You're listening to Strictly Business Podcast with Lindsay Williams.
Commodities have caught the eye in 2025 and there's so many commodities to cover
that it would be beyond the
scope of this podcast.
So we're going to be focused on precious metals, that's the PGMs and gold, and also
the oil price.
We'll have a look at that, the fundamentals behind all of those
commodities.
And also at the end we'll talk about copper, which has come late to the party,
with me to do so.
is Mohamed Dokrat from 91 in Cape Town.
It's been quite a year, Mohamed.
You must have been very busy.
Yeah, thanks for having me, Lindsay.
And I mean, it's been certainly interesting in the commodity space.
And I think broadly as a theme, coming out of COVID, many supply chain bottlenecks
were identified.
And as we move into a more sort of geopolitically fragmented world,
we've seen the desire for many governments to ensure production and to secure book.
the supply of critical minerals across many different sectors.
And so this broad sort of theme has seen relatively strong demand for commodities.
And if you sort of factor in what's happening on the supply side,
this has resulted in pretty strong metal prices across the board, but especially,
as you mentioned,
the precious metals.
And if you look at the PGMs in particular, we've been bullish on this.
commodity for most of the last year.
And there's sort of three primary reasons why.
The first is that the supply picture based on our fundamental bottom-up modeling
indicated
that you were going to see lower supply coming out of the primary producers in
South Africa.
And that's just the function of them not having sufficient margin and capital to
invest over the past decade.
And as some of their older mines from the 1990s start to come to the end of life,
we have not seen enough investment into replacement or growth projects to offset
this.
And basically every year from here on till 2030 plus,
we see a low supply coming out of South Africa.
If you add to that then what's happened on the secondary supply market, you know,
you've seen significant downgrades to forecasts.
relative to a few years ago.
And there's basically just not been enough scrappage of second-hand vehicles,
which is the primary contributor to secondary PGM supply.
Do you think there's going to be in the situation where there's actually a
shortage of certain of the PGM basket?
Yeah.
And so if you look, you know, on our fundamental modeling, And then we've got
near to medium term.
deficits for all three metals, so platinum, palladium and rhodium, over the
next two to three years.
And in fact the World Platinum Investment Council just put out their latest forecast
which indicates an 850,000 ounce
platinum deficit in 2025 and continued deficits of about 600,000 ounces per year
thereafter.
Now on a market of 8 million ounces in total that's a 10% deficit which is
substantial in any commodity.
I mean, in copper, for example, that would equate to a 2.5 million ton deficit,
and the market's getting excited about a 200,000 to 300,000 ounce deficit next
year.
So it looks quite constructive on that metric.
And, you know, as I mentioned, supply certainly is the key driver over the sort
of near term.
But we also think that demand expectations have been underestimated by the market.
And, you know, talking about deficits in PGMs would have been...
seen as ludicrous just two years ago when everyone expected battery electric
vehicles to rapidly reduce the amount for
pgms which are mainly used to clean up exhaust emissions from combustion engine
vehicles
and so i think it was about two years ago and the market thought that by 2030 bev
sales would account for one in every two cars but actually you've seen over the
last year or
two That estimate has dropped to about 30 to 35 percent of new car sales by 2030.
And even there, there seems to be some downside risks, just as the challenges and
the cost of implementing this massive energy
transition are becoming more apparent.
And if you add to that the fact that we enter in a global interest rate cutting
cycle where consumers
might have more disposable income,
the average age of vehicles far exceeds long-term averages across the U.S.
and the European markets.
And actually, China is just making cars more affordable again.
So we think that the overall vehicle demand number will likely surprise market
estimates.
And if you combine that with the very tight supply coming out of the PGM
markets,
we think that these deficits could materialize over the next two to three
years at least.
So it's almost the perfect storm for PGMs, if you're a bull, that is.
And obviously, things change.
But it seems to me that this could be...
Quite a long-term cycle we're going into to the upside.
Let's move now to the yellow metal.
I look at the yellow metal and I think, right,
you've got the really big demand and the really big solid holders came from the
central banks.
And then that pushed the price up.
And then that got people excited.
And people got excited and started buying.
And ETFs were created.
And it went on from there.
It's obviously had a pullback, which we'll talk about.
But is gold still in the bull market and why, please, Mohamed?
Yeah, I think you've sort of captured the broad sort of reasons behind the rally.
And it's been quite incredible over the past two years.
And, you know, the 50% rally year to date has been quite staggering.
And so, I mean, the way I think about it, there'd probably be two broad themes that
are driving this.
And within those, obviously, there's a lot of subcomponents.
But the first one just being the mix of monetary policy.
easing conditions that are manifesting and are likely to continue as the Federal
Reserve and other central banks cut
interest rates.
And secondly, this fiat currency debasement theory,
which is certainly driving central bank and more recently investment demand as a
portfolio hedge.
And so, you know, just starting with, you know, 2022, when Russian central bank
assets were frozen,
there was a market shift.
in central bank purchases of gold coming from emerging markets, especially China.
And so, you know, in 2024, about 5,000 tons of gold was consumed,
with central banks accounting for about 25% of that, so over 1,000 tons, for the
third straight year in a row.
And this year, again, we're running slightly below that sort of level that we
were last year,
but still well above the 2010 to 2021 average.
And more recently, there's been a surge in investment demand from institutions and
retail investors.
I think the gold ETF saw $26 billion inflow in the third quarter of this year,
which is a record.
And September alone was the single largest month ever in terms of ETF inflows.
And so, you know, talking to why people would be now waking up to gold and still
seeing value in this
is that The central banks are cutting interest rates, which lowers the
opportunity cost of owning the metal.
But I think the more sort of bigger theme is this debasement theory,
which suggests that overly indebted DM countries don't have the political
appetite to implement austerity measures
required to reduce their debt.
And so as you see widening fiscal deficits, the only real option left for
them is to inflate their way out of their debt.
And so they run nominal interest rates below inflation.
which transfers wealth from the savers, i.e.
your cash in your bank, to the debtors, which is the government.
And so as this happens, it reduces the purchasing power of your cash, and
therefore it's quite bullish for equities,
but also especially for hard assets like gold, like commodities and property,
because it's the only real way to preserve your purchasing power in this environment.
Do you think that that last point, just as we end this gold discussion,
do you think the last point you made about the indebtedness of nations and inflating
their way out of it is a
long term bullish factor for gold?
Because it doesn't seem as though that sort of policy can rid themselves of debt
overnight.
Yeah, I think so.
I mean, it looks like for us, at least, that we still remain in a structural long
term bull market.
but you know the recent pace of the rally just got a bit aggressive and so the
subsequent correction we've observed over
the past week or 10 days or so indicates that some of that momentum had got into
extreme levels and there needed to be some
healthy consolidation.
Now normally for security in a strong uptrend in markets you can get periods of
short-term momentum pullback that usually
last around two to four weeks and you get prices pulling to the 50-day average.
In this case it would be about $3,700 the dollars per ounce.
But we still believe that in this pullback,
you're likely to see a lot of people who missed the first rally still allocate some
of their portfolio holdings to gold.
And actually, there's a recent survey by one of the large Southside research
houses, which poll fund managers,
and it indicates that many of them still have relatively low.
allocations of gold in their portfolios and are likely to increase their holdings
going forward.
And more likely, we believe that in the past where you would allocate
40% of a multi-asset portfolio to bonds,
we think over time that allocation is likely to reduce in favor of hard assets
like gold and other commodities.
Okay, let's move on from the yellow metal to black gold, and that is the oil price,
of course.
Now, This is a classic commodity when it comes to weighing up fundamentals versus
geopolitics, Mohamed.
And 2025 has really driven home that point.
Yeah, you know, the oil price is down 13% year to date.
And it's pretty rare for the oil market to be such a consensus bearish view across
almost every commodity
research team and all the oil agencies like the IEA, EIA.
The only one with a slightly different view, perhaps biasly so, is OPEC.
But of course, they control a significant share of the global supply and can
massively influence
the fundamental picture by withholding or releasing that supply.
And so if you look at the fundamentals, global demand growth for this year and for
next year is only around 700,000 barrels
per day, which is almost half the sort of long-term average demand growth over the
past 20 years that we've witnessed.
But even...
In this low demand picture, we continue to see massive waves of supply coming online,
both from
OPEC as they continue to restore production, which they previously cut to,
you know, sort of help the market over the past two,
three years, but also non-OPEC supply from sources like Brazil, Guyana, etc.
And so, you know, based on our forecasting,
we expect the market surplus exceeding 2 million barrels per day average next year.
And if you get this kind of surplus.
You know, you tend to get inventory bulls in pricing hubs.
And global inventory balances this year have been increasing, especially over the
past six months,
indicating that our surpluses of about 2 million barrels per day are accurate.
And so with this environment, you'd expect to see oil below $60.
But actually, you've seen, especially over the last week, that as it got to that
level,
it promptly came back up above $65 per barrel.
And that, once again, has just highlighted the geopolitical supply risk factor in the
oil price that
could be a wild card, which could significantly alter market balances.
And the latest news was the U.S.
moving to sanction two of the largest Russian oil companies.
And therefore, you know, as these companies are sanctioned, you've seen
India and China saying that they will stop taking delivery of Russian oil.
And so they obviously have to then replace these barrels from elsewhere.
And so that big surplus that we spoke about, the 2 million barrels,
could easily be wiped away if Russian oil is not allowed access into the market
because they export over
3 million barrels per day.
It's very interesting as well that in the last few days, one of those
Russian oil companies has decided to sell all of its international interests.
So this is a story that will...
continue.
Yeah, let's now look at a commodity that has suddenly started exciting people.
And one of those people was a colleague of yours in London.
And he had some very interesting ideas about where the copper price is going.
Are you as excited as he is about it?
Yeah, definitely.
I think as a house, we have quite a positive outlook for copper.
And we just have a belief that this industrial metal
will continue to play a critical role in the energy transition in technologies such
as electric vehicles which use three times
the amount of copper that a normal vehicle uses between even more so in other areas
like the
power grid investment that's required to support
the power hungry data centers that are needed for artificial intelligence and
other sort of electrification across many
industries and so you know generally the market is quite constructive copper on a
long-term basis,
but we had a view that copper deficits might materialize earlier than markets
expected because
we believe that everyone was underestimating the supply disruption from
some of the major mines that
are going on, such as the Freeport-Grasberg mine in Indonesia.
You've had Kamoa-Kakula in the DRC, Anglotex, QB2 and Kualawasi mines also.
lowering their guidance over the next year or two.
And so with this major supply disruption risk against a market that continues to
see strong demand,
we had deficits beginning from next year.
and actually above the top end of the consensus deficit for next year.
And so we were quite bullish that prices would rise.
Overall, the commodity complex, if you look at it as an index, including all the
ones we've just spoken about,
would you say that you are still bullish?
Again, I'm talking about commodities as a whole, Mohamed.
Yeah, as I mentioned, I think in the world that we found ourselves in,
where countries are unsure in supply,
Geopolitics could influence the production of various commodities and
the flow of metal.
I think in that environment you're likely to see stronger demand than what market
balances would suggest,
and perhaps even somewhat inefficient demand.
Normally it would go to the lowest cost area, but now because of supply chain
issues,
you could see excess capacity being built and not fully utilized.
And so if you add to that on the supply picture,
you really start to see across many different commodities how adverse sort of
weather
and natural disasters, etc., and even just declining grades are impacting the supply
coming out of mines.
And so if you compound those two views,
plus this theory that real assets are starting to benefit from debasement, then
as a house I think
we are fairly constructive across most commodities, especially, as I mentioned,
precious metals and base metals like copper, aluminium,
but less so on the bulk metals or bulk commodities like iron ore and thermal
coal,
where we believe there's just sort of structural demand headwinds on that side.
Mohamed, thank you very much for your excellent analysis.
That was Mohamed Dokret, analyst at 91.
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