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A secular bull market on metals is about to start
ESG funds

A secular bull market on metals is about to start

The zero COVID policy and the property sector route in China also put pressure on metals prices.

Benjamin Louvet, OFI Asset Management

2022 was, up to now, a really harsh year for industrial metals. It well started, with the post COVID recovery pushing up prices as the beginning of the year. Then, the Ukrainian crisis led to worries about Russian supplies for some of the metals, which pushed prices even higher. The nickel price went even up by more than 200% in just 2 days, forcing the LME to close trades for one week.

But as it became more and more obvious that the metals flow from Russia would keep running, prices moved south. It then accelerated when central banks decided to tighten their monetary policies, raising fears of recession in Europe and the United States. The zero COVID policy and the property sector route in China also put pressure on metals prices.

As China mentioned the possibility of relaxing restricting measures in November, prices rebounded sharply, before moving down again as COVID cases reached a new all-time high at the end of the month.

China is clearly at the heart of the metal’s future. Processing between 40 and 80% of almost all metals that are critical for the energy transition, they are also consuming almost 50% of all industrial metals on earth! For that reason, prices went down as investors saw the restrictions in China and the property sector difficulties. But investors seem to have missed something: the property and construction demand accounts for less than 20% of Chinese demand, whereas the demand for green technologies is rising fast. All in all, demand for copper this year in China is up year on year! And it’s the same in Europe, where demand for electrification is so high that the pandemic nor the current crisis led to a copper demand reduction, according to Trafigura’s CEO Jeremy Weir.

As the world realized its dependency to fossil fuels the worse possible way with the Ukrainian crisis, it seems that there is clearly now the will to accelerate the energy transition, making copper and other industrial metals supply crucial. But as Maximo Pacheco, chairman of the board of Codelco stated a few days ago, “Considering some copper deposits are in the process of stopping production and that other projects are in the process of starting operations, it is estimated that the deficit will be almost eight million tons in 10 years”. As today copper consumption is roughly 25 million tons a year, if we want to balance the market, prices will have to rise sharply to incentivize mining companies to quickly invest. And as the energy transition accelerates, the rise should come quickly and push prices higher as soon as next year and for the years to come… As the IMF said in a report last year, copper could see a price appreciation of more than 60% between now and 2030, while lithium, cobalt and nickel could rise by several hundred percent! We are probably at the beginning of one of the strongest trends ever!

To invest in this theme, OFI Asset Management launched in January 2022 OFI Financial Investment – Energy Strategic Metals. The purpose of this passively managed index fund is to get exposed to the performance of the metals strategic to the energy transition according to the management team.

The fund has currently an exposure to the performance of the following metals: 14% Copper, 14% Nickel, 12% Aluminum, 12% Silver, 12% Platinum, 12% Zinc, 8% Lead, 8% Palladium and 8% Gold. The allocation is fixed and quarterly rebalanced but may change once a year after an investment committee, which may decide to modify the index composition the Fund is exposed to. The committee may in particular decide to add components to the index, to remove some, or to modify the weightings, within the limits set by the prospectus.

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