***Please note that this an abridged version of our quarterly investor letter. Our online version focuses on our market commentary. For a complete copy, please contact info@myst-capital.com***
January 20, 2023
2022 In Brief The commodity market rallies throughout 2021 continued in early 2022 with a combined focus on the energy transition materials and supply side dynamics in the crude oil and natural gas markets. Less than two months into the year, the tail-end risk events began. The conflict in Ukraine sparked all sorts of supply-side concerns in every commodity from grains to crude oil to cobalt and palladium (we touched on these risks in our Russian Commodity Insights).
The tail events were just beginning. In April, Shanghai began a two-month long lockdown that quickly turned a positive first quarter into an historically negative second quarter across the metals space. As we have previously mentioned, base metals witnessed the second-worst quarter since 1960 with Q4 2008 being marginally worse.
The above is returns of an equal weighted base metals index based on spot prices since 1960. The data is not intended to represent hypothetical performance and Myst New Energy Materials fund does not intend to track represented data in any way. The information presented is for research purposes only. Source: Myst Capital | LME | Refinitiv
The supply-side concerns across the global energy space did not wane in the second quarter leaving legacy energy as the out-performer. Crop conditions, fertilizer prices, and shipping concerns aided grains & oilseeds in maintaining a flat return on the quarter.
As Europe began to seek replacement energy from Russian Natural Gas, record amounts of Coal imports flooded into the ARA ports (Antwerp, Rotterdam, Amsterdam). Subsequently, energy producers were forced into higher carbon use which caused a spike in demand for European Carbon Offsets.
The third quarter saw broad risk selling as global central banks ramped up tightening measures and expectations of an early 2023 global recession increased.
Despite the doom and gloom commentary during the third quarter, we began to see some bright spots across the industrial materials universe. While industrial activity continued to slow, a bid emerged in some metals during the third quarter. For example, when copper prices dipped below $7,500/tonne it was apparent that importers and merchants in China were buying up Copper. Prices dipped further; however, the consistent buying/importing activity eventually put a short-term floor in the market.
Consumers, end-users, and merchants began to acquire auto-production materials as expectations for increased production in 2023 increased and inventories of inputs at OEMs appeared thin. This combination led us to increase our exposure late in the third quarter in the metals space such as Platinum (used in Autos) Copper, Aluminium, and Lead.
In the fourth quarter, activity in the physical space began to ramp up as the downstream remained under-purchased for 2023 and merchants took advantage of low prices. Negative sentiment typically keeps consumers (downstream) and merchants from procuring much material due to a combination of anticipating lower prices and the uncertainty around how much they may need in the following quarters and year. At a certain point, prices become too attractive or enough time passes along that they need to at least obtain some sort of inventory/inputs. The fourth quarter represented those two scenarios coming together and resulted in strong gains across the metals space.
The dawn of 2023 has seen wide disparities in sectors and individual assets. Financial players started to pile back into the base metals space in anticipation of an increase in demand out of China. Conversely, the energy sector went in the opposite direction, led by a steep sell-off in global natural gas prices.
Meanwhile, survey indicators began to turn not only in China and Japan but also in Europe where PMI data flipped back into expansion territory in January. We have observed physical buying in the metals space out of both Europe and North America. While this does not ensure that manufacturing is back to 2021 levels, it is a positive sign that the slowest activity may be behind us.
Drought conditions across Argentina have kept soybean prices stable despite anticipation of a large crop out of Brazil. Sugar markets continue to rally on fears of India not expanding their export capacity in a time where uncertainty surrounds the health of their crop. At the same time, Brazilian sugar cane crushers have been focusing on ethanol production causing lower supply in edible sugars.
2022 will go down as one of the more volatile and memorable years across the commodity markets. For 2023, we remain constructive on the core structural thesis surrounding the energy transition.
**The above is a snippet of our fourth quarter 2022 investor letter. For a full version, please reach out to inquire.
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