A Strong Case For Metals

Robert Minter is the director of ETF Investment Strategy at abrdn. Abrdn’s suite of ETFs focuses on commodities, particularly precious and industrial metals. 
 
As inflation heats up, commodities have come into sharp focus this year. In part two of this Q&A, Minter shares his thoughts on the Fed’s next moves, as well as the strong outlook for palladium and industrial metals. 
 
The following transcript has been edited for clarity and brevity. 

ETF.com: It feels like a lot of the factors driving inflation are out of the Fed's control. But from an optics standpoint, it'll need to do what it can. Do you think there are any surprises, looking ahead to next month's FOMC meeting, or do you think the market has priced in already anything that's going to happen? 

Robert Minter: Will there be surprises? I guess the developments around geopolitics and the Russian and Ukraine situation have the potential to make the Fed more cautious if they see a reason for reduced economic activity or defensiveness in the economy because of this situation. But it's far too early to tell at this point.  

There are people correctly worried that by raising rates and reducing asset purchases at the same time, in an economy where growth is slowing and inflation is slowing, is that really the most prudent thing to do? Particularly if it were for political purposes because inflation is on everyone's mind. That doesn't seem like the way to run an economy.  

Most likely what happens is we head down this path. You can see the stories from major Wall Street banks predicting seven, eight, nine rate hikes this year. Those look extremely aggressive.  

My best guess is that several of them happen, and then we get out of this ultrahigh inflation, partially because of base effects where energy is up now off of very low base effect numbers from a year ago. But as we go through the year, it'll be off of higher numbers last year.  

I think we get a couple of rate hikes, and then pause and see what we've done to the economy, because the reaction function of rate hikes having an effect on an economy typically are over 12 months. And you wouldn't want to be setting hikes into a slowdown without seeing what it's doing to the economy. You certainly don't want to slow the economy so much that you kill demand for energy as a way to bring down energy prices.  

ETF.com: Turning to abrdn's suite of ETFs, I was surprised to see palladium is the top performer this year. What's driving palladium prices right now? 

Minter: Palladium has flown below the radar for a number of years. Through the end of January, palladium has, over the last 10 years, had a per-year return of 13%. And over the last five years, it has a per-year return of 25%.  

Normally you’d think that sort of return profile doesn't happen in commodities, because the price goes up and then the supply side reacts and provides more supply to the market bringing prices down.

But what's been going on in the commodity world is, for ESG and a bunch of other reasons, supply has not been able to react. And so, the supply has been stable. And in the case of palladium, there were environmental drivers pushing the demand higher.  

China's emission requirements were strengthened, and it required a higher per-vehicle loading of palladium. The important point there is, even if auto sales were flat in China, if you go from 1 gram to 2 grams of palladium in every automobile industry control device, you've doubled the Chinese demand for palladium. 

The market hasn’t been able to keep up with demand. And that's a structural feature that has lasted over many years. And the reason it's important to understand that is that same exact dynamic that regulatory environmental rules increasing creates demand that grows faster than supply can grow. That same exact situation is happening in industrial metals for the same reason.  

When you combine U.S., Europe and China’s GDPs, it adds up to $51 trillion. These economies are all trying to decarbonize end-user renewables at the same time. It’s creating a tremendous uncertainty in demand for the next five to 10 years for things like copper that are used, in electric vehicles, the charging devices, the transmission lines that will be needed, wind turbines, batteries and solar panels. 

The demand is so uncertain, and we're not really clear where the supply's going to come from. Not only are the Chinese trying to lock down their supply, the U.S. Energy Department issued a battery document on where battery supplies should come from in an attempt to secure the supply and protect the supply of battery materials, which include some of the metals we're talking about —copper, aluminum, zinc and nickel. 

Additionally, the European Union has started the European Raw Materials Alliance with largely the same purposes.  

So these three large economic blocs—the EU, the U.S. and China—have all recognized there's going to be a shortage. And these materials are going to become geopolitically sensitive, just like oil has been over the last six decades. 

That's another theme that we think is important. There's a lot of noise in the market, and we're trying to look through these temporary disruptions and noise to take advantage of longer-term trends. And [two] of them [are] the renewables trend and what we see with palladium.  

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