Ranking the metals 2017, Part I

Producing any sort of investment “ranking” for a community of investors is a perilous undertaking. The activity will likely win some friends whose investments sit at the top of the rankings. Equally, however, it is an exercise which can create enemies – with those readers whose investments are not given what is perceived to be “a fair ranking.”

That said, with it being the beginning of the year readers are wanting to look ahead and be presented with some investment ideas for the coming year. Donning my flak jacket, here is an analysis of metals markets for 2017, with my favorites presented in a Top-3 ranking.

First, however, let’s establish some criteria. Metals markets are being analyzed according to supply/demand fundamentals. With markets (and investors) having a bias toward short-term performance, preference will be given to metals with better near-term fundamentals versus those whose strength is based more on longer-term factors.

With our terms defined, here is a run-down on important metals markets with a brief summary of fundamentals, listed in alphabetical order:

1. Cobalt – By now, cobalt is a metal which should have moved onto the radar of any/all serious investors in metals markets. As with any strong commodity story, the cobalt market is currently characterized by both very bullish demand fundamentals and very bullish supply fundamentals. Demand strength centers on soaring demand for hi-tech, lithium ion batteries. Supply issues center on the relative scarcity of this metal.

2. Copper – The copper market has not been able to recapture the strength of this commodity at the end of 2010, where the price of copper reached an all-time high of approximately $4.50/lb (USD). While LME inventories have fallen considerably from the large glut that existed at the end of 2012, inventories remain relatively abundant while demand pressures are modest.

3. Gold – The gold market is in a long-term supply deficit which is the product of rabid demand in China combined with continued strong demand in India, and unprecedented purchases of gold by central banks. Meanwhile, continued low prices for gold have caused mine supply to actually start to decline.

4. Graphite – Graphite is another small-market specialty metal where demand is growing due to the increasing usage and importance of lithium ion batteries. The graphite market is also vaguely similar to the cobalt market in that increasing supply to meet growing demand will be problematic.

5. Lead – Lead inventory levels have also dropped off from the large glut seen in 2012. However, the market remains in surplus and lead prices have fallen off from the higher prices seen in the fall of 2016.

6. Lithium – Lithium is another metals market which has seen a spike in demand due to new technological applications, in general, and the spike in demand for lithium ion batteries in particular. However, while the strength in demand for lithium is unequivocal, supply fundamentals are much more ambiguous.

7. Nickel – Nickel inventories remain relatively abundant in comparison to the supply-squeeze which occurred in this market close to a decade ago. However, with the price of nickel mired near multi-year lows and with demand fundamentals improving, 2017 could see some price appreciation in this market.

8. Platinum – While the price of platinum is near an historic low versus the price of gold, the lack of demand strength in this market and relatively abundant inventories mean that platinum prices are unlikely to appreciate significantly in the foreseeable future.

9. Palladium – The ‘poor cousin’ of platinum among the PGM group metals, palladium benefits versus platinum from a somewhat stronger demand profile which has resulted in a modest but persistent supply deficit in the palladium market. However, the lack of investor interest in the PGM group metals and uncertain economic fundamentals make any further upside for palladium unlikely over the short term.

10. Silver – Silver is humanity’s most versatile metal, with a host of hi-tech and low-tech industrial applications which ensure continued, strong industrial demand. Meanwhile the silver market has also been in a long-term supply deficit which has existed for roughly 30 years. Silver remains a monetary metal, and thus also benefits from robust investor demand along with its industrial demand.

11. Uranium – The uranium market remains a difficult market to forecast due to the lack of transparency in the nuclear industry. Supply/demand fundamentals remain difficult to discern due to the ever-present issue of decommissioned nuclear weapons bringing more enriched fuel onto the market. Most likely investors will only become aware of the next bull market in uranium after prices have already advanced significantly.

12. Zinc – Like silver, zinc is one of our more versatile metals, having a plethora of uses, and it remains one of the most important base metals. With mine supply flat, the market has fallen into deficit with LME inventories down by roughly 2/3 from the glut which existed in 2012. This draw-down has caused zinc prices to reach levels which haven’t been seen since bull market conditions for commodities peaked in 2008.

Before producing the Top-3 metals ranking for 2017, here is an “honourable mention” list, to explain why some highly touted metals did not crack the Top-3 (again in alphabetical order).

Graphite will continue to exhibit bullish fundamentals through 2017 and on into the future. Most of the global supply of graphite is presently coming from China. With many of these aging mines becoming depleted and with China currently undertaking a consolidation of its graphite mining industry, it would/will be difficult to ramp up production should the market descend into deficit. However, unlike cobalt, there are primary sources of graphite available to increase global production to meet any deficit.

Lithium is presently in a strong bull market, as soaring demand for (in particular) lithium ion batteries has led to a spike in lithium demand. However, while the lithium market experienced a supply deficit in 2016, lithium is one of the Earth’s most abundant commodities. The largest lithium producers still have excess production capacity, and as new producers emerge the market can (will?) quickly move back into surplus.

Nickel is presently a market characterized by depressed prices on the one hand, but elevated inventories on the other. However, with the stainless steel market strengthening and prices rising, this bodes well for some level of recovery in nickel prices in 2017.

Zinc is presently enjoying the strongest bull market conditions in the sector since the global commodities boom cooled-off in 2008. Zinc inventories are at multi-year lows, and prices have spiked to their highest level in eight years. However, as with lithium, zinc is a very abundant commodity and thus there is plenty of capacity to address current demand and rebuild inventories back to normal levels.

2017 is likely to be a tumultuous year in markets. On the one hand, the “U.S. recovery” is now very long-in-the-tooth. U.S. markets have once again reached bubble levels, and are poised to reverse sharply. On the other hand, much of the rest of the world, including many of the strongest Emerging Market economies have been relatively depressed in recent years, and are ready to move into a new growth cycle. Precisely how these fundamentals will play out this year remains a subject of conjecture.

For Canadian investors choosing to remain invested in these markets, the markets for graphite, nickel, lithium, and zinc all boast supply/demand factors which should be supportive of higher prices in 2017. However, there are three other metals for which overall supply/demand fundamentals are substantially stronger.