Metals & mining: Meltdown or opportunity?

0:00Hey, everybody. Welcome back to the Barclays Brief. It's Ronnie. I left snowy, icy, frigid New York for predictably rainy London, but it's really nice to be here. It's especially nice to be here in our studio with our European metals and mining analyst, Amos Fletcher. Amos, welcome to the pod. Hey, Ronnie. Great to be here. Welcome to rainy London. The mining sector is running pretty hot, so very happy to be here to discuss it. Totally. I mean, this is a sector that most people, myself included, described as somewhat boring for, I guess, most of my career. And that feels like it's changing now for a variety of reasons.

0:37Perfect time for you to do your first appearance on the pod. So why the sudden rush of interest in this metal space from the investor community? Yeah, it's a variety of factors. I'd say key ones are Fed rate cut expectations through 2026 at a time when other central banks are pricing out cuts. So investors are going to be looking for hedges against dollar weakness. We've also got the reality of inflation upside risks into the midterms. Commodities, obviously, are a big hedge against that. I'd say the fundamentals also looking pretty supportive on a supply-demand basis. Sector's under-owned. It's a tiny component of the indices.

1:13The valuations are pretty supportive. and geopolitics is increasingly in play as well with the US and China starting to kind of bifurcate in terms of their commodity supply chains. So copper is a buzzword now. Copper is a commodity that really matters for this. I keep hearing about the copper super cycle. In fact, our head of equities tactical strategies, Alex Altman was on the pod just a few weeks ago, spending some time on it as well. Is this copper super cycle a real thing? And if so, what are the drivers? Yeah, well, I was around for the original China industrialization supercycle in the early 2000s.

1:48Do I think it's a supercycle now? I'm not sure we're quite there yet. I'd be hesitant to use the word supercycle today, but we've definitely got a very favorable set of macro settings for this year and above trend demand growth. On the demand side, fundamentals have really been driven by electrification. That's picking up globally, partly driven by AI, but that's really a quite small contributor at the moment, but growing rapidly. Really the bigger drivers are the shift to EV, that's 15 % of copper demand, and renewables, which also require significant grid investment, and that's 30 % of copper demand.

2:19So we're seeing overall an acceleration in the electricity intensity of GDP growth versus previous decades. And then on the supply side, we've seen record supply disruptions in 2025. If those continue in 26, we could see zero supply growth despite the copper price being at all-time highs. And then we've also seen a 200 % increase in the cost of building a new copper mine versus pre-COVID levels. So we think mining companies need to see prices sustained well above$5 a pound for a number of years before they start justifying building new copper mines. All right. I mean, that's a lot to take in. So super cycle or no super cycle, it's clear that demand for copper is going up while supply feels like it's constrained or could become even more constrained.

3:02What does that mean for the price of copper? What's your bull case in terms of the price of copper this year and beyond? Yeah, so clients are working through all the scenarios right now. If we're thinking about bull cases or blue skies for the copper price, then we think the drivers are going to be a combination of inventory flows continuing to the US ahead of possible tariffs by mid-2026. That could starve the ex-US market of physical copper and could see potentially parabolic price appreciation if inventories outside US get close to zero. And then if we see a repeat of the 7 % mine supply losses we had last year in 2026, that could see zero supply growth despite prices at all-time highs.

3:41And then demand from China is pretty solid. We think it grows 1.5 % this year, but the government could resort to stimulus to support growth if external demand is potentially weaker. And then the final factor is probably to consider is just speculative financial flows. They have picked up and could drive prices materially higher if any of those factors I mentioned come to pass. Interesting. So let's move from the commodity lens to the corporate lens for a minute in the space. what does all that you just laid out mean for corporate activity and what should we be on the lookout for? Yeah, so typically when prices are high, companies are more optimistic.

4:14That typically drives more deal making. And in terms of history, we're not quite at a peak of sector activity yet, but it's definitely picking up and will be an important driver for the sector. We've seen a particularly big step up in activity at the large cap end of town. You've had BHP making two unsuccessful offers for Anglo-American. Anglo itself turned around and is in the process of acquiring tech. And Rio Tinto is potentially looking to make an offer for Glencore. When I speak to investors, they tend to look at mining companies on a sum of the parts basis. And I'd say the M &A activity is being driven by the corporates, kind of recognizing that the best way to find cheap copper assets is by buying diversified miners with big copper businesses, but trading at a discount to their sum of the parts.

4:58So I'd say overall, yeah, good to see the pickup in M &A volumes, but we're still not at that elevated a level versus prior peaks. And that's likely to be supportive for the sector's performance going forward. Historically, China has been the main driver or lever when you think about copper prices. You were recently there visiting companies. What from your trip is important for listeners to know about? Was there anything that surprised you? Yeah. So you're right, Ronnie. I mean, China is the be all and end all of commodity demands. We go to China three or four times a year. We've been doing that for the last seven years or so.

5:31and it's always interesting to see inflection points happening on the ground from this type of primary research. And as always, there's some bullish aspects, some bearish aspects. I'd say this time around, we were surprised on the bearish side with our meetings with the auto players in particular. Q1 is going to be a very difficult period because of the roll-off of subsidies, which came to an end at the end of last year. And so our base case is for auto sales in China to fall 3 % this year. And property is also stuck in a relatively difficult position due to infantry overhangs, which could take until the end of this decade to get worked off.

6:03So those two factors, I guess, were slightly more negative. On the positive side, though, grid spend remains a positive driver for commodity demand. That's 40 % of China's demand. And we heard from state grid, they expect over the next five years to spend 40 % more capex than they spent over the last five years. And then overall, China from a policy point of view is aiming to double its renewable capacity by 2035 from current levels. The one thing also that emerged out of nowhere, I would say, on this trip was ESS. That's energy stationary storage. So the Tesla battery walls, that's emerged to be 1 % of global aluminum demand and 25 % of lithium demand, but it's growing 100 % year over year.

6:43And we met some of China's biggest ESS battery producers who are sold out for this year. Okay. I can't have our metals and mining analyst on the pod without asking about everyone's new fixation, the price of gold? How sustainable is it all? Well, overnight, we just published a note with our colleagues in FX and Equity Strategy discussing this exact question. And the gold price fell 10 % on Friday in reaction to the new Fed chair nomination, who's seen as potentially the most hawkish amongst the candidates. And we're recording this at 11am on Monday, the 2nd of Feb, and spot gold prices are down again today.

7:17But for some bigger picture context for listeners, I think the driver of the upside gains are the factors I've mentioned earlier in the pod, which is a combination of rate cuts to come from the Fed at a time when other central banks are pricing out cuts, US dollar weakness, the economy being run super hot into the midterms with fiscal, you've got the Fed reversing QT, CapEx is booming and limited labour supply. And we think all of those factors are going to drive investors to seek upside inflation hedges. And then in addition, you've got central bank buying remaining robust and structural trends of global central banks diversifying away from US treasuries.

7:53And then finally, the stablecoin issuer Tether has emerged as one of the biggest buyers of physical gold in 2025 ahead of most global central banks. And they're using gold to hedge their currency exposures. So in conclusion, we've gone from 4 ,000 to 5 ,600 in three months, and then back down to 4 ,500 today. But we see these structural drivers as remaining in place for the year ahead at least. So look, admittedly, I'm a little bit sore about all of this. I've been skeptical. Well, if I was a listener, I'd go back to the second episode of the Barclays Brief with Ajay, where he talks about the distrust of fiat regimes.

8:26And I think that's an important structural driver. De-dollarization is another big driver as China internationalizes the RMB. That reduces demand for dollars. As we know, gold has overtaken treasuries as the biggest holdings of central banks globally. And I think all these factors are likely to remain in place, at least for this year. And if we look back at the bigger picture, Pistri shows gold bull markets can run longer and higher than expected. If we go back to look at the last three since the 1970s, that saw gold peak between 200 and 400 % above the starting level and the rally's running for up to four years.

8:58And so far this time round, gold's up 170 % from the start of this bull market in October 2023. three. And so we think the combination of today's setup of rate cuts, fiscal expansion, fiat debasement, detolarization is likely to keep investment demand firm in the long term. But in the short term, obviously, we aren't surprised to see the short term pullback. Amos, this has been great. I learned a lot. It's clearly going to be an interesting year in your space and the markets in general. And I only ask that we can have you back the next time makes sense to cover this again and see how it's all evolving.

9:31Thanks for joining us. Great to see you again, Ronnie. And I'm sure we'll be talking more about the space in 2026.

10:01And for those with access to Barclays Live, there's a lot more from Amos on the topic for you all to dig into.