Now that there’s some hope on the horizon for the end of COVID-19, base metal production is ramping up. Natalie-Scott-Gray gives an overview of some of the activities that are driving this, such as clean energy, the EV industry, construction, and others.The key drivers behind higher base metal production come from both ends of the equation (i.e., supply-push and supply-pull). For example, on the supply push-side, not only will miners be driven to increase production output this year to make up for lost guidance last year (due to COVID-19 disruptions to workforce capacity), but producers over the last six months are also benefiting from higher operating margins (given the dramatic rise in base metal prices themselves, which across the suite are well above the 90th percentile cash cost). As it stands, over the last three years (focus on 2018-2019), depressed metal prices resulted in miners cutting costs and reducing CAPEX; however, we are now in a situation where they can benefit from higher operational effectiveness with more room for future investment.
On the supply-pull side, consumption for the base metals is expected to rise year-on-year globally as vaccine rollouts increase mobility, while continued supportive stimulus (in the west) helps to lift consumers appetite. If we touch on mobility, we think this will be a key driving force behind base metal demand after the aerospace and road transportation industries fell flat on their backs in the height of lockdown; here, replacement demand (for example for lead-acid batteries in ICE vehicles) will benefit, while the continued pick up in manufacturing will help elevate demand for new products. We believe another key area will arise from the accelerated push towards green policy (as a result of COVID-19), in which “electrification” is a key focus, benefiting base metal demand in the move towards reducing the global carbon footprint. The best example of this comes from the rise in hybrid and electric vehicles in which battery metals (cobalt, lithium and nickel) will benefit from their use in lithium-ion batteries, while green metals such as aluminium and copper will benefit from their use in lightweighting and electric wiring. Indeed, in the case of copper, it is hard not to see where demand will profit in a green world, in which its use in renewable energy, grid and EV charging infrastructure is unmatched. Furthermore, given the release of China’s 14th Five Year Plan, copper demand will heavily be involved in the build out of 5G networks and data centres. However, having focused on the positives, reducing carbon emissions will also result in production cuts from carbon intensive sectors, such as the production of aluminium, while an increased focus on recycling could further pull back the requirement of metal from primary sources.
Recently, copper reached a nine-year high, breaching the US$9,000-a-tonne mark, before falling sharply. How do you think copper will perform in the year ahead, and what could be some of the challenges it faces?
There are different ways of looking at this, if we did just a technical analysis approach (which ignores everything external in the market and just focuses on copper’s price moves), then one could see that the upward trend for copper is still very much in place, which is a case for the bulls.
Meanwhile, if we look at copper from a fundamental perspective, the narrative is also bullish. Firstly, copper is supported not only by its relationship to the macro environment (being known as Dr. Copper), which we believe to remain supportive this year, given further stimulus roll outs in the west, continued improvements in vaccination distribution in addition to an environment where we believe we will see lower-for-longer interest rates. Secondly, copper’s use in electrification and the increased move towards green policy on a global scale will continue to create a strong backbone for demand in the medium-term. Now there are arguments here that post-pandemic the requirement for electronic goods will contract; however, this is countered by the rise in demand for NEV, EV chargers, renewable energy and increased grid infrastructure, not to mention new infrastructure targets set in China’s 14th Five Year Plan. While thirdly, in the bull case for copper, its underlying fundamentals are supportive (particularly against the rest of the base metal suite), with demand set to outstrip supply this year, with reduced stock levels likely to see the market record a deficit.
However, there are threats to this forecast, particularly coming in the form of supply. If we focus on South America (copper’s largest producing region), while the first couple of months of this year have seen supply issues faced by bad weather at ports, virus disruptions and logistical issues in the freight market, we are already starting to see the tight concentrate market in China ease. In addition to this, while the risk of strike action in the region will sit in the background (especially on higher copper prices and upcoming elections in both Chile and Peru), we do forecast that mine production in the region will rise Y/Y. Therefore, if the supply side of the equation continues to pick up this year, then this could be as an argument against higher prices. Meanwhile, our largest downside risk comes in the form of further virus spreads, particularly on mutant strains of the virus which could alter the effectiveness of current vaccines. In addition, the outlook on trade and geopolitical tensions particularly with between the U.S. and China will be something to watch closely.
Copper’s use in electrification and the increased move towards green policy on a global scale will continue to create a strong backbone for demand in the medium-term
Some are saying the so-called commodities supercycle has arrived. Do you agree with this view, or are we still in mining-boom mode, and what does this mean for the outlook for metals like copper and nickel?
We think it is too early to call a commodity supercycle. Indeed, although there are inflation concerns, we believe they are premature, with the realistic situation in employment likely to take longer to recover than anticipated. Meanwhile, the remarkable recovery in China last year was a result of 6Tr RBM in fiscal stimulus being pumped into the economy, and we know from China’s NPC meeting last week that this year, fiscal stimulus is being reduced, while long-term goals for the country are focused on reducing dependence on overseas markets while increasing domestic consumption. On a separate note, we do not believe a return in demand outside China (as vaccines roll out) is enough to start a supercycle. Perhaps there is only one area therefore that could lead us into a supercycle and that is green climate policy, although more clarity will be needed on how long-term goals such as China’s carbon neutrality by 2060, will be reached. The main beneficiaries here would be green metals.
Recently, news broke that Tesla is partnering with the Goro nickel mine in New Caledonia to ensure a steady supply of the metal for batteries. Do you see this type of activity becoming more common in future as EV producers look to secure their own supplies?
Absolutely, I think there are two ways of looking at this, not only are we seeing more and more joint ventures between OEMs as well as OEMs and battery manufacturers, which are looking to take advantage of not only technology but also economies of scale, but in addition to this, we are seeing the move towards the vertical integration of supply chains, which is the next logical step, although this certainly will not be clear cut. If we look to Tesla, it led this move last year, arranging deals to secure lithium supply with Piedmont Lithium (1/3 of its supply over the next five years), while also negotiating a deal with Glencore to buy as much as 6,000t of cobalt annually, while furthermore investigating the practicality of in-house lithium mine production. Meanwhile, if we look at traditional automotive companies that are adopting EV into their fleets, we are also seeing a rise in deals being struck with mining companies directly, where it may be the case that investment into current assets or future projects are required.
Numerous countries are planning to be carbon neutral by 2030, which will require huge resources of copper and nickel, among other commodities. What are likely to be some of the biggest challenges to these plans?
I think challenges here come in many forms. Firstly, the increase in demand for these metals has seen raw material prices surge which in turn will have a knock-on impact to the cost of infrastructure. Alongside this, challenges which are already being outlined will arise on the supply side; is there enough supply to meet forecast demand and will bottlenecks along the supply chain cause delays? In a similar vein, there are concerns over whether infrastructure (such as EV charging stations) will be developed enough to support new technologies such as EV. Certainly, we have seen such issues in the past, for example fuel cell technology; although the technology itself is proven, its largest issues have arisen from cost and lack of infrastructure.
From an investment point of view, EV metals clearly seem like a good bet for now. What are some of the headwinds investors could face in the year ahead?
I would agree that “green metals” are certainly well placed to benefit from the rise and increased pace of acceleration towards the adoption of green policy, with hard set targets by countries around the world securing demand. However, perhaps two of the biggest risks could firstly come in the form of a supply shock. For example, Tsingshan (the world’s largest producer of stainless steel) announced that it will be providing over 100,000t of nickel matte (an intermediate product that can be turned into battery grade nickel sulphate) to two Chinese companies (Huayou Cobalt and CNGR Advanced Materials). In theory, what this announcement has done has highlighted that Tsingshan has the flexibility to produce either nickel pig iron (NPI) to feed the stainless-steel market or use NPI towards the creation of nickel matte for use in lithium-ion batteries (not to mention its involvement in projects into the production of nickel sulphate via high-pressure-acid-leaching). Overall, it has altered the outlook for nickel supply, although the degree to which it has is still being assessed.
Meanwhile, perhaps another area where these ‘green metals’ can be impacted will come from changes within technology itself, such as material changes to lithium-ion batteries for EVs. A prime example here is the move towards finding alternative materials for those metals which are deemed unethical to use (cobalt) or that may be in scarce supply (such as class I nickel that is used in 70% of lithium-ion battery designs). Please note, a good example here is the push towards building market share in lithium iron phosphate batteries that do not contain either nickel or cobalt as an alternative.
