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Traditionally investors have looked at precious metals as an asset class which offered a safe haven niche, while industrial metals are more seen as sensitive to the ongoing economic dynamics and the forecasted economic outlook. The main precious metals are gold, palladium, platinum and silver, while the well know industrial metals are copper, aluminium, zinc and nickel. This is the traditional view-however overtime, selectively, both precious and industrial metals emerged to be important for other avenues.
Let’s refresh our memories. In September 2015, the automobile industry was shocked by the news that Volkswagen (VW) had intentionally programmed their diesel engines tests to satisfy the ‘Clean Air Act’ set by the United States which is designed to control air pollution. A scandal which tremored not only the industry per se, but more concerning the credibility of VW and other auto manufacturers. The said scandal has triggered a remarkable demand for palladium a precious metal which over the past years has become more precious than gold.
Palladium is used in catalytic converters, a device which controls and reduces exhaust emissions and other damaging gasses. Indeed the scandal triggered a two-fold demand for this precious metal, namely auto manufacturers themselves which shifted from the traditionally used platinum to palladium given its more effectiveness in reducing emissions. Moreover, since the emissions scandal, the automobile industry has also experienced a shift in consumer demand. More are looking into buying a petrol driven vehicle which predominately uses palladium in their catalytic converter.
It is no secret that electrical vehicles (EV) will eventually become the new norm in the coming future, however in the short to medium term we will continue to experience a shift from diesel to petrol engines, which in turn is a positive for precious metal.
More of a longer shot is the use of both platinum and palladium in the development of lithium-ion batteries, which should enhance battery performance amongst electronics, but also within the EV space. Thus a demand which should continue to support the metal per se.
Furthermore the metal might experience also demand/supply imbalances as the threat of supply disruptions by namely South Africa, which produces circa 38 percent, might be another catalyst for palladium. Thus no surprises that this precious metal has surged by circa 350 percent since 2016, while gold was up circa 45 percent-clearly conditioned by different dynamics despite usually considered within the same basket.
Another interesting metal which we believe should be supported in the short-term but also over the longer term is copper. Traditionally, copper which forms part of the industrial metals basket is very sensitive to economic outlooks of growing economies. China which is one of the main drivers in terms of demand had harshly negatively conditioned the price of copper when in 2015 woes surrounding China’s economic growth prevailed. The said sensitivity comes to no surprise when considering that China’s demand for copper is just over 50 percent of global demand.
Following the hiatus brought about by the pandemic, we believe that 2021 is a year of normalisation for the global economy, and with this believe copper should be supported. As economies will try to rebound from the pandemic, demand for copper should remain robust also given the remarkable fiscal injections by Governments which should aid well infrastructure which is benevolent for copper.
Rightly so, many investors would question whether this expected economic rebound is mostly priced-in within the current price of copper. Possibly yes, but we still see value over the longer term.
Our view is based both from a regional and sectorial perspective. We believe that China’s long term strategy of self-sufficiency is one of the supportive elements for copper. Domestic demand will be a key driver to achieve this prophecy, however we believe that China has what it takes namely given its attractive demographics and its well-versed disciplined policies.
From a sectorial perspective, the E within the ESG proposition continues be in our view another key driver for copper demand. EV is one of the drivers and this shift will increase remarkably the demand for copper from the traditional combustion engine.
However more interestingly is the increased demand we are seeing from renewable energy systems given that copper is considered as a highly efficient metal. In addition, a new emerging trend is the ideology of ‘smart construction’ amongst the sustainable building community. Copper plays a very important role in achieving this greener era
Moving forward, it is no secret that Governments hold specific targets in achieving a more sustainable climate. The said transition is not an option, but an obligation for the benefit of all. In this regard we believe that there is a long term investment argument for selective metals. It is evident that the cohort move towards a greener world will inevitably push selective metals to be more precious than others.
Disclaimer: This article was written by Jordan Portelli, Chief Investment Officer at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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