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The Asset Class with Muhammad Docrat · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  Commodities have caught the eye in 2025 and there's so many commodities to cover
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  that it would be beyond the
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  scope of this podcast.
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  So we're going to be focused on precious metals, that's the PGMs and gold, and also
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  the oil price.
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  We'll have a look at that, the fundamentals behind all of those
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  commodities.
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  And also at the end we'll talk about copper, which has come late to the party,
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  with me to do so.
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  is Mohamed Dokrat from 91 in Cape Town.
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  It's been quite a year, Mohamed.
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  You must have been very busy.
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  Yeah, thanks for having me, Lindsay.
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  And I mean, it's been certainly interesting in the commodity space.
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  And I think broadly as a theme, coming out of COVID, many supply chain bottlenecks
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  were identified.
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  And as we move into a more sort of geopolitically fragmented world,
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  we've seen the desire for many governments to ensure production and to secure book.
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  the supply of critical minerals across many different sectors.
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  And so this broad sort of theme has seen relatively strong demand for commodities.
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  And if you sort of factor in what's happening on the supply side,
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  this has resulted in pretty strong metal prices across the board, but especially,
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  as you mentioned,
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  the precious metals.
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  And if you look at the PGMs in particular, we've been bullish on this.
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  commodity for most of the last year.
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  And there's sort of three primary reasons why.
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  The first is that the supply picture based on our fundamental bottom-up modeling
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  indicated
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  that you were going to see lower supply coming out of the primary producers in
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  South Africa.
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  And that's just the function of them not having sufficient margin and capital to
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  invest over the past decade.
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  And as some of their older mines from the 1990s start to come to the end of life,
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  we have not seen enough investment into replacement or growth projects to offset
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  this.
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  And basically every year from here on till 2030 plus,
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  we see a low supply coming out of South Africa.
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  If you add to that then what's happened on the secondary supply market, you know,
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  you've seen significant downgrades to forecasts.
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  relative to a few years ago.
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  And there's basically just not been enough scrappage of second-hand vehicles,
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  which is the primary contributor to secondary PGM supply.
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  Do you think there's going to be in the situation where there's actually a
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  shortage of certain of the PGM basket?
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  Yeah.
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  And so if you look, you know, on our fundamental modeling, And then we've got
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  near to medium term.
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  deficits for all three metals, so platinum, palladium and rhodium, over the
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  next two to three years.
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  And in fact the World Platinum Investment Council just put out their latest forecast
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  which indicates an 850,000 ounce
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  platinum deficit in 2025 and continued deficits of about 600,000 ounces per year
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  thereafter.
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  Now on a market of 8 million ounces in total that's a 10% deficit which is
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  substantial in any commodity.
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  I mean, in copper, for example, that would equate to a 2.5 million ton deficit,
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  and the market's getting excited about a 200,000 to 300,000 ounce deficit next
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  year.
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  So it looks quite constructive on that metric.
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  And, you know, as I mentioned, supply certainly is the key driver over the sort
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  of near term.
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  But we also think that demand expectations have been underestimated by the market.
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  And, you know, talking about deficits in PGMs would have been...
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  seen as ludicrous just two years ago when everyone expected battery electric
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  vehicles to rapidly reduce the amount for
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  pgms which are mainly used to clean up exhaust emissions from combustion engine
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  vehicles
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  and so i think it was about two years ago and the market thought that by 2030 bev
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  sales would account for one in every two cars but actually you've seen over the
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  last year or
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  two That estimate has dropped to about 30 to 35 percent of new car sales by 2030.
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  And even there, there seems to be some downside risks, just as the challenges and
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  the cost of implementing this massive energy
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  transition are becoming more apparent.
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  And if you add to that the fact that we enter in a global interest rate cutting
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  cycle where consumers
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  might have more disposable income,
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  the average age of vehicles far exceeds long-term averages across the U.S.
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  and the European markets.
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  And actually, China is just making cars more affordable again.
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  So we think that the overall vehicle demand number will likely surprise market
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  estimates.
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  And if you combine that with the very tight supply coming out of the PGM
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  markets,
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  we think that these deficits could materialize over the next two to three
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  years at least.
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  So it's almost the perfect storm for PGMs, if you're a bull, that is.
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  And obviously, things change.
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  But it seems to me that this could be...
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  Quite a long-term cycle we're going into to the upside.
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  Let's move now to the yellow metal.
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  I look at the yellow metal and I think, right,
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  you've got the really big demand and the really big solid holders came from the
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  central banks.
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  And then that pushed the price up.
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  And then that got people excited.
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  And people got excited and started buying.
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  And ETFs were created.
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  And it went on from there.
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  It's obviously had a pullback, which we'll talk about.
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  But is gold still in the bull market and why, please, Mohamed?
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  Yeah, I think you've sort of captured the broad sort of reasons behind the rally.
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  And it's been quite incredible over the past two years.
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  And, you know, the 50% rally year to date has been quite staggering.
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  And so, I mean, the way I think about it, there'd probably be two broad themes that
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  are driving this.
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  And within those, obviously, there's a lot of subcomponents.
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  But the first one just being the mix of monetary policy.
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  easing conditions that are manifesting and are likely to continue as the Federal
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  Reserve and other central banks cut
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  interest rates.
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  And secondly, this fiat currency debasement theory,
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  which is certainly driving central bank and more recently investment demand as a
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  portfolio hedge.
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  And so, you know, just starting with, you know, 2022, when Russian central bank
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  assets were frozen,
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  there was a market shift.
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  in central bank purchases of gold coming from emerging markets, especially China.
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  And so, you know, in 2024, about 5,000 tons of gold was consumed,
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  with central banks accounting for about 25% of that, so over 1,000 tons, for the
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  third straight year in a row.
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  And this year, again, we're running slightly below that sort of level that we
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  were last year,
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  but still well above the 2010 to 2021 average.
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  And more recently, there's been a surge in investment demand from institutions and
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  retail investors.
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  I think the gold ETF saw $26 billion inflow in the third quarter of this year,
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  which is a record.
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  And September alone was the single largest month ever in terms of ETF inflows.
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  And so, you know, talking to why people would be now waking up to gold and still
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  seeing value in this
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  is that The central banks are cutting interest rates, which lowers the
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  opportunity cost of owning the metal.
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  But I think the more sort of bigger theme is this debasement theory,
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  which suggests that overly indebted DM countries don't have the political
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  appetite to implement austerity measures
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  required to reduce their debt.
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  And so as you see widening fiscal deficits, the only real option left for
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  them is to inflate their way out of their debt.
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  And so they run nominal interest rates below inflation.
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  which transfers wealth from the savers, i.e.
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  your cash in your bank, to the debtors, which is the government.
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  And so as this happens, it reduces the purchasing power of your cash, and
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  therefore it's quite bullish for equities,
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  but also especially for hard assets like gold, like commodities and property,
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  because it's the only real way to preserve your purchasing power in this environment.
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  Do you think that that last point, just as we end this gold discussion,
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  do you think the last point you made about the indebtedness of nations and inflating
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  their way out of it is a
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  long term bullish factor for gold?
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  Because it doesn't seem as though that sort of policy can rid themselves of debt
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  overnight.
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  Yeah, I think so.
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  I mean, it looks like for us, at least, that we still remain in a structural long
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  term bull market.
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  but you know the recent pace of the rally just got a bit aggressive and so the
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  subsequent correction we've observed over
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  the past week or 10 days or so indicates that some of that momentum had got into
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  extreme levels and there needed to be some
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  healthy consolidation.
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  Now normally for security in a strong uptrend in markets you can get periods of
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  short-term momentum pullback that usually
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  last around two to four weeks and you get prices pulling to the 50-day average.
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  In this case it would be about $3,700 the dollars per ounce.
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  But we still believe that in this pullback,
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  you're likely to see a lot of people who missed the first rally still allocate some
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  of their portfolio holdings to gold.
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  And actually, there's a recent survey by one of the large Southside research
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  houses, which poll fund managers,
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  and it indicates that many of them still have relatively low.
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  allocations of gold in their portfolios and are likely to increase their holdings
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  going forward.
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  And more likely, we believe that in the past where you would allocate
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  40% of a multi-asset portfolio to bonds,
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  we think over time that allocation is likely to reduce in favor of hard assets
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  like gold and other commodities.
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  Okay, let's move on from the yellow metal to black gold, and that is the oil price,
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  of course.
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  Now, This is a classic commodity when it comes to weighing up fundamentals versus
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  geopolitics, Mohamed.
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  And 2025 has really driven home that point.
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  Yeah, you know, the oil price is down 13% year to date.
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  And it's pretty rare for the oil market to be such a consensus bearish view across
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  almost every commodity
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  research team and all the oil agencies like the IEA, EIA.
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  The only one with a slightly different view, perhaps biasly so, is OPEC.
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  But of course, they control a significant share of the global supply and can
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  massively influence
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  the fundamental picture by withholding or releasing that supply.
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  And so if you look at the fundamentals, global demand growth for this year and for
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  next year is only around 700,000 barrels
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  per day, which is almost half the sort of long-term average demand growth over the
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  past 20 years that we've witnessed.
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  But even...
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  In this low demand picture, we continue to see massive waves of supply coming online,
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  both from
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  OPEC as they continue to restore production, which they previously cut to,
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  you know, sort of help the market over the past two,
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  three years, but also non-OPEC supply from sources like Brazil, Guyana, etc.
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  And so, you know, based on our forecasting,
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  we expect the market surplus exceeding 2 million barrels per day average next year.
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  And if you get this kind of surplus.
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  You know, you tend to get inventory bulls in pricing hubs.
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  And global inventory balances this year have been increasing, especially over the
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  past six months,
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  indicating that our surpluses of about 2 million barrels per day are accurate.
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  And so with this environment, you'd expect to see oil below $60.
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  But actually, you've seen, especially over the last week, that as it got to that
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  level,
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  it promptly came back up above $65 per barrel.
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  And that, once again, has just highlighted the geopolitical supply risk factor in the
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  oil price that
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  could be a wild card, which could significantly alter market balances.
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  And the latest news was the U.S.
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  moving to sanction two of the largest Russian oil companies.
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  And therefore, you know, as these companies are sanctioned, you've seen
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  India and China saying that they will stop taking delivery of Russian oil.
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  And so they obviously have to then replace these barrels from elsewhere.
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  And so that big surplus that we spoke about, the 2 million barrels,
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  could easily be wiped away if Russian oil is not allowed access into the market
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  because they export over
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  3 million barrels per day.
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  It's very interesting as well that in the last few days, one of those
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  Russian oil companies has decided to sell all of its international interests.
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  So this is a story that will...
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  continue.
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  Yeah, let's now look at a commodity that has suddenly started exciting people.
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  And one of those people was a colleague of yours in London.
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  And he had some very interesting ideas about where the copper price is going.
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  Are you as excited as he is about it?
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  Yeah, definitely.
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  I think as a house, we have quite a positive outlook for copper.
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  And we just have a belief that this industrial metal
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  will continue to play a critical role in the energy transition in technologies such
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  as electric vehicles which use three times
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  the amount of copper that a normal vehicle uses between even more so in other areas
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  like the
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  power grid investment that's required to support
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  the power hungry data centers that are needed for artificial intelligence and
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  other sort of electrification across many
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  industries and so you know generally the market is quite constructive copper on a
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  long-term basis,
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  but we had a view that copper deficits might materialize earlier than markets
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  expected because
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  we believe that everyone was underestimating the supply disruption from
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  some of the major mines that
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  are going on, such as the Freeport-Grasberg mine in Indonesia.
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  You've had Kamoa-Kakula in the DRC, Anglotex, QB2 and Kualawasi mines also.
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  lowering their guidance over the next year or two.
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  And so with this major supply disruption risk against a market that continues to
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  see strong demand,
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  we had deficits beginning from next year.
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  and actually above the top end of the consensus deficit for next year.
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  And so we were quite bullish that prices would rise.
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  Overall, the commodity complex, if you look at it as an index, including all the
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  ones we've just spoken about,
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  would you say that you are still bullish?
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  Again, I'm talking about commodities as a whole, Mohamed.
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  Yeah, as I mentioned, I think in the world that we found ourselves in,
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  where countries are unsure in supply,
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  Geopolitics could influence the production of various commodities and
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  the flow of metal.
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  I think in that environment you're likely to see stronger demand than what market
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  balances would suggest,
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  and perhaps even somewhat inefficient demand.
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  Normally it would go to the lowest cost area, but now because of supply chain
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  issues,
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  you could see excess capacity being built and not fully utilized.
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  And so if you add to that on the supply picture,
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  you really start to see across many different commodities how adverse sort of
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  weather
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  and natural disasters, etc., and even just declining grades are impacting the supply
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  coming out of mines.
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  And so if you compound those two views,
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  plus this theory that real assets are starting to benefit from debasement, then
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  as a house I think
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  we are fairly constructive across most commodities, especially, as I mentioned,
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  precious metals and base metals like copper, aluminium,
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  but less so on the bulk metals or bulk commodities like iron ore and thermal
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  coal,
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  where we believe there's just sort of structural demand headwinds on that side.
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  Mohamed, thank you very much for your excellent analysis.
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  That was Mohamed Dokret, analyst at 91.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams.
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  and various contributors and do not reflect the policy, position, or opinion
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  of any other agency, organization,
• 16:53
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• 17:03
  entity other than the speaker or the author.
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  And since we are critically thinking human beings, these views are always subject to
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  change, revision,
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  and rethinking at any time.
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  Please do not hold us to them.
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  in perpetuity.