**The following is a snippet of Myst Capital's first quarter of 2023 investor letter. For a full version, please contact info@myst-capital.com.
By Bentley Atteberry
April 25, 2023
The banking hiccup in March 2023 will likely be what most use to characterize the first quarter of 2023; however, the industrial commodity space was filled with idiosyncratic events impacting a variety of markets both positively and negatively. That combination along with a quick reversal in manufacturing activity resulted in a poor first quarter for industrial commodities.
It would be impossible to ignore the $320 billion elephant in the room (or no longer in the room) when discussing the first quarter. With that said, I will save from repeating the common rhetoric and focus on the potential impact across the broad industrial material space. Our largest concern was actually not around the collapse of the two U.S. regional banks. The uncertainty in our space has risen out of the news of the Credit Suisse take over by UBS.
Despite being completely landlocked, Switzerland is home to some of the largest physical commodity traders globally and Swiss banks play an important role in the global economy through commodity trade financing. Large traders such as Trafigura use over 100 banks globally for their letters of credit (credit to procure, store, and/or transport metals, agriculture, and oil products); however, the small to medium sized merchants are concerned that Credit Suisse potentially leaving the space could lead to less supply thus more expensive credit. This has been an ongoing theme as the availability of trade finance has diminished in recent years with ABN AMRO and BNP Paribas stepping back from that area.
For instance, we have recently heard of Tin traders having to pay 7-8% to finance physical, which is quite costly given the assets that back the credit.
Generally speaking, higher financing costs lead to expensive inventory costs which encourages merchants and the downstream consumers to live more on a hand-to-mouth basis. While the end result of this is not yet known, it has caused lower inventories, which results in less trading and subsequently higher volatility.
The sentiment driven market reaction on the back of the SVB failure was not to be ignored as the more speculative driven commodities witnessed the sharpest move. Crude oil and petroleum products took the largest initial brunt falling around 11% over the ensuing week but quickly recouped most losses by the end of the quarter. Gold was the headline bid-catcher, however Silver was the outperformer since the SVB collapse up a whopping 18% from March 10 through the end of the quarter where gold was up only 6.8%.
Moving forward, the potential contagion in the banking and credit sectors do not appear widespread, but the direct and indirect impacts of the SVB collapse will take time to filter through. We do not expect a large direct impact in the industrial commodity sectors, however, we remain vigilant and alert to further potential impacts to the upstream, midstream, and downstream sectors.
The drag in the energy space during the first quarter came from global Natural Gas prices. US Henry Hub prices and European prices (Dutch TTF) fell 35% in the quarter, while benchmark spot LNG prices falling a hefty 55%. After the extreme bomb cyclone in December 2022 froze off some natural gas wells in the US and set a record for daily natural gas demand in the lower 48, a strong pacific jet set in for the winter resulting in a mild to warm season throughout the high demand regions in North America. A similar story persisted across much of the Northern Hemisphere and outside of talks of a late season Sudden Stratospheric Warming (SSW), the polar vortex remained put together much of the winter. This resulted in abnormally low heating demand throughout much of North America and Europe.
Although Nord Stream pipeline gas remained cut off, Europe was able to refill inventories through LNG imports, including record LNG imports from Russia. These factors resulted in near record storage levels across both continents and suppressed prices. Looking forward, we will be watching Europe's actions towards keeping their inventories full heading into next fall/winter as well as the actions of the price sensitive buyers in Asia, such as India and Pakistan, that have started to re-enter the LNG market as prices have fallen.
Flip a first quarter natural gas chart upside down and you get one that looks a bit like a Sugar chart. Impressively, Sugar (#11) ended the quarter up nearly 25% (and a further 18% through first 25 days of April). Our biofuels desk noted, sugar markets showed significant strength due to India's decision to leave their export quota unchanged. Much of this decision was based upon the country's aggressive shift to ethanol, which is a supply side substitute of Sugar. The decision not to lift the quota left Brazil and to a lesser extent Thailand as the only real suppliers of global Sugar which surprised global importers.
The talk of the metals markets in North America during the first quarter was the continuation of the extreme rise in hot-rolled coil steel (HRC) prices. Late in 2022, positioning in the market became difficult as near and longer-dated future prices sat 20-30% above the spot market at the time. Since 2020, we have been talking about a particular large producer's potential pricing power over the market in North America. Even so, we underestimated the strength of pricing power Cleveland Cliffs has over the market. A series of $50/tonne price hikes beginning in late November 2022 were then followed by aggressive $100/tonne hikes throughout March and February. The end result was spot prices rising nearly 100% between late November and the beginning of April 2023.
Base metals had the most positive attribution to the fund over the first quarter with a majority of that coming during the first 45 days of the year. In January, we took advantage of a rally that was fueled by speculation on a booming China reopening. At the time, it was apparent that the short-term physical fundamentals were not lining up with the rally in various metals such as copper and aluminium. Simply put, the downstream was not buying the rally unless they absolutely had to.
As shown, sentiment driven market moves can be pristine opportunities for hedging or tactical positioning, however, not all environments are created equal. At the end of 2022, we formed a cautious, yet optimistic tone. Bright spots began to appear in January as manufacturing activity surprised to the upside in Europe and procurement from the mid and downstream appeared in North America. We still did not want to turn fully optimistic at that point as we needed to see follow through. We were concerned that the rally in January was the result of procurement as finances became available downstream at the start of the year. The short-lived nature of the procurements in various materials along with uncertain rhetoric from the downstream lead us to believe these stockpiling purchases were relatively. Therefore, our near-term outlooks in Europe and North America remain highly unclear.
In China, we mentioned in our last letter that we were worried the markets were getting far too excited and ahead of themselves. That proved to be the case as solid demand was disappointing for the markets. Moving forward, local governments continue to hold onto cash reserves. While the uncertainty around cash being deployed towards new real estate projects, more actionable plans have been put into place for continued buildout of solar, wind, and grid connectivity projects. Furthermore, the New Energy Vehicle sector remains somewhat downbeat in China despite a relatively strong consumer although there have been signs of pickup in that sector over the past week (late April). We continue to have a close eye on the auto sector as opportunities have opened up in a few assets tied to EV production such as Lithium following its 19 consecutive weeks of selling (down around 52%).
Overall, the uncertainty of the first quarter has only led to further uncertainty. Despite the near-term cloudiness, the long-term outlook in the secular fundamentals remains strong.
**The above is a snipped from the Q2 2023 Myst Capital Investor Letter. For a full version please reach out to us at info@myst-capital.com.
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Myst Capital offers market insights and commentary. Our market insights are intended to simply be insights, commentary and research for those who are interested in this information. This research is not a solicitation for investment with Myst Capital nor should such market research be construed as trading advice to buy or sell any specific financial investment. The above commentary, insights, and research may or may not fully represent the opinions of the entire Myst Capital team and is not intended to be indicative of any investments.
Myst Capital Management LLC is dually registered in The United States with the Commodity Futures Trading Commission (“CFTC”) as a Commodity Pool Operator and Commodity Trading Advisor and is a member of the National Futures Association. This document is for informational purpose only and is in no way a solicitation of an offer to sell securities or investment advisory services.
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