Commodity Watch: Beneath the Surface of Supply Shocks

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" data-fr-image-pasted="true" src="/getContentAsset/e4db1c4c-2687-44cd-adbd-db1eb849e5d2/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.jpg?language=en" alt="Ahmad Al Sati" title="Ahmad Al Sati" class="fr-fic fr-dii" style="width: 180px"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>In early September, 800,000 tons of mining slurry (the equivalent weight of half a million cars) unexpectedly careened into the underground caves of the Grasberg copper mine in Indonesia ("mud rush"), killing two workers and trapping five more. Mine operations have been suspended since then, with resources diverted towards rescue. The miners have not yet been found.</p><p>Last week, the mine’s owner Freeport-McMoRan declared force majeure on its contracted supplies, warning that production at Grasberg will be lower into 2026. Copper prices jumped. Grasberg provides 3% of global copper supply and its shutdown comes at a time when copper supplies are tight, with accidents and shutdowns at other mines. Yet, the market reaction underscores the fragility of the copper supply chain as long-term underinvestment collides with increasing and sustained demand – smelters were already scrambling for feedstock before these disruptions. These imbalances may well continue. The United Nations Conference on Trade and Development (UNCTAD) estimates that the copper markets will require over 80 new mining projects and $250 billion in investments to meet global copper demand by 2030.</p><p>Structural undersupply may also be evident elsewhere in commodities. The Organization of the Petroleum Exporting Countries (OPEC) is meeting only 75% of its announced supply increases even as supply from sanctioned countries decreases and oil climbs to a 7-week high. Fracking companies in the US have continued to downshift production as prices remain at or below breakeven and costs increase, such as for chemicals, steel, and labour. The latest Dallas Fed survey showed a 6.5% decrease in drilling activity during Q3 (after an 8.1% decrease in Q2). At the same time, new replacement reserves are harder to find (97% of oil being produced was discovered in the 1900s) even as the world continues to rely on hydrocarbons for electricity.</p><p>These shortages are not confined to the two most ubiquitous commodities but have occurred across a slew of commodities over the last 5 years. South Korea had a gold crunch earlier this year as its mint was unable to procure raw materials. Other commodities have also experienced increased shortages and volatility. Some of these supply constraints were driven by artificial export controls (e.g. rare earth export restrictions) and some were ultimately met with increased supply (lithium). But after a decade of neglect (underinvestment and under allocation by investors), the commodities supply chain is fragile and susceptible to disruption (market, weather, or geopolitics).</p><p>This fragility exists at a time when a consistent and stable supply of commodities is key to meeting the food and economic needs of a growing population. For example, copper is needed for economic development (across homes and factories), infrastructure, electrification, and AI. Without it, a modern economy cannot function. Disruptions will be felt across the economy potentially restricting growth or increasing inflation (or both). More investment in commodity supply chains is required. Opportunities are increasingly present.</p>