Has the Next Commodities Supercycle Begun?

Theme and Background

This chapter focuses on the correction in the energy transition materials market in February 2023, analyzing how the macroeconomic environment (particularly the Federal Reserve's interest rate policy) dominated short-term price behavior, while emphasizing that long-term fundamentals remain robust. The report notes that despite the index falling 9.49% during the month, the global energy transition "arms race" is intensifying, with supply security now more important than price.

Core Thesis

The author's central investment argument is: The 40-year bond bull market has ended, and a new long-term bull market for commodities has begun. Counterintuitive judgments include:

• Market expectations for the terminal federal funds rate have risen to 5.42%, 50 basis points higher than a month ago, but recent stress in the U.S. banking sector could once again alter this expectation.
• Although electric vehicle sales have declined due to subsidy cuts in China and Europe, the long-term outlook remains strong, and these external shocks are merely short-term disruptions.
• In the energy transition "arms race," supply security has become more important than price, with companies and governments prioritizing securing raw material supply over cost.

Key Arguments and Data

1. February Market Performance: The Nasdaq Sprott Energy Transition Materials Index fell 9.49% in February, erasing two-thirds of its year-to-date gains. The index declined in tandem with nearly all risk assets as investors reversed expectations that the Fed was about to end its rate hikes.

2. Macro Expectation Shift: Less than three months ago, the consensus expected the U.S. economy to enter a recession in the first half of 2023, leading the Fed to pause rate hikes and cut rates in the second half. These expectations have been shattered, with the timing of rate cuts pushed back to early 2024.

3. Rates and the Dollar: The 2-year U.S. Treasury yield reached a new high of 5.05% on March 8, and the dollar rebounded sharply to resistance levels. Macro volatility remains elevated.

4. Supply Over Price: The report cites an interview with LG Chem (parent company of the world's second-largest EV battery manufacturer), which explicitly stated that "the top priority is to secure enough raw materials in the future." U.S. government agencies (such as the Department of Defense and the Department of Energy) have directly funded mining projects to secure critical mineral supply.

5. Recent Headline Cases:

• GM invested $650 million in a lithium company to support its EV business
• The DOE provided a $375 million loan for a lithium battery recycling plant
• The first contracts for the U.S. Strategic Uranium Reserve have been awarded

Companies/Assets Involved

Company/Institution	Role	Key Data/Action	Bullish/Bearish
LG Chem	Parent company of the world's second-largest EV battery manufacturer	Explicitly stated "top priority is to secure future raw material supply"	Bullish (supply priority)
General Motors (GM)	Automaker	Invested $650 million in a lithium company	Bullish (supply chain security)
U.S. Department of Energy (DOE)	U.S. government agency	Provided $375 million loan for lithium battery recycling	Bullish (policy support)
U.S. Department of Defense	U.S. government agency	Directly funded mining projects to secure critical minerals	Bullish (national security driven)

Investment Implications

• Short-term macro volatility is an entry opportunity: The current price correction is primarily driven by interest rate expectations, not fundamental deterioration. Investors should use macro disruptions to position for long-term structural opportunities.
• Focus on supply-side bottlenecks: The energy transition "arms race" implies that upstream minerals (lithium, cobalt, nickel, uranium, etc.) will face prolonged supply tightness. Companies and governments prioritizing supply security will push up the prices and valuations of these commodities.
• Watch for policy-driven capital inflows: Policies like the U.S. Inflation Reduction Act provide tens of billions in grants and loans, which will stimulate capital expenditure across the entire energy transition supply chain. Capital availability may outpace spending capacity, benefiting mining companies with project pipelines.
• Beware of inflation risk: Building entirely new energy infrastructure—from raw material extraction to processing and distribution—is highly capital-intensive and will generate demand-pull inflation, further supporting commodity prices.

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Theme and Background

This chapter focuses on the core judgment that commodities, especially critical minerals, are transitioning from a prolonged bear market to a structural bull market. It provides an in-depth analysis of the market performance of three key energy transition materials—lithium, uranium, and copper—as of February 2023. The report argues that the 40-year bond bull market has ended, commodities will outperform bonds over the long term, and geopolitically driven industrial policies are reshaping supply dynamics.

Core Views

• Commodity Super Cycle Has Begun: The market has passed the "peak of cheap commodities," and will face dual supply and demand shocks, leading to increased scarcity and value appreciation for commodities.
• End of the 40-Year Bond Bull Market: The downward trend in the US 10-year Treasury yield since 1981 ended in 2020, and the 40-year bear market for commodities relative to bonds has also reversed. The report believes commodities will outperform bonds over the long term.
• Counter-Intuitive Judgment: Despite a 23.95% drop in lithium prices in February, the report argues that the long-term demand growth logic remains intact, and prices are still well above long-term averages. Uranium prices bucked the trend with a slight increase amid declines in most other commodities, highlighting its portfolio diversification value due to low correlation.

Key Arguments and Data

• Historical Correlation Between Bonds and Commodities: From 1981 to 2020, the R² between the US 10-year Treasury yield and the ratio of the BBG Commodity Index to the US Treasury Index was 0.83 (highly correlated). Charts show this ratio is breaking above its 40-year downward trendline.
• Macro Drivers: Deglobalization, competition for energy security, the energy transition, and the reshoring of US manufacturing will push up inflation, putting pressure on bond markets and benefiting commodities.
• US Treasury Market Risks: Two major liquidity failures occurred in the past three years (2020, 2022); quantitative tightening is ongoing; foreign holdings of US Treasuries fell sharply in 2022, and this trend is expected to continue.
• Lithium:
• Spot lithium carbonate prices fell 23.95% in February but remained higher than 12 months prior.
• Global EV sales plunged in January 2023: Chinese sales fell 50% month-over-month and 6% year-over-year (China accounted for 58% of global EV sales in Q4 2022).
• However, lithium prices remain significantly above long-term averages and the cost curves of most miners; General Motors invested $650 million in Lithium Americas, Stellantis invested €50 million in Vulcan Energy, and Tesla is reportedly considering acquiring Sigma Lithium.
• Uranium:
• Spot uranium prices edged up 0.20% in February, outperforming most commodities.
• Long-term contract signings hit a record: Cameco signed a contract with Ukraine's Energoatom for 40-67 million pounds of uranium supply (compared to Cameco signing 80 million pounds in 2022 and only 30 million pounds in 2021).
• Uranium has very low 20-year correlations with major asset classes (see original Figure 5 for specific data), offering portfolio diversification benefits.
• Copper:
• Spot copper prices fell 2.7% in February.
• Panama ordered the suspension of a major copper mine operation due to a tax dispute, highlighting exogenous supply-side risks.
• On the demand side: EVs use approximately 53 kg of copper per vehicle, compared to only 22 kg for traditional internal combustion engine vehicles; BloombergNEF forecasts copper demand will grow nearly 60% by 2040 compared to 2022.

Companies/Assets Involved

Company/Asset	Role and Key Data	Bullish/Bearish
Lithium Americas	GM invested $650 million	Bullish (strategic investment)
Vulcan Energy	Stellantis invested €50 million	Bullish (strategic investment)
Sigma Lithium	Tesla reportedly considering acquisition	Bullish (potential acquisition)
Cameco	Signed contract with Energoatom for 40-67 million lbs of uranium	Bullish (surge in long-term contracts)
CATL	Pressuring lithium suppliers for price cuts	Neutral (short-term bearish for lithium prices)
Energoatom	Ukrainian state-owned nuclear company, signed long-term contract with Cameco	Bullish (driven by supply security)

Investment Implications

• Strategically Overweight Commodities, Especially Critical Minerals: The report believes the 40-year bond bull market is over; investors should reduce bond allocations and increase commodity exposure. The energy transition, deglobalization, and industrial reshoring will generate persistent inflationary pressures, benefiting commodities.
• Lithium: Short-Term Pullback as a Buying Opportunity: Despite a plunge in EV sales due to subsidy phase-outs, lithium prices remain above long-term averages, and OEMs are securing supply through equity investments. Focus on lithium miners with cost advantages and strategic partnerships with automakers.
• Uranium: Low-Correlation Asset for Portfolio Diversification: Uranium prices rose against the trend in February, long-term contract signings hit records, and supply security has become a core consideration for utilities. Uranium miners (e.g., Cameco) benefit from locked-in long-term contracts.
• Copper: Supply Bottlenecks + Structural Demand Growth: Copper discoveries are declining, inventories are low, and ore grades are falling, while the energy transition (EVs, power grids) will significantly boost demand. Focus on copper miners facing supply disruptions.

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Theme and Background

This chapter focuses on the performance of the nickel market in February 2023, analyzing the divergence between short-term price declines and long-term fundamentals. The report notes that despite an 18.45% drop in nickel prices for the month, the logic of long-term demand growth (particularly in the electric vehicle battery sector) remains solid, while the supply side faces structural constraints.

Core Thesis

The author argues that short-term price fluctuations in the nickel market (driven by macro sentiment, weak EV sales, and negative news shocks) obscure its core market strength. Over the long term, nickel demand is set to grow significantly due to the adoption of high-energy-density batteries (NMC cathodes), while supply—especially Russia’s Class 1 nickel—is constrained by sanctions and struggles to keep pace with demand growth. This is a classic pattern of "short-term bumps, long-term upside."

Key Arguments and Data

1. Price Performance: In February 2023, the LME nickel spot price fell from $13.68/lb on January 31 to $11.15/lb, a decline of 18.45%, with a year-to-date drop of 17.72%. Over the same period, the Nasdaq Sprott Nickel Miners Index fell 9.64%, with a year-to-date decline of 2.65%.

2. Demand Drivers: The primary demand for nickel comes from stainless steel production (tied to the economic cycle), but the majority of future growth is expected from EV batteries. Nickel-intensive NMC cathodes are gaining market favor due to their ability to provide higher energy density and extend driving range.

3. Supply Constraints:

• Russia is a major nickel producer (especially Class 1 nickel needed for batteries) and is expected to remain under long-term economic sanctions.
• Despite new supply from Indonesia, overall supply still struggles to keep up with demand growth.

4. Negative Events: In February, major nickel trader Trafigura recorded a $577 million impairment loss after purchasing nickel cargoes that contained no nickel, exacerbating market volatility.

5. Historical Context: After the historic short squeeze in March 2022 triggered by the Russia-Ukraine conflict, market volatility in nickel increased significantly, though current prices remain in a high range not seen in over a decade.

Indicator	2023/2/28	2023/1/31	Change	Monthly Change	Year-to-Date Change
LME Nickel Spot Price (USD/lb)	11.15	13.68	-2.52	-18.45%	-17.72%
Nasdaq Sprott Nickel Miners Index	885.95	980.48	-94.53	-9.64%	-2.65%

Companies/Assets Involved

• Trafigura: A major nickel trader that recorded a $577 million impairment loss due to a nickel cargo fraud incident, becoming a focal point of negative news in the nickel market in February. The report does not explicitly take a bullish or bearish stance on the company, but the event exacerbated short-term market volatility.
• Russian Nickel Producers (unnamed specific companies): As the primary suppliers of Class 1 nickel, they are long-term constrained by sanctions, making them a key factor in the supply gap. The report implicitly takes a bullish view on these assets (as supply constraints push prices higher).
• Indonesian Nickel Producers: A source of new supply, but insufficient to close the overall gap. The report does not assign a clear rating.

Investment Implications

• Short-Term Caution, Long-Term Positioning: Nickel prices face short-term macro and event-driven shocks, but the long-term supply-demand gap is clear (especially for battery-grade nickel). Investors should use short-term pullbacks as opportunities to gradually build positions in nickel miners or related ETFs.
• Focus on Supply-Side Risks: Russian sanctions and the pace of Indonesian supply are core variables. If sanctions persist or Indonesian supply falls short of expectations, the upside potential for nickel prices could exceed forecasts.
• Beware of Volatility: Since the short squeeze in 2022, nickel market volatility has risen significantly, requiring disciplined position sizing and stop-loss management.