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Daniel Ghali, Senior Commodity Strategist at TD Securities, speaks with Greg Bonnell about the growing physical demand for commodities, the role geography plays and the potential implications for prices, commodity markets, and investors.


Greg Bonnell: While investors weigh the outlook for commodities amid fears of a recession in North America, an interesting shift in demand is taking place. Joining us now to discuss, Daniel Ghali, senior commodity strategist at TD Securities. Daniel, great to have you back on the show.

Daniel Ghali: Thank you, Greg. Great to be here.

Greg Bonnell: So obviously, for good reason, there’s a lot of concern among investors about where this economy is headed, blah, blah, blah. And for good reason, we’re focused on North America. You’re noticing some global trends when it comes to commodities and demand. What are you seeing?

Daniel Ghali: Yeah, absolutely. Greg, I think the point here is that the West appears to be losing control on the pricing of commodities. What I mean by that is if you look at copper prices or gold prices, for instance, most commodities are trading higher than what the macroeconomic regime would dictate, right? So copper prices are significantly higher than what leading demand — looking at leading demand indicators alone would suggest. When you look at gold prices, they’re trading a lot higher than US 10-year real rates would suggest. I think behind the scenes what’s going on is that the East is driving the physical demand that is associated with these price dislocations. The West is losing control of the pricing mechanism because they tend to impact the investment landscape, and right now, it’s not about investor flows. It’s actually about the physical demand, physical supply, and the constraints globally that we’ve seen, which tend to be Eastern focused as opposed to Western focused.

Greg Bonnell: Physical demand? So who is out there in this market buying gold, that actually wants to hold physical gold?

Daniel Ghali: Yeah, I mean gold is a great example. It’s really interesting. You have — over the last year, we’ve seen Turkey, for instance, emerge as one of the largest global buyers of gold. That is the retail segment. People are buying a lot of jewelry. People are buying a lot of bars and coins. But it’s also their central bank, who actually emerged as one of the largest buyers of gold globally as well.

What’s driving that? And this is a theme that’s true for most emerging markets. If you look at how gold acts in local currency terms for emerging markets, it actually is a pretty amazing inflation hedge when inflation is particularly elevated or particularly low. We call it a tail hedge of inflation actually. So if you look at gold in those perspective, then it’s not a surprise to see that Turkey, who’s facing hyperinflation today, has been a massive buyer of gold.

Elsewhere in the world, China has also been — particularly their central bank — has been a major buyer of gold. We’ve talked about this in the past. I think that’s probably related to the shifting geopolitics, the need to diversify away potentially from US dollar reserves towards another reserve currency or reserve asset like gold that is really nobody’s liability. That’s a trend we’re seeing, again, rise in the East. Qatar’s doing the same. The GCC nations have been one of the larger buyers of gold over the last year as well, and all of this is really catalyzed by the war in Ukraine, which really resulted in a mind shift for a lot of these eastern central banks.

Greg Bonnell: Obviously, what we saw in Ukraine as well had a pretty profound effect in the early innings, at least on oil and gas, other parts of the energy space. And then you’ve got China reopening and trying to gauge the effect of how much, I guess, consumption demand they’re going to have. How does that play into oil and gas, other areas?

Daniel Ghali: Yeah, it’s a great question, and I actually think, now, you’re starting to see evidence that the implications of China’s reopening aren’t broad-based. When you look at — overnight, there was the release of the manufacturing PMI of China. It was particularly strong. When you look at the details therein, it does suggest that it’s not necessarily a domestic recovery in China. It’s actually probably also associated with stronger demand in the West, which is actually, in turn, tied to the miracle weather that Europe has faced and particularly mild weather in the US as well.

But leading demand indicators for metals like copper and aluminum still suggest a downdraft in demand, and I think what’s really happening here is that we’ve seen stockpiling in a pretty significant way. Copper users, aluminum users are overstocked today, which tells you that they’re going to consume less of this stuff over the next three to six months. The property sector is the caveat to that, I think, and that’s probably a little bit more gradual, but we are starting to see some signs that it is going to start to recover. But again, that’s going to take some time.

Greg Bonnell: When it comes, you mentioned copper, and whenever I hear copper now, I think about the electrification of everything, which people talk about. And often, from here in North America, we think of it as a North American story, whether it’s Tesla or other companies. But obviously, China has a huge market for EVs and a huge domestic market, from my understanding, of people producing it. What is China’s demand like for those EV electrification kind of metals?

Daniel Ghali: Yeah, I mean, China has been really leading the charge on the push for electrification. I think in 2019, electric vehicles were about 2% of auto sales in China. Today, they’re closer to 45%. That dramatic shift was really subsidized by the government. Some of those tax incentives have went away, so we’d expect EVs to lose market share. But I think the big picture that is really underappreciated when it comes to the electrification trends that everybody in the West is looking towards is that China actually controls every single part of the supply chain that’s necessary for the electrification to happen.

So while this theme is often touted by the West, and thankfully so, the East is really the one who’s controlling the supply chain there. So if you look at global capacity for the anodes and cathodes that go into making a battery, for example, 70% to 80% of that capacity is in China. The same is true for battery cell production. The same is true for EV manufacturing. And even going further down the line, or earlier in that supply chain, the material processing capacity that is for things like copper, lithium, nickel, all of that — or a big chunk of that — is still in China. So I think this is something that is underappreciated because, as trade flows start to diverge, the West is going to perhaps need to build that capacity up themselves, and that’s just something we haven’t seen being done yet.

Greg Bonnell: As the world does work towards electrification, the argument is made, and it’s a logical argument, that you’re going to need oil, you’re going to need gas for a while. To make this transition, you need it for a while. What do we think about oil demand in this climate? It seems like it’s always a to and fro on any given day.

Daniel Ghali: Yeah, I mean, so from the cyclical outlook, you have to consider the fact that, over the next five years, China is overwhelmingly driving the demand growth for oil. Beyond that, India is really driving it, actually. So that has been the case for some time, but again, going forward, I think what is often missed is that over that same time horizon, five, 10 years out, North American demand and European demand is actually going to decline quite substantially. We’re already starting to see signs of demand destruction in oil. That’s people’s preferences to buy hybrid vehicles, or fuel efficiency gains actually have been one of the largest contributors to demand destruction for oil, and EV sales as well, who are gaining market share faster than many had anticipated prior to COVID.

But again, those shifting trade flows are pushing geopolitical relationships away from the status quo that we’ve been used to for the last 40 years, and towards a world that is potentially more multipolar, in which the need for diversifying away from US dollar reserves is growing and where gold definitely is already seeing some benefits.

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