Global Trade Wars: Unraveling the Impact on Critical Materials Markets

I think by having an allocation to both gold and silver it does help provide some downside protection potential as well as giving you the critical materials exposure I'm FIA Hayden with ETF guide it's nice to see you again despite rising market volatility the global energy shift continues and so does the demand for critical materials but how will global trade Wars impact the market and how can investors and advisers position themselves for the opportunity ahead helping us to get to the bottom of all of it Steve Schall director of ETF product management at Sprat Asset Management Steve welcome to the program great to see you again it's great to be back thanks for having me yes let's get started there's a lot of uncertainty in the markets right now what impact is this having on critical materials yeah there's definitely no shortage of news flow uh over the last several months here and and that's having a number of impacts particularly as it relates to critical materials uh in many ways the uncertainty is often worse than bad news right because what we're seeing is Market participants are trying to digest the information and figure out exactly what that means and and what we're seeing is uh in many cases Market participants are actually Paralyzed by the uncertainty um when you start looking at some of the critical material sectors uranium is a place where the utilities are are very much watching what's going on in the enriched uranium market so um new developments uh as it relates to Russia and the enrich uranium that they can provide to West countries is is top of mind you start looking at some of the other Commodities like silver and copper uh we see pricing dislocations happening where uh metal in the United States is more expensive than in other parts of the world and in some cases uh Market participants are looking to Arbitrage those pricing differences uh we also see end users or manufacturers uh in some cases are actually starting to frontload um purchase orders so that they can get ahead of any potential tariffs that might be coming down the pike and uh all this is is kind of sending some mixed signals within the market and it's um I I suspect what we'll end up seeing once all this shakes out is we'll we'll see an effort to reshore back into the United States and I I think we're starting to see some companies uh make announcements around moving manufacturing to in a attempt to get around these tariffs and and Steve how about Investors how have you seen them navigate the turbulent markets yeah as far as Commodities are concerned I think one commodity that we've seen a lot of interest in isn't a critical material but gold has been a place we've seen investors over the last uh two or three months on the physical side actually start to uh place a lot of Investments and and buy ETFs in general um if you look at uranium uh the second half of last year we saw investors showed a preference for moving Downstream uh away from miners in certain extent uh to a certain extent um we're starting to see signs that that Downstream uh trade might uh be softening and we're starting to see uh you know continued flow into our UR uranium minor ETF ticker urm and our Junior uranium minor ETF ticker urj which has steadily grown assets uh throughout the year through investor flows um and then finally I think what we're seeing in some of the other Commodities have been out of favor recently things like nickel and lithium uh and copper uh we're starting to see investors start to kind of dip their toes back in there and in many cases look at this as a potential buying opportunity so let me ask how does supply and demand play in the investment rationale of critical minerals yeah it's one of those aspects that's that's really important and really supportive of the longer term thesis when you start looking at um things like technological innovation and the transition to cleaner energy sources uh that's really bullish in our view of things like uranium and copper and silver um these are three Metals where we're not seeing um miners are able to increase Supply in any meaningful way uh very easily there's tends to be a very long lag uh could be a decade or more to get new projects from uh Discovery up up to Mining and to start producing um in uranium's case when we look at the mines that are either already open or planned to be open over the next several years uh we're still expected to be in a uranium deficit uh as it relates to uh the ongoing needs of utilities uh copper is in a unique situation because uh a lot of the large deposits uh and easy to access copper have been you know very much depleted where we're seeing de declining or grades and those higher uh quality deposits aren't coming as as quickly as they once have and I just say what lastly on Silver um that's a unique critical material because of of the materials that we follow it's not principally mined by many companies 72% is actually mined as a byproduct meaning that higher silver prices don't necessarily mean that miners will increase silver production now you mentioned the uranium deficit uranium and uranium miners had a turb 12 to 15 months so how should investors be thinking about this sector yeah it really was kind of a tale of uh you know two different stories over the last 15 months or so around this time last year we were coming off uh you know recent highs in the physical uranium Market uh but what I would tell investors is to to stay focused on the long term uh these you know uranium in particular and a lot of the critical materials are you know uh still emerging asset classes even though we've been mining them for decades uh with you tend to see a lot of volatility uh but the main thing to focus on with uranium is that the fundamentals have um not only stayed the same they've actually improved over the last year so um we're not seeing utilities really step into the market in any meaningful way there's a little bit of a staring contest between miners who don't want to accept uh what they believe to be undervalued prices for uh their uranium and then also on the other side you have utilities which aren't um willing to spend higher prices uh than what what current prices would otherwise uh dictate so uh there there's a little bit of a stalemate happening there but at some point utilities are going to have to come back to the table uh they're going to have to replenish the supplies that they've been drawing down over the last number of years and we expect you know uh moving forward uh that that fundamental uh under production story remains intact okay now if trade Wars lead to a softening global economy how would copper be impacted yeah copper is one of those uh metals that's in a much different position than it was 10 or 15 years ago when it was really Reliant uh particularly on the Chinese economy but the global economy in general uh we we've actually seen a lot of the uh uh investment in Copper comes from the energy transition uh last year was almost $2.1 trillion do invested in the energy transition it's 11% increase over 2023 uh so that's acting to give a kind of a base level of demand for copper and rvw uh we also have um the increasing Reliance on artificial intelligence uh that's very much copper intensive as we look to build out electricity grids to support the growing energy demand uh whether it's through the energy transition or artificial intelligence uh these are are two aspects of the copper Market that weren't really um as prominent you know 10 or 15 years ago and we think should help cushion any potential slowdown in the global economy Steve would you say there are certain critical materials that may hold up better in a deteriorating global economy uh there's three that come to mind um uranium being the first uh you know as we talked about uh that the fundamentals are very strong there uh uranium tends not to move in lock step with other asset classes so it can provide some diversification to a portfolio um and you know very similar to uranium copper is kind of starting to fall into that story as we're looking at increases in electricity demand uh and then finally I'd say silver is another area where um we're seeing a lot of uh support um for the metal moving forward uh it tends to do well in periods of geopolitical uncertainty um economic uncertainty Market volatility currency debasement know falling interest rates uh those types of volatile uh environments because it is still you know not only critical material but also does maintain a lot of those precious metals qualities and you mentioned silver I know Sprat has recently launched the Sprout active gold and silver minor ETF ticker GBU what can you tell us about how the fund is managed yeah so jbug which is how we refer to it uh it's our first foray into active management it's a logical extension of our precious metal Suite uh most recently which was our our silver Miners and physical silver ETF uh back in January uh the fund is focused on investing in gold and silver miners uh predominantly uh so it's miners uh development exploration companies uh royalty streaming companies uh there is the ability for the portfolio management team to invest in other precious metals like platinum and padium though we would expect those exposures to be relatively small over time um the thing that makes this unique is you know precious metals is really where Sprout's made a name for itself um the investment team has about over A Century of experience in the precious metal space and and over that time uh they've really developed deep relationships within the mining industry uh which comes in very handy when they're doing over 200 site visits a year to really understand management structures and um you know which management teams may be uh you know have the resources they need to to properly manage the portfolio uh they also do up to 30 site visits a year uh all over the globe not just located in the United States and Canada uh we actually have a uh a financial geologist on staff of part of the investment team uh that is very much involved with that and not only are are uh the portfolio management team looking at things like capital structure and management cap abilities uh they're also uh have their own sensitivity models where they're looking at things like changes in costs or the price of the underlying metal or how taxes will impact uh the underlying companies sticking with jbug how might changes in the geopolitical landscape impact the ETF uh so jbug is a little unique because you know it it gives you that gold and and silver exposure which have their precious metal qualities but when you look at Silver it's also critical material so it's a way to get exposure to both precious metals and critical material materal uh in in one ETF um so you do get those diversification benefits that we discussed with the precious metals uh but specifically when you start looking at how gold miners and gold equities stack up uh relative to the S&P 500 what you'll see is uh in general uh gold miners tend to be undervalued by about 40% relative to the S&P 500 uh they have a about 50% higher dividend yield uh lower levels of debt they're less leveraged uh and from a profit margin perspective it's about 35% higher so I I think by having um uh you know an allocation to both gold and silver it does help provide some downside uh protection potential as well as giving you uh that that critical materials exposure all right Steve we learned a lot this episode thank you so much for your timely insights and keep up the great work happy to be here thanks all right that does it for today's episode of Shifting energy thank you for joining us if you enjoyed the show please tell us in that comment section below and hit that like button to learn more about the critical materials and ETF we discussed on today's program be sure to visit Sprat etf.com finally if you missed previous episodes of Shifting energy hit the shifting Energy playlist to catch up I'm Thalia Hayden with ETF guide thanks for watching and we'll see you next time