Interview with Andy Home, Industrial metals analyst, author and Senior Metals Correspondent for Reuters.
Who better to ask about the current macro state of metals markets than the Senior Metals Correspondent for one of the largest news outlets in the world?
Matthew Gordon talks to Andy Home, 20th June 2020
A certain CEO recently remarked that the EV thematic had been “crushed” by COVID-19, and Home thinks he’s right. It’s an extremely hostile environment right now. However, it’s important to remember that battery metals were already having a bad year in 2019. The boom around Nickel, Cobalt and Lithium around 3-years ago has now turned to bust. Too much production was brought on too quickly, just at the time that battery demand in China was losing some of its momentum. COVID-19 has acted as an accelerator of that trend by creating battery demand destruction and extirpating consumer EV demand.
Is there a light at the end of the tunnel? Home thinks there might be. The big automotive companies have collectively invested c. US$300Bn into their EV infrastructure and eco-systems; they may need to kick start the market. I’d expect to see incentives offered by EV manufacturers to bring demand back in an accelerated timescale. China, the world’s largest EV market, was preparing to remove EV subsidies, which was a primary reason behind falling battery metal prices. As a result of COVID-19, this policy has been modified: subsidies will be extended to 2022. This is good news for the flagging Chinese EV market. Will Europe follow suit?
In Europe, the national support packages for the automotive sectors and the EV infrastructure is being heavily endorsed, except for Germany. The US is also proceeding in this vein, as countries look at globalisation as the solution for strengthening their own economies. The idea that America is reliant on a major rival, China, for materials to support its national security reminds me of the current happenings in the uranium and rare earths space.
Home believes that the turning point for the US foreign policy came under the Obama administration, and regardless of the outcome in US elections in November, he believes that US foreign policy will stay the same.
Indonesia – Nickel, Lithium and Cobalt
In terms of the next wave of battery production, Homes cites Indonesia as the hub. It has an exceptional infrastructure, including mines and processing plants. In addition, its production has been largely unaffected by COVID-19. As a consequence, nickel could be well supplied for the next EV demand surge. However, Lithium and Cobalt may struggle.
Even if Lithium companies believe they can be winners in the next cycle, it takes “5-6 years to create new brine capacity.” They should be building capacity right now, but they are actually curtailing it. There have also been curtailments for Cobalt, mainly due to price.
With Indonesia due to start churning out nickel at a record pace, how will nickel juniors the world over get funded? It will be a matter of timing, and it will also be a matter of supplying the right quality of Nickel. The battle has certainly heated up though.
Moving onto copper, Homes sees it as a very financialised commodity; one of the big reasons the Copper price is up right now is because the stock market is up. Home urges caution for Copper investments because for Copper demand to increase, consumer demand for Chinese goods like fridges, TVs and air conditioners need to also increase. If this doesn’t happen, Copper could be in for a rough ride.
Zinc has rallied recently, but the broad analyst consensus is that this isn’t sustainable. It will be just as affected by purchasing decisions as copper. Zinc’s recovery, like several metals, was down to the “lockdown lottery.” Zinc supply was particularly affected, with severe lockdowns taking place in India, Peru and Mexico: key parts of the supply chain. However, this is now passing. Lockdowns are gradually lifting, and zinc could be heading straight back to where it came from.
Lastly, what about Aluminium. Home remarks that it looks like a “renewed crisis” for the aluminium sector. Prices have been performing particularly badly, and this is because it is extremely difficult to turn off an Aluminium smelter. To do it safely, it takes a minimum of 3-4 weeks and up to a couple of months. As a consequence, far more Aluminium has been produced than is needed during the COVID-19 crisis.
The Big Mechanisms
Home recommends that investors pay attention to the bigger picture. Investors should look at the international metals’ macro story: what direction are markets headed in? One of the biggest elements is electrification. Global economies will electrify at different rates. In addition, there is a wider green energy thematic as we move away from fossil fuels towards renewable energy. Both of these themes are going to drive metal demand, but what metals? Investors are going to have to decide for themselves. The major issue with battery metals investment is the level of material uncertainty, as the materials used in batteries constantly evolves.
The other crucial area that requires focus is the deglobalisation of raw material supply chains. This is a political global phenomenon, and investors can expect to see material that comes from “friendly nations” have more demand in the near future.
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