Despite slowing global growth, demand for certain metals will be strong in 2023 and some of the industry’s big stocks could be worth 25% more next year.
UBS believes the overall commodities outlook has improved on a 12-month view, but that a better buying opportunity exists in three to six months time as macroeconomics are still fragile and fundamentals likely to deteriorate near-term.
It favours commodities that should benefit from the energy crisis, such as thermal coal, zinc or aluminium, or those that have an attractive medium-term outlook so that the market is more likely to look through near-term softness. These include lithium, copper and nickel.
UBS also favours gold in 2023 as prices are poised to continue their recent improvement as real interest rates decline and the US dollar weakens against G10 currencies.
On Glencore, it says the company’s strong coal and aluminium exposure are among factors for making the FTSE 100 stock one of its “buy” recommendations.
But UBS moved Rio Tinto to “sell” this week, having seen shares in the world’s largest iron ore producer jump by a quarter since mid-October. The surge comes on the back of a 30% rise in iron ore price as prospects are boosted by China’s reopening and a weaker dollar.
UBS is sceptical that iron ore fundamentals can support prices above $100 a tonne in the medium term, pointing to expectations for demand to fall by about 2% in 2023 and for supply to grow by about 3%.
On China’s reopening, it warns that weak property starts in 2022 will have a lagging impact on construction activity. Scrap steel consumption will also normalise after falling this year.
The price of copper has recovered by 20% in the past two months, with UBS lifting its own forecast to reflect an improved economic outlook and weaker supply picture. However, it recommends waiting for a more attractive entry point for copper.
However, Glencore warned at an investor day last week that the world’s net-zero ambitions had created the potential for a significant supply deficit over the rest of the decade.
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The world’s fourth-largest copper miner presented estimates showing 2022-30 requirements from renewable energy of 100.1 million tonnes (Mt) and 19.4 Mt relating to electric vehicles.
When including conventional demand, this means the world needs over 350 Mt of copper in the next eight years compared with current supply estimates of around 304.5Mt.
However, Glencore said that increasing supply was far from easy due to country and operational risks and industry wariness of multi-billion-dollar investment decisions.
Glencore shares are rated as a “buy” by Liberum, which has a price target of 670p. It adds that the company continues to benefit from the “strategic missteps” of competitors who opted to exit coal, whereas Glencore chose to wind down assets through a plan for 12 mine closures by 2035.
UBS expects gas and coal prices to remain elevated in 2023, particularly with China’s reopening likely to add to the strain on demand.
It said: “We expect Europe will struggle to rebuild gas inventories ahead of winter 2023-24 without Russian supply and with China's LNG demand normalising as the economy reopens this will result in high gas prices again in 2023, which in turn will support thermal coal prices.”
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