By Gavin Wendt, MineLife
I’d like to begin this week’s note by highlighting a graphic – specifically, a chart showing the remarkable rise in the ASX Small Resources Index since the beginning of 2016.
What this chart highlights is that although there’s been recent recognition of sector strength, the catalyst for the resurgence at the junior end of the sector actually began almost two years ago. At the time there was a lot of negativity surrounding the sector, with the first interest rate rise during December 2015 by the US Federal Reserve since the GFC damaging the mood in the gold sector, accompanied by doubts about the Chinese economy. Gold however defied the sceptics and drove a robust recovery in the domestic sector from early 2016 onwards, which has permeated the broader market.
Here’s another interesting graphic – it shows the performance of the Gold Price versus the Dow Jones Industrial Average (DJIA) over the past 20 years. It highlights the various periods of alternating outperformance between gold and the Dow – in particular reflecting the Dow’s escalation so far in 2017. Gold has also performed solidly this year, but has been overshadowed by the Dow’s strength. Is it the right time to invest in gold in particular, based on a potential pullback in the US market? Only time will tell.
The graphic below highlights the anticipated surge in demand for a whole host of commodities, based on the forecast increase in production of electric vehicles (EVs). Key commodities in my view are copper, nickel, graphite, lithium and cobalt. I am the most cautious on lithium, as demand will flush out a tidal wave of new supply, whereas copper, nickel and cobalt face the greatest supply-side headwinds in my view.
The rate at which global automotive markets are adopting electric vehicles (EVs) is accelerating at a much faster pace than even some of the keenest market observers had estimated at the start of 2017, opening up seemingly once-in-a-lifetime investment opportunities amongst the key ‘energy metals.
Since the beginning of 2017, the market has reached a new peak of lithium-ion battery capacity in the pipeline. An additional 153 GWh has been added to planned capacity build-outs this year alone, taking the total to 372 GWh. But there are estimates that suggest by 2025 we will need to be around 750 GWh, of which 645 GWh will be for EVs.
Lithium-ion battery demand will continue to be the story that dominates the lithium market. This will be led by Chinese demand and their build-out of new hard rock lithium conversion capacity will be the one- to three-year processing story to watch. The emergence of western EV auto manufacturers is a comparatively new trend that will influence the supply chain.
The question is whether more automakers will follow Great Wall Motors’ (GMW’s) investment in Portfolio stock Pilbara Minerals (ASX: PLS) and invest cash into the upstream mining and processing space. GWM announced in September that it will take a 3.5% stake in Australian lithium miner Pilbara Minerals, helping the vehicle manufacturer secure upstream supply of lithium.
The other rare, yet critical component of current lithium-ion battery chemistry is cobalt, which has enjoyed a more than 150% price increase in the past 12 months. Prices have rallied on the back of political instability in the Democratic Republic of Congo (DRC), the world’s largest producer, and to some extent copper mine closures, where it is mainly produced as a by-product. The metal is critical to increase the energy density of batteries.
Turning to nickel, we believe nickel sulphate needs to go from 75 000 t/y to at least 350 000 t/y to 400 000 t/y by 2025. These increases in capacity are the same magnitude as lithium’s. Nickel demand from EVs will grow significantly from 75 000t today to at least 200 000t in 2025, despite nickel being expected to largely remain market driven by steel demand. This is in a two-million-tonne-a-year market, leaving EV growth unlikely to drive a sustained higher nickel price.
In the case of graphite, the high-quality, large-flake material is used as the anode material in lithium-ion batteries and prices have lagged behind those of lithium and cobalt thus far. The global market comprises about 650,000t/y, and it is estimated that should 1% of the auto market comprise EVs, it would consume up to 100,000 t of flake concentrate.
The market is anticipating that there will be a 300% increase in demand for high-quality graphite by 2025, given that a lithium-ion battery requires 10 to 20 times more graphite than it does lithium. Combined with an increasingly positive outlook for the global steel market, and the explosive growth of the EV market, several new graphite mines would be required to lock in supplies for the future base case scenario.
Let’s take a look at the most significant commodity in terms of usage and world growth. Copper has had a great 2017, as the price has made higher lows and higher highs throughout the year. Chilean miner Codelco believes prices could test record highs above $10,000 a ton, as the supply-demand balance shifts to “substantial” deficits from 2018 onwards. Goldman Sachs also predicts the metal will continue to benefit from synchronized global growth. Copper is up by around 23% this year and is trading a three-year high.
And what about zinc, the best-performing metal over recent years? Zinc’s shortfall has made it all the way down the supply chain to the refined metal market, meaning tightness is going to be here for a while. Even if Glencore was to reactivate all of its mothballed capacity, it would take months to significantly impact the amount of material available for delivery to the LME against short positions. The LME backwardation in the graphic is testing refined metal availability every day and the lack of response has been telling.