Mining analyst John Meyer speaks to interactive investor about the current state of the mining industry, what impact a resolution to the war in Ukraine might have, and how he thinks things will play out over the next 12 months.
Lee Wild, head of equity strategy, interactive investor: Hello. With me today, I’m lucky to have John Meyer, mining analyst and broker, SP Angel. Hello, John.
John Meyer, mining analyst, SP Angel: Hello.
Lee: What a year for the mining industry. Inflation, aggressive interest rate hikes, a cost-of-living crisis, war in mainland Europe, Covid, I could go on. What have been the most significant events for you and other mining investors this year?
John: Well, it’s been a huge year for different news and different events, and there’s a lot to go on. If you remember, we came out of Covid in the west, and of course, Covid still with us, but we are – as a crisis, that seems to be over. We had the reopening of Western businesses, offices, activities, people going on holiday again. Logistics got going, which is good. The blockages that we’d seen in a lot of logistical chains have eased. Ukraine hit us. That’s still going on, unfortunately, although it looks like the Ukrainians are now powering ahead.
Inflation, of course, there was a double whammy there because not only were we hit by a degree of natural inflation at the end of Covid, where people were running out catching up on buying things that they weren’t able to buy in lockdowns, but then you had this soaring energy inflation that’s come out as a result of the Ukrainian situation. High gas prices, high oil prices, just high energy prices as a whole, some of that caused by our own energy policy as well, which is something we can blame the government about but that’s another matter. We could blame any government, it doesn’t matter which one.
And then of course interest rates, with the Federal Reserve looking to try and push inflation back down again, although very limited in what it can actually achieve, in my view. The interest rate pivot, which people talk about, when will they start slowing interest rates? The rise of the US dollar, which of course rose strongly as US interest rates rose, and can still probably go up a bit more from here, but generally the funds are all long on that. And, the rise of growth in the US economy as manufacturing is re-shored back out of China into the US, and other Southeast Asian countries.
Lee: Well, look, it’s unsurprising that the FTSE 350 mining index crashed from over 20,000 at the start of ’22, but it went below 9,000, but the war in Ukraine was the main catalyst and there have been few positives, I think, to generate any significant buying activity since. How big an impact do you think a resolution of whatever kind to the conflict in 2023 will have on the mining sector and prices?
John: I think many funds are looking through this now, and looking through just to a western victory, if I might call it that. I mean, really, it’s a Ukrainian victory because it’s the Ukrainian soldiers and men who are fighting their way through this, and they’re getting a little bit of help from NATO. In fact, I think they’re getting quite a lot more now, but it’s very much a Ukrainian victory, and I think the fallback in the FTSE 350 was largely sentiment driven. So there was a certain amount of – there was a huge loss of confidence in European industry, and I think some of that is coming back now. The sky hasn’t fallen in on our heads.
Companies have worked out other ways of powering their factories. Over the last 10, 20 years, many factories had moved away from using diesel and heavy fuel oil, to going for gas, so gas burners, gas generators. Now companies like Siemens AG (XETRA:SIE) have been very, very busy retrofitting the machinery so that these can take diesel again, largely, and so that’s an important thing to note. The huge loss of confidence that we saw is starting to claw its way back again, particular now that we know that Russia is not winning this war, and that’s very important.
Lee: So how do you think things will actually play out over the next 12 months for the industry more broadly?
John: Well, I think the risk is on the upside from here. Yes, there’s the potential for some further downside if China catches Covid really badly, but as we saw in the West, Covid doesn’t affect most of the population. Yes, I think they’re going to have a few hard months where people are unwell, people have to go and look after relatives, there will be fatalities as a result particularly amongst the over-80s.
And China isn’t as well vaccinated as the West, and its vaccinations are not as good as the West. They haven’t taken on the MRNA vaccines, they haven’t taken on AstraZeneca (LSE:AZN), although to be honest, the way the virus has mutated and new variants are a bit more skilful at evading even Western vaccines, but the fact is, China has to go through this. But the world is still going to grow because even if China pulls back, so much of that manufacturing will now be done elsewhere, and so we’re not as worried about this as we were a while ago.
Lee: What about the consequences of a recession? I mean, in the UK, it seems – you read the papers, the UK is going to catch this perhaps worse than many other countries, I mean, certainly worse than the US, I think is the current thinking. So how do you think the global mining industry will cope with recessions, not just here, but certainly a slowdown elsewhere in the world?
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John: Well, the UK may well have experienced a degree of recession through 2023, but there’s still quite a lot of cash, I think, swashing around in the economy. And OK, cash is coming out of our pockets at a fast rate of knots, particularly with the cold weather this winter that we’re in now, but I don’t think it’s going to be as terrible as many people are forecasting. And as I say, I think the loss of confidence has been overdone, and I think much will return. So probably yes, some pullback in demand growth, but still growth in the US, still growth in many Western economies, and probably a certain degree of growth even in China.
Lee: John, are there any metals that you think are going to stand out in 2023 that might, whether it be copper, lithium or one of the many others, is there something that you’ve got your eye on and you think will do better than others next year?
John: I think copper will have a very good year. The world is still electrifying as much as it can. The high energy prices have demonstrated to us that we need more solar, more wind power, more diverse means of generating power so that we’re not beholden to Russia for gas supplies going forwards. That means more inter-connectors between countries, more ways of sharing energy, more ways of storing energy.
So I think all this becomes more increasingly important, and all this uses copper. Yes, electric vehicles also use a lot more copper than conventional cars, about twice the amount. And sales of those are going to continue to increase, particularly with Sadiq Khan bringing through his Ultra Low Emission Zone (ULEZ) next year, in August next year. So that suggests to me that some 160,000 vehicles in London are probably going to change. They won’t all become electric vehicles, but a lot of them will in order to avoid paying the £12.50 ULEZ charge. And London’s clearly not going to be the only city doing that sort of thing, so there’s still going to be strong drivers for electric vehicle sales, and I don’t see that slowing particularly.
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