“While COVID and Chinese macro developments matter most in the near term, the global energy transition and structural supply constraints should be the key fundamental drivers for mining in 2022,” broker Jefferies said in a note released on 6 December.
“We are most bullish on copper and aluminum, and we believe consensus price forecasts for these metals continue to be too low. This is a repeat of 2021 in some ways.”
The broker recommends buying Freeport McMoRan, First Quantum Minerals (TSX:FQM), Alcoa (NYSE:AA), Anglo American, Glencore, and Antofagasta.
Jefferies also recommends avoiding iron ore and coal miners for now.
China, as ever, remains the key driver.
“China has gone through a multi-decade period of urbanization and industrial development,” said Jefferies.
“This growth has been characterized by steel-intensive FAI and has led to a high level of debt, property market bubbles, and pollution. President Xi's pledge for China to reach peak carbon by 2030 and to be carbon-neutral by 2060 will require seismic shifts in capital allocation, characterized by a transition from investment in the old economy and housing to investment in new economy infrastructure, including renewable energy, EV charging stations, and technology.”
Meanwhile, says Jefferies, property market development, which has historically accounted for more than 30% of China's GDP, is in structural decline.
“We expect changes in the Chinese economy to lead to a shift from steel, iron ore and coal to copper, nickel, aluminum, and other 'energy transition' metals.”
In the rest of the world, developed economies have mostly recovered from the 2020 downturn despite supply chain bottlenecks and frequent COVID flare-ups.
“Demand in these regions should improve further over the next year,” said Jefferies.
“In addition, an emerging market demand recovery, possibly in response to higher vaccination rates, would be very bullish and could blindside the bears in 2022.”