient in steel production, the situation for other industrial metals is much more differentiated. In the case of copper, the USA's degree of self-sufficiency is around 50 %, with the remaining demand - around one million tons per year - having to be covered by imports. The situation in the aluminum sector is much more complex. The United States is highly dependent on imports and has to import around 80 percent of its annual aluminum requirements from abroad. Increased use of aluminum scrap could theoretically help to reduce this dependency. However, the USA lacks both sufficient smelting capacity and the necessary stable power supply to expand recycling and production. The construction of new production facilities also competes directly with the rising demand for electricity in other sectors, particularly the rapidly growing energy requirements of data centers for artificial intelligence.
Bottoming out of the aluminum price
The price of aluminum has fallen by around twelve percent in euro terms this year. In addition to trade and customs policy developments, particularly in the USA, Chinese market data has also recently had a stabilizing effect on the price. For example, inventories on the Shanghai Futures Exchange have fallen significantly compared to late summer 2024. In addition, the Chinese government's upper limit for aluminium production capacity of 45 million tons is approaching its limit. As China accounts for the majority of global aluminum supply at over 60%, this production restriction will play an important role in future price trends.
Continued positive outlook for copper worldwide
Copper remains a metal that is in high demand and is the focus of diversified companies. The medium to long-term prospects for copper are very positive due to the expansion of renewable energies, the electrification of transportation and the expansion of the energy infrastructure. Energy infrastructure already accounts for around 31% of global copper demand.
Future energy demand, particularly in the USA, is likely to increase further due to the rapid expansion of data centers for artificial intelligence applications. According to the International Energy Agency, the electricity consumption of data centers in 2022 was around 400 terawatt hours, which corresponds to around two percent of global electricity demand - and the trend is rising. Leading cloud providers such as Microsoft and Meta are therefore pursuing targeted strategies to use climate-neutral energy sources.
Trump wants to rely on nuclear energy again
President Trump plans to use the Defense Production Act to declare a national emergency in the area of nuclear supply in order to reduce the USA's dependence on uranium imports - particularly from China and Russia. Since 2021, nuclear energy has received increased political support in the context of the global energy transition and is seen as a central building block for achieving the net-zero targets. To achieve this, global nuclear energy capacity would have to grow by around 15 gigawatts per year by 2030.
Nuclear energy is emission-free and serves as a high-capacity base load source. A new contract cycle is imminent as uranium inventories at utilities are declining and delivery times are up to two years. Rising demand is the result of both expiring long-term contracts and the global construction of new reactors and the growing use of modular small reactors from the end of the decade. The USA is planning a tripling by 2050, China ten and India 18 new reactors by 2032. Due to years of underinvestment, supply remains limited, which indicates a long-term deficit situation and a stable to rising price trend in the uranium market. The three largest producers cover around 46% of global supply. Against the backdrop of geopolitical developments and national subsidy measures, uranium producers could become even more of a focus for investors.
Conclusion: Commodity and metal producers have underperformed the market as a whole so far this year. Stabilization in key emerging markets and the expansion of energy infrastructure should have a supportive effect. Diversified conglomerates with copper exposure remain attractive. In view of the expected strong growth in demand forCO2-free electricity, uranium producers and energy infrastructure companies could benefit from an upward trend in the long term.
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