Could 2021 be a transformational year for precious and speciality metals?

While the natural resources sector faced difficulties during 2020, precious metals delivered strong performance and many industrial metals have recovered after the initial pressure. Mining companies have largely demonstrated operational resilience during the crisis, enabling them to emerge well positioned to take advantage of the key themes that are developing out of this extraordinary year.

In particular, the green revolution is progressing even faster than we could have anticipated at the start of the year and is likely to be boosted by targeted stimulus spending. At the same time, the economic and political environment is proving very supportive for gold as real interest rates are set to remain low, monetary policy builds inflationary pressure and political tensions remain.

As the global economy begins to emerge from the COVID-19 crisis, which sparked sharp recessions and a historic response by policymakers, the outlook for metals and mining is shifting rapidly, with several sub-sectors poised for significant potential growth in the months and years ahead. The mining sector remains undervalued relative to broader equity markets and relative to its historic levels. Prior to the onset of COVID-19, the natural resources sector was already under pressure from the US-China trade war and its associated geopolitical and economic uncertainty. Yet the world has changed dramatically over the past year, the decline in economic activity during 2020 has set the stage for a global economic recovery, aided by the emergence of a number of potential vaccines which will be rolled out by governments in the months ahead. 

For commodity prices, the level and focus of economic stimulus packages being implemented in response to the COVID-19 crisis is highly significant. Policymakers are implementing historic levels of economic stimulus, amid strong political support for higher levels of government spending and intervention. The focus on low carbon industry and green technology, particularly in Europe and China, is a major theme for miners. As specialists in this sector, we aim to identify the commodities most likely to benefit from various ‘new green deals’, such as vanadium, certain grades of graphite, and high purity alumina. We believe a period of growth lies ahead for certain sub-sectors of the mining industry. 

Our team identifies two key long-term trends which will drive the mining sector in the months and years ahead and which inform our investment decision making.  The first positive trend for miners is the global movement towards sustainability and the development of green technology. Demand for speciality metals is forecast to surge amid potential supply shortages, as factors such as rising electric car production, increasing renewable energy usage, and the development and expansion of battery capacity require a significant increase in demand for a number of strategic raw materials. 

Tesla Battery Day in September drew attention to the huge demand potential in focused ‘battery metals’ such as lithium, nickel and graphite. Tesla’s planned 3TWH of battery capacity could require 10x the current lithium market, 6x the current cobalt market and 2x the current nickel market, over the next ten years. Manufacturers’ valuations have reflected the growth potential for the sector, yet the underlying commodity prices have remained subdued so far. It is increasingly clear that the market is underestimating the future demand implications. 

The second major trend for miners is the growth of fiscal and monetary imbalances, including the build-up of inflationary pressure caused by years of loose monetary policy by central banks and the movement towards higher levels of government spending and rapid debt expansion. These trends have been exacerbated by the policy response to the COVID-19 crisis. Backed by a supportive macroeconomic environment, many gold producers are in the best financial shape they have been for a long time, but company valuations do not yet reflect this. The US election results are unlikely to change the fundamental economic outlook for government spending, monetary policy and economic risk, which provide a supportive backdrop for gold. We believe there is far more to come from the precious metals sector in the months and years ahead.

We have reached a critical juncture for the mining sector, as the global economy moves into recovery supported by historic economic stimulus packages, funded by debt, with a particular focus on boosting the growth of low carbon industry and green technology. Going into 2021 we believe there is a lot more to come from the mining sector, as the global economy moves into the aftermath of the COVID-19 crisis and towards recovery. Speciality metals producers face a transformation of demand, driven by the green recovery and transition towards sustainability, while precious metals are backed by a highly supportive macroeconomic environment of low real interest rates, soaring debt and rising inflationary pressure.

Most importantly for Baker Steel, however, is the margin expansion underway currently, led by the gold equities sector. Producers’ margins are expanding, and dividends are increasing, yet the sector remains fundamentally undervalued relative to broader equities. Our team remains focused on identifying those producers which are best positioned to benefit from margin expansion and a share price re-rating as metals prices moves higher. Click through here to gain a better understanding of our range of funds and strategies which reflect our outlook for the next year.