Energy Metal Outlook for 2019
As we approach the start of the New Year, the global mining industry seems to be at an inflection point, with the fundamentals for a range of metals, including the full basket of energy metals, in a position to strengthen.
Many of these same metals experienced a price pullback during 2018, leading to sentiment that does not take into account the faster-than-anticipated adoption of electric vehicles and supporting infrastructure and what this adoption means for battery metal growth.
There has also been confusion regarding battery chemistry and battery lifecycles. I recently wrote a guest article for the 121 Group’s mining publication (The Assay), which illustrates the fact that, with the single exception of Tesla, the entire auto industry has settled on a battery chemistry. That chemistry is Lithium Nickel Manganese Cobalt (NMC). If you’ve not seen it, you can find the article here.
Price fluctuations – even large ones – are going to happen in any technological revolution and EVs are no different. For example, prior to the pullback, cobalt had an almost unbroken 18-month bull-run. It did so because producers were simply unable to cope with the speed at which demand was growing.
Eventually, additional supply began flowing out of the DRC and the ramp-up was faster than expected. Notoriously unstable as a jurisdiction, the DRC has since had a substantial hiccup with the suspension of Kamoto's cobalt exports. In this case it’s due to the presence of significant amounts of uranium in the cobalt being produced but there are many other pitfalls awaiting producers in that particular region.
While the impact of Kamoto’s problems has been limited thus far, it’s worth noting that a good portion of the sudden extra supply out of the DRC in 2018 has been from artisanal sources. Many of these artisanal operations will not be sustainable over the long term and we will see them tail off.
As time goes on, as the incredible pace of EV adoption and EV charge station rollout pushes electric metal demand up and up, people may well find there is not as much cobalt production as they thought. In turn, this is likely to start placing upwards pressure on prices.
The lithium price story is not much different in terms of supply. In 2018, the price for the different forms of lithium began falling as new sources of production came online. In addition, structural changes to the Chinese market squeezed prices all the way down stream to the finished lithium-ion batteries.
Some of this may have been due to a necessary correction. Bernstein analyst Paul Gait said in a recent note lithium producers' margins were far too high for a sustainable supply chain and that lithium prices still implied “astonishingly high returns” on any investment in lithium production capacity.
Current lithium carbonate prices are in the range of US$10,000-15,000/t depending on the exact price series one looks at, but according to Bernstein analysis, these prices would still imply IRRs of between 46% and 74% based on a representative list of 20 lithium projects from around the world.
Meanwhile, Macquarie Group's top pick for the next 12 months was nickel, which it said would climb over 20% to $14,500/t. Nickel is an energy metal with a lot of potential price runway ahead.
It is believed to have seen a shortfall in 2018, resulting in an inventory drawdown of around 200,000t. That was the result of supply topping out at 2.2 million tonnes and demand was 2.4 million tonnes in 2018.
Glencore estimates demand growth in nickel reached 7% this year, the highest of all its commodities, and it also believes new supply next year will be limited to 200,000t. The major commodity trader recently said the inventory level of about 66 days would have to be dealt with first, before prices would meaningfully take off in 2019.
Moving onto copper, there is potential for a modest deficit to emerge in 2019, despite Wood Mackenzie forecasting 250,000t of new copper supply to come on line. Combined with an expected 3.1% demand growth of copper in 2019, it would not be long for the current 12-day above ground stockpiles to be eaten away.
It’s also worth taking a look at perhaps the newest energy metal, zinc, which has seen a price decline of around 13% in the past year to approx. US$183/lb. Analysts have been flagging an emerging supply deficit for years, and it finally seems it could appear in a meaningful sense in 2019.
On the London Metals Exchange, zinc stocks are at their lowest levels since January 2008, at 119,000t. On the Shanghai Futures Exchange, stocks slipped to less than 27,000t and stocks in Chinese bonded warehouses stand at 34,000t.
Wood Mackenzie says the price response to falling zinc warehouse stocks has been muted, with finished metal supplies set to deteriorate further in 2019.
Mass adoption of EVs is rapidly drawing closer. Money is pouring into EV manufacturing capacity as Germany and the US race to catch up with China – the world’s largest auto market and the leader in EVs. Money is also flooding into charging infrastructure around the world and into the power grid upgrades that will be needed as more people “plug-in” instead of “filling up the tank”.
Whatever the near-term price movements for energy metals, their longer-term fundamentals are strengthening in lock step with the EV and renewable energy boom.
As the cobalt streaming leader in the world, and the largest holder of physical cobalt metal outside of China, Cobalt 27 is ideally positioned to meet the looming supply deficit. Things are positioned to heat up in this exciting sector over the next 12 months.
We invite shareholders to get in touch with any questions or comments.
Anthony Milewski, CEO and Director of Cobalt 27
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