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On the whole, natural resources experienced a decent recovery following the coronavirus-induced price collapse that occurred in March and April. Precipitous commodity demand declines across developed economies at the onset of the pandemic were, eventually, partially offset by massive global stimulus measures and re-opening economies, as well as by a general slowing of global production and near-complete supply disruption from several emerging market economies. And, while the first quarter was mainly a story of gold and crude oil, in the second quarter, they were joined by copper and iron ore.
For copper, the way in which COVID-19 progressed, geographically, shifted demand and supply fundamentals. At the outset of the pandemic, the impact was predominately on demand in China, Europe and the U.S. but, as restrictions in these regions lifted and as the virus spread to other parts of the globe, its impact was more on supply from Brazil, Chile, Peru and Africa. Copper fell to a low of $4,625 per tonne on 23 March. Thereafter, on the back of massive governmental stimulus and noted supply disruptions, it continued on an upward trajectory to end the first half of the year at around $6,005 per tonne.
Demand for iron ore remained strong during the second quarter of 2020. While, coming into the year, global inventory levels of iron ore had been relatively low in anticipation of increasing production, the introduction of a number of iron-ore-heavy infrastructure projects in China (post COVID-19 onset) improved the metal’s demand outlook for the second half of the year. After hitting a low of just over $80 a tonne on April 1, iron ore finished the first half at approximately $103 a tonne—an increase of over 28% for the quarter.
Similar to the first quarter of the year, the gold industry continued to encounter only marginal impacts from the pandemic. Demonstrating just how much better positioned they were than many other industries to handle the crisis, during the second quarter, miners continued to adhere to the health protocols which allowed them operate safely during onset of the virus. And, while gold stocks did suffer a sharp fall in March as the market crashed on lockdown fears, they continued to be propelled by these health measures, as well as by resilient gold prices. Gold established a new, positive trend during the second quarter of the year, trading around the $1,700 level and reaching a fresh seven-year high of $1,786 (intraday) on 30 June.
Crude oil found itself victim of at least two “black swan” events to start the year. In addition to COVID-19, in March, Russia rejected Saudi Arabia’s demand that it and other non-OPEC (Organization of the Petroleum Exporting Countries) members agree to supply cuts. At the time, the price of West Texas Intermediate (WTI) crude oil had already started to fall amid uncontrolled production and, by 20 April, began trading in negative territory for the first time in history following a historic drop of nearly 300% in the oil futures market. When it became apparent that OPEC and Russia were going to get back together to come up with a new quota system, though, things quickly started to improve. By the end of June, the price of crude oil was close to where it had been before the Saudi Arabia/Russia “standoff”—even in spite of the skepticism around COVID-19 and continued, robust U.S. shale oil production.
While we see the potential for an ongoing recovery in the natural resources space, there are certainly no guarantees that it will be either hassle-free nor consistent across all sub-sectors.
Speaking directly to oil markets (a sector most often used by investors as a gauge for the overall health of the natural resources space), in our opinion, the outlook largely hinges on demand progression which is predominately dependent on the reopening of the global economy. The trend is clearly positive, but equally, it is apparent that there are huge potential set-backs associated with any resurgence of COVID-19. It is also important to note, too, that we don’t see current oil price trends as capable of rescuing the energy industry as a whole. For example, Deloitte recently released a report suggesting that approximately one-third of the U.S. shale industry was technically insolvent at $35/bbl WTI, suggesting many companies will continue to struggle if prices remain in their recent range.
Broadly speaking, we continue to believe that massive, coordinated global monetary and fiscal stimulus is likely to impact global demand for natural resources beyond the extent of the current virus. We have also seen capital expenditures on new supply pretty much evaporate across nearly all natural resources sectors as there has been, quite clearly, a pause in the investment cycle. As we said at the end of the first quarter, these two factors combined (global demand aided by stimulus and supply impacted by capital expenditure cuts), suggest that the demand/supply imbalance in place today may stabilize quickly, and allow for many commodity prices to return back to, or near, their pre-crisis levels. While it may not be either a perfect or uninterrupted process, we do believe that the long-term directional drivers for a rebalancing are in place.
Additionally, we are also persist in the belief that identifying and investing in companies with the strongest fundamentals (quality) remains vital. Because so many of the companies and industries we follow have spent the last several years restructuring their business models and strategy, they entered the crisis with not only secure balance sheets, lower operating costs and improving returns on/of capital (i.e., dividends and share repurchases), but were also strongly positioned to weather the current environment. They have continued to display their strengths while those that forewent the opportunity to get their houses in order when they had the chance, have very publically fallen by the wayside.
I should like to finish by, once again, echoing the sentiments of Jan van Eck, the firm’s CEO, and conveying my wishes for the best to all and their families during these enduring difficult times. And to say that we remain extremely grateful for the millions of healthcare and other essential workers out there who continue to battle on the frontlines of this global pandemic on a day-to-day basis. Thank you.
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