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The Nasdaq Sprott Energy Transition Materials Index (NSETM) fell 4.52% in August to close the month at 960.21. Weakening economic data and deteriorating liquidity in China's shadow banking system weighed heavily on most commodities except energy-related commodities. Among stocks, mining indices most exposed to China, such as lithium and copper miners, experienced the sharpest selloff.
Uranium, by contrast, had a notable month, rallying to near the highs it reached in a spiking market in 2022. Uranium fundamentals are the least exposed to the economic cycle and China's secular and cyclical challenges. Year to date, spot uranium and uranium miners have been among the top-performing commodity and mining equities groups, gaining 25.49%9 and 21.52%,3 respectively, and have outperformed the frothy S&P 500 Index’s YTD gain of 17.40%.12
After five straight months of increases, the broad equity market had its first down month since February as bond yields and the U.S. dollar (USD) continued to rally. The U.S. 10-year Treasury yield reached a 15-year high as real yields rose quicker than breakeven yields following the recently announced massive Treasury issuance and the Fitch downgrade of U.S. government debt. This was despite several countervailing factors, including headline inflation falling to 3.2% from the 9.1% peak, the U.S. Federal Reserve likely near the end of its rate hiking cycle, deflationary conditions in China and record bond inflows.
Though the energy complex rallied on supply restrictions, the rest of the commodity complex fell on news and sentiment from China. Weakening economic data and deteriorating credit liquidity issues from China's shadow banking sector weighed heavily on industrial metals commodities in the first half of August before a modest recovery toward the end of the month. Despite the turmoil in China, the Nasdaq Sprott Energy Transition Materials Index continued its consolidation (see Figure 1).
Figure 1. Nasdaq Sprott Energy Transition Materials Index Continues to Consolidate (2018-2023)
Source: Bloomberg. Nasdaq Sprott Energy Transition Materials Index (2013-2023). Data as of 8/31/2023. Moving average convergence/divergence is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMAs), calculated by subtracting the 26-period EMA from the 12-period EMA. Included for illustrative purposes only. Past performance is no guarantee of future results.
The lithium carbonate spot price experienced extreme volatility in August and fell 25.04% over the month to $12.59 per pound (see Figure 2). The fall came from short-term bearish sentiment largely in reaction to China’s economic concerns. The lithium market is currently very tightly balanced, causing the spot price to become extremely sensitive to small shifts in supply and demand. However, despite the steep decline in the spot price since the November 2022 high, lithium prices are still many times higher than their historical levels (e.g., in late 2020, the lithium spot price was below $3 per pound).
As of this writing, the recently launched lithium carbonate futures contract on the Guangzhou Futures Exchange was $11.91. Though this still puts the market in backwardation, the extent has lessened since last month, and we believe this may imply a slowdown in lithium’s price descent. CEO Paul Graves of lithium producer Livent Inc. echoed our viewpoint when he stated in August that the company believes prices have reached a floor “above $30 per kilo in China based on public data points and ... expect this to be the case through the rest of this year and into 2024.”16
The lithium market is being bolstered by long-term demand for electric vehicles (EVs). In 2020, the average lithium carbonate spot price was $2.90, while global EV sales were 3.2 million. In 2021, the average spot price was $8.53, while EV sales were 6.5 million. In 2022, the average spot price was $32.64, while EV sales were 10.5 million. EV sales at this level now put 23 countries above the 5% adoption point said to trigger mass adoption.17 Bloomberg has forecast that annual global EV sales are likely to nearly triple by 2026 to 27 million.18 Lithium miners are pushing to develop projects as quickly as possible, but the scale of the increase in supply needed is unprecedented and may lead to future market imbalances.
In August, lithium miners fell by 12.27% as many mining equities sold off and the lithium spot price fell. That said, YTD the miners have fared much better than the lithium spot market and are nearly flat, with a -0.67% return. Although the drop in the lithium spot price has reduced miners’ margins, they are still profitable at current price levels.
Lithium mining equities have been a more attractive investment than the physical commodity because of the rise in announced offtake agreements, direct equity investments by original equipment manufacturers (OEMs) into lithium miners, and merger and acquisition (M&A) activity. Most recently, on September 4, 2023, Liontown Resources Ltd's share price jumped 11.50% as its board backed a refreshed A$6.6 billion takeover bid from Albemarle Corporation, the largest lithium producer in the world.19 The acquisition would expand Albemarle’s presence in Australia, where that company already has significant exposure. This is the fourth offer Albemarle has made for Liontown. The previous offer, A$5.2 billion in March 2023, sent Liontown’s stock price up more than 70%.
Figure 2. Lithium’s Long Descent (2018-2023)
Source: Bloomberg. Lithium carbonate spot price, USD/lb. Data as of 8/31/2023. Included for illustrative purposes only. Past performance is no guarantee of future results.
The copper spot price fell 4.49% to $3.81 per pound in August (see Figure 3), and shares of copper miners fell 9.20% as USD strength prevailed and China’s weakening economy dampened markets. China has been the source of swings in the copper price, which generally falls on disappointing economic data from China and rises on news of a potential stimulus from the Chinese government.
In August, the U.S. Department of Energy (DOE) named copper a critical mineral for the first time, following the example of the EU, Canada, China, Japan and India. Copper joins lithium, nickel, cobalt, some rare earths such as neodymium and praseodymium, and others on the list.20
Copper met the DOE’s criteria as a critical mineral:
In copper’s case, supply chain risks include declining ore grades, fewer meaningful discoveries, reduced production guidance due to operational challenges and long lead times. With regard to energy technologies, copper’s role in transmission has made it essential in the electricity grid (see our July commentary), and it plays a critical role in wind and solar energy as well as EVs. An EV requires 4x the copper of an internal combustion engine (ICE) vehicle. Offshore wind energy requires 7x the copper per megawatt (MW) of traditional coal and natural gas sources. Onshore wind and solar require 3x the copper per MW of conventional sources.21 Energy transition represents a significant area of growth for critical minerals, and renewable energy installations are likely to experience strong growth in 2023 (see Figure 4).
Figure 3. Copper Moves on Macro Concerns (2018-2023)
Source: Bloomberg. Data as of 8/31/2023. Included for illustrative purposes only. Past performance is no guarantee of future results.
Figure 4. Renewable Energy Installations Set to Surge in 2023
Source: Canary Media sourcing IEA Renewable Energy Market Update. Data as of 6/30/2023. Included for illustrative purposes only. Past performance is no guarantee of future results.
The nickel spot price fell 9.01% in August (see Figure 5) as China’s negative economic data slowed demand for nickel and stainless steel. Nickel is generally split into Class I, a higher grade for batteries, and Class II, a lower grade for stainless steel. A surplus in the supply of Class II nickel has weighed down the nickel price. Further, processing innovations have allowed lower-grade nickel to be refined into a higher-grade intermediate product (NPI-to-matte production). These developments have contributed to nickel’s year-to-date decline despite low global inventories and longer-term increasing battery demand.
In the recently released 2023 Critical Materials Assessment from the U.S. Department of Energy, while copper made big headlines, the DOE expects nickel and lithium to become the most critical minerals globally between 2025 and 2035. Tailwinds supporting nickel are the fleet penetration of EVs and the nickel intensity of battery chemistries within those EVs. It is important to note that nickel intensities in battery chemistries are generally expected to increase to meet consumer demand for longer driving distances.
Figure 5. Nickel Falls in August (2018-2023)
Source: Bloomberg. Data as of 8/31/2023. Included for illustrative purposes only. Past performance is no guarantee of future results.
China’s government has launched waves of regulatory "reforms" for several years. Its crackdown on the property sector, greater regulations on technology companies, tightening control in Hong Kong and stringent zero-COVID policies have created uncertainty and unease. Through these measures, the Chinese Communist Party (CCP) has reasserted substantial control over the economy, with policy being driven by hardline ideology and societal intervention. Ostensibly aimed at establishing stability, these actions have stunted economic growth by eroding the confidence of businesses and investors.
After two decades of robust growth, China's economic engine shows signs of strain. The latest data paints a bleak picture. July saw a 14.5% decline in exports, with exports to the U.S. plummeting by 23%. Concurrently, imports shrunk by 12.4%, with imports from the U.S. down by 11%. These statistics reflect weaker domestic and international demand consistent with prior distressed levels (see Figure 6). More concerning are the deflationary readings. China’s producer price index decreased by a worrying 4.4% in July, while the consumer price index fell by 0.3%. Such deflationary pressures in a highly overleveraged system (China's total debt to gross domestic product [GDP] ratio is 360%) are warning signs of a possible "balance sheet recession."22
Simultaneously, the People's Bank of China has cut interest rates to combat deflation. These cuts have failed to spur borrowing and spending. The dearth of credit demand is not a cyclical issue but indicates underlying structural problems within the economy. Moreover, the rate cuts have led to the devaluation of the renminbi (RMB), which serves as a red flag for an economy grappling with internal and external challenges. While the Chinese government is weakening its currency to ease financial stress, it has aspirations for internationalizing RMB use and is avoiding a drastic devaluation that could imperil its long-term goals for the currency. Since early 2022, the U.S. dollar-RMB (USDCNY rate) has had one of its most dramatic declines and has now weakened to 15-year lows.
Figure 6. Bad China Data: Weak External and Internal Demand, Deflationary Readings, Highly Leveraged System
Source: Bloomberg. Data as of 8/31/2023. Included for illustrative purposes only. Past performance is no guarantee of future results.
A more ominous concern looms over China’s economy — the shadow banking system.23 This parallel financial network (approximately $3 trillion in size) operates outside traditional regulatory frameworks, raising concerns about financial system stability. Recently, China has faced many economic challenges, but growing concern over the country's shadow banking system adds another layer of complexity to the unfolding narrative (see Figure 7).
Financial service provider Zhongrong International Trust Co. Ltd. missed multiple payments on trust products to investors in August, raising concerns about liquidity at parent Zhongzhi Enterprise Group, the trillion-yuan conglomerate at the heart of China's burgeoning shadow banking crisis. The immediate problem is rollover risk, as new wealth management products must be sold to service maturing obligations, creating a Ponzi-like vulnerability. Adding to the complexity are the intricate cross-holdings and overlapping risks within Zhongzhi. This labyrinthine structure amplifies the potential impact of its financial troubles, potentially sending shockwaves throughout the broader system.
Notably, the bankruptcy of embattled property developer Evergrande Group (with approximately $300 billion in liabilities) highlights the critical role of shadow banks as primary funding sources for the property sector. This interdependency has fostered a precarious cycle of liquidity troubles, particularly when developers encounter setbacks. As the crisis deepens, the Chinese government may be compelled to step in as the lender or spender of last resort. Drastic fiscal stimulus measures could be deployed to boost demand, alleviate property sector restrictions and restore investor confidence.
China finds itself at a precipice. The deflationary landscape poses a formidable challenge, and the shadow banking system's vulnerabilities further deepen the uncertainty. The market is waiting to see how the Chinese government will address the myriad issues beyond its current patchwork solution of small-scale stimuli and decrees. If the situation deteriorates to mass social unrest, the government may have no choice but to launch a massive fiscal stimulus reminiscent of 2009. A powerful rally in commodities would likely follow if a substantial fiscal stimulus package were announced, especially since the U.S. economy appears to be avoiding a recession.
Figure 7. A Quick Summary of China's Shadow Banking System
The shadow banking system in China refers to a network of non-bank financial intermediaries and activities operating alongside traditional banks, often with limited regulatory oversight.
Types of Shadow Banking Activities
Key Concerns and Risks
Source: Sprott Asset Management. Included for illustrative purposes only.
China's reform era was characterized by stability, openness and rapid growth, but these pillars have been dismantled as the CCP has gained more control. The post-reform era has been marked by uncertainty and a departure from the practices of the past few decades, with ideological hardening and restrictions on engagement with the West. President Xi Jinping's consolidation of power and various crackdowns have raised concerns. Slowing economic growth in China adds complexity to the CCP's ambitions. China's economy remains substantial and interconnected globally, but its economic growth model powered by manufacturing and infrastructure projects has run out of steam and greatly reduces its influence on the commodity supercycle.
China has been the dominant driver of metals demand and pricing for the past two decades as it urbanized, built its infrastructure and became the world's largest export manufacturer. But as the tidal forces of deglobalization speed up, industrial metals (and, by extension, energy transition materials) are caught between the emerging new energy transition-led supercycle and the fading old China-led commodity cycle.
The engines that powered China's extraordinary growth are now sputtering. A deflating property bubble and dampening demand for China’s exports have cast a shadow on the country’s economic trajectory. Despite the extreme stress in China's property sector, a patchwork of stimulus measures has failed to meet expectations.
Since their peak in January 2023, metal prices have been in a choppy decline as bearish China data and bullish energy transition data pull markets in different directions. The turmoil is evident in the long-short positioning of funds on the metals exchanges; they have switched long-short positions several times this year. Range trading and ongoing volatility reflect the market's reaction to poor China data and hopes for future government stimulus.
While the short term remains uncertain, metals tied to the long-term growth of energy transition applications continue to gather momentum as the U.S. and EU ramp up EV sales and renewable energy infrastructure, driving demand for energy transition metals.
As the global push for sustainable development and climate action gains momentum, the U.S. Inflation Reduction Act (IRA) stands as a pivotal piece of legislation shaping the landscape for energy transition-related industries. This comprehensive act with massive spending powers holds transformative potential for business investment and technological innovation.
Analysis from the U.S. Treasury Department reveals the unique trend that, amidst uncertainty, the IRA has sustained private business investment. This counters historical norms, because business fixed investment typically lags during post-recession recovery phases (see Figure 8). The IRA, combined with the Bipartisan Infrastructure Law and the CHIPS and Science Act, has invigorated business investment despite rising interest rates. The resurgence of spending on research and development (R&D) is a pivotal component of this investment surge. U.S. R&D investment has expanded by 17% since early 2020, surpassing growth rates typically observed at this stage of the business cycle.24 This R&D resilience, a hallmark of modern supply-side economics, spurs technological advancements that lead to long-term economic growth.
Figure 8. U.S. Business Investment Runs Ahead of Trend
Source: U.S. Bureau of Economic Analysis; U.S. Treasury calculations. Business cycle peaks are defined as the final quarter before a recession begins, as determined by the National Bureau of Economic Research. All business cycle peaks since 1969 are included in "Average Recession & Recovery." Included for illustrative purposes only. Past performance is no guarantee of future results.
Beyond macroeconomic shifts, the IRA has ignited a manufacturing renaissance within the clean energy sector. In the year since its passage, the IRA has sparked over 100 new clean energy manufacturing announcements and nearly $80 billion in private investment. The IRA mandates that substantial portions of the approximately $390 billion in climate tech funding be allocated to products at least partially manufactured in the U.S. The ripple effects of this policy pivot have extended across global markets. The U.S. has become the most desired destination for global capital in the cleantech space. This seismic shift has attracted a wave of private investment from domestic and foreign firms, each eager to harness the potential of the clean energy boom.
|Metric||8/31/2023||7/31/2023||Change||Mo % Chg||YTD % Chg||Analysis|
|Nasdaq Sprott Energy Transition Materials™ Index1||960.21||1,005.62||(45.42)||(4.52)%||2.82%||Weakening economic data and deteriorating credit liquidity issues from China's shadow banking sector weighed heavily on the industrial metal commodities complex in the first half of the month before a modest recovery. Those metal miners more leveraged to China experienced sharp markdowns, while uranium miners soared as spot uranium approached the 2022 highs.|
|Nasdaq Sprott Lithium Miners™ Index2||916.16||1,044.35||(128.19)||(12.27)%||(0.67)%|
|North Shore Global Uranium Mining Index3||2,949.22||2,648.23||300.99||11.37%||21.52%|
|Solactive Global Copper Miners Index4||141.30||155.62||(14.32)||(9.20)%||8.45%|
|Nasdaq Sprott Nickel Miners™ Index5||789.03||856.18||(67.14)||(7.84)%||(13.30)%|
|Nasdaq Sprott Junior Copper Miners™ Index6||957.84||1,041.40||(83.56)||(8.02)%||11.59%|
|Nasdaq Sprott Junior Uranium Miners™ Index7||1,138.00||1,006.70||131.30||13.04%||10.88%|
|Lithium Carbonate Spot Price $/lb8||12.59||16.80||(4.21)||(25.04)%||(63.14)%||Weak economic data weighed on prices except for uranium. Uranium continues to show strength even in weak economic environments.|
|U3O8 Uranium Spot Price $/lb9||60.63||56.21||4.42||7.85%||25.49%|
|LME Copper Spot Price $/lb10||3.81||3.99||(0.18)||(4.49)%||0.48%|
|LME Nickel Spot Price $/lb11||9.11||10.01||(0.90)||(9.01)%||(32.79)%|
|S&P 500 TR Index12||4,507.66||4,588.96||(81.30)||(1.77)%||17.40%||The broad equity market had its first negative month since February 2023 as yields increased to 15-year highs and the U.S. dollar continued to rally. The energy complex rallied on supply restrictions, but the rest of the commodity complex fell on negative news and sentiment.|
|DXY US Dollar Index13||103.62||101.86||1.76||1.73%||0.09%|
|BBG Commodity Index14||106.03||107.34||(1.31)||(1.22)%||(6.01)%|
|S&P Metals & Mining Select Industry TR Index15||2,661.89||2,759.16||(97.27)||(3.53)%||4.32%|
Source: Bloomberg and Sprott Asset Management LP. Data as of 8/31/2023.
Past performance is no guarantee of future results. Included for illustrative purposes only. You cannot invest directly in an index.
|1||The Nasdaq Sprott Energy Transition Materials™ Index (NSETM™) is designed to track the performance of a selection of global securities in the energy transition materials industry, and was co-developed by Nasdaq® and Sprott Asset Management LP.|
|2||The Nasdaq Sprott Lithium Miners™ Index (NSLITP™) is designed to track the performance of a selection of global securities in the lithium industry, including lithium producers, developers and explorers; the Index was co-developed by Nasdaq® and Sprott Asset Management LP.|
|3||The North Shore Global Uranium Mining Index (URNMX) is designed to track the performance of companies that devote at least 50% of their assets to the uranium mining industry, which may include mining, exploration, development and production of uranium, or holding physical uranium, owning uranium royalties or engaging in other non-mining activities that support the uranium mining industry.|
|4||The Solactive Global Copper Miners Index includes international companies active in exploration, mining and/or refining of copper. The index includes a minimum of 20 and a maximum of 40 members. The calculation is done in USD as a total return index. Index adjustments are carried out semi-annually.|
|5||Nasdaq Sprott Nickel Miners™ Index (NSNIKL™) is designed to track the performance of a selection of global securities in the nickel industry.|
|6||Nasdaq Sprott Junior Copper Miners™ Index (NSCOPJ™) is designed to track the performance of mid-, small- and micro-cap companies in copper-mining related businesses.|
|7||Nasdaq Sprott Junior Uranium Miners™ Index (NSURNJ™) is designed to track the performance of mid-, small- and micro-cap companies in uranium-mining related businesses.|
|8||The lithium carbonate spot price is measured by the China Lithium Carbonate 99.5% DEL. Source: Bloomberg and Asian Metal Inc. Ticker L4CNMJGO AMTL Index. Data converted to pounds and to USD with Bloomberg FX Rates.|
|9||The U3O8 uranium spot price is measured by a proprietary composite of U3O8 spot prices from UxC, S&P Platts and Numerco.|
|10||The copper spot price is measured by the LME Copper Cash ($). Source: Bloomberg ticker LMCADY. Data converted to pounds.|
|11||The nickel spot price is measured by the LME Nickel Cash ($). Source: Bloomberg ticker LMNIDY. Data converted to pounds.|
|12||The S&P 500 or Standard & Poor's 500 Total Return Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.|
|13||The U.S. Dollar Index (USDX, DXY) is an index of the value of the U.S. dollar relative to a basket of foreign currencies.|
|14||The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index that tracks prices of futures contracts on physical commodities and is designed to minimize concentration in any one commodity or sector. It currently has 23 commodity futures in six sectors.|
|15||The S&P Metals & Mining Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS metals & mining sub-industry.|
|16||Source: Livent Corp., 2Q23 earnings call transcript, August 3, 2023|
|17||Source: Bloomberg, “Electric Cars Pass a Crucial Tipping Point in 23 Countries,” August 28, 2023|
|18||Source: PV Magazine, “EV sales to account for one-third of US passenger car sales by 2026, says BNEF,” June 30, 2023|
|19||Source: Reuters, “Lithium developer Liontown backs Albemarle's $4.3 billion bid,” September 4, 2023|
|20||Source: Mining Technology, “U.S. adds copper to critical raw materials list,” August 4, 2023|
|21||Source: International Energy Agency, “The Role of Critical Minerals in Clean Energy Transitions,” March 2022|
|22||A balance sheet recession, also known as a debt-deflation recession, is an economic phenomenon characterized by a prolonged period of weak economic growth or contraction triggered by a significant decrease in the value of assets and high levels of debt among households, businesses and financial institutions. This concept was popularized in the aftermath of the Japanese economic crisis of the 1990s.|
|23||The shadow banking system in China refers to a complex network of non-bank financial intermediaries and activities that operate alongside the traditional banking sector, often with limited regulatory oversight. China's shadow banking system has grown significantly, raising concerns about financial stability and systemic risks.|
|24||Source: U.S. Department of the Treasury, “The Inflation Reduction Act and U.S. Business Investment,” August 16, 2023|
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