What impact do you see from the current broader geopolitical situation on metals pricing?
We’ve been wondering how much of a slowdown in China will impact broader commodities prices as well as battery materials. Obviously, China has driven battery material prices up. But similarly, the COVID-19 related shutdowns in China have also driven battery material prices and commodity prices in general down in this cycle, and the market doesn’t know how this will affect the battery supply chain.
And then also building on the geopolitical theme, the invasion of Ukraine has had a direct impact on energy prices, and on the wider economy. So obviously, it’s pushed European gas prices up through the roof. Global gas and oil prices went up as well, which has resulted in supply chain dislocations and hyperinflation. Which then causes central banks to take measures to slow economies down, slow demand down, which risks triggering recession.
Coming out of the COVID-19 lockdowns, do you see a greater focus on regionalizing supply chains and how do you see this playing out across various markets?
This is one of the core thematics to come out of the COVID-19 event. Many have already been quite concerned about how centralized the battery supply chain, for instance, is in China, but I think it’s come out in other areas as well due to the pandemic. Increasingly now, the Western world has spent 20 years outsourcing its manufacturing industries to China. That’s going to stop now. And I think that the most important impact is going to be the switch from just-in-time inventories, which effectively have been proven to be very risky on a global basis.
We’ll also need to see recentralization of supply chains. We’re seeing this in the battery industry, with this huge slew of gigafactory and EV factory announcements in Europe and North America. But we haven’t really seen it at the primary end of the market yet, or with primary metals extraction and primary commodity production.
If you look at the solar sector, something like 75% of polysilicon production comes from China, which is very materials, power, and labour intensive. Something like 85% of solar modules and are manufactured in China. It must be brought over to Europe and North America. China dominates in rare earth mining and rare earth minerals production. So we have to see this decentralization of supply and bring it back to regional demand centres.
Looking at investment challenges, especially for this kind of the battery metal space, where do you see the money going, and is it coming in fast enough?
Investment is a challenge in the battery material space. The money we’re seeing now is going too much into the downstream part of the industry. We’re not seeing enough in the upstream. Currently, in mid-May, the equity markets are in turmoil and 60-70% of the capital that’s been raised is in raw materials.
Battery raw materials over the last three years, has come from the equity market. So, if we cannot raise money in the equity market, because they’re too volatile, that’s going to have a huge impact on the supply demand balance.
What do you think the projected demand for various metals along the battery value chain is? Are there any kind of alternatives to keep an eye on, regarding different battery chemistries?
We project quite strong structural demand growth in all the key lithium-ion battery ingredients. And that ranges from about ten times market growth for natural graphite and lithium to maybe two times market growth for cobalt. But we’re talking about substantial increases in demand.
The question of different chemistries is one that we get quite regularly. On the stationary energy storage side, there are competing chemistries to lithium-ion. Things like vanadium redox flow batteries, chromium flow, iron and zinc flow batteries, is where we see potential for demand erosion in lithium-ion. But in the EV space, there’s very little competing with lithium-ion.
And the other area that people always ask us about is solid state. I don’t see solid state happening on a large basis until probably mid 2030s at the earliest. And the reason for that is that solid state replaces the anode with a solid lithium anode. And I don’t see how that helps because at the moment we’ve got a huge shortage of lithium.
Let’s talk about the role of original equipment manufacturers (OEMs) and other market players within the battery value chain.
I think the OEMs have been foolish about the battery industry. If an OEM is allocating, say $130B and $150B to investing in EVs over the next 10-15 years, they should have done a full spade-to-car analysis of the sector. And it’s very clear to everyone in the battery material space that the OEMs haven’t looked at the supply side of the equation at all over the last five to ten years.
If you look at all of the participants in the industry, the OEMs are the only organizations that have had net cash on their balance sheets over the last five years. They’re really the only ones who can invest sufficiently to build new projects and lift this problem.
Median prices for EVs at the end of last year was something like £30,000 and they are increasing. So the OEMs need to do their homework and understand how the situation has emerged. You’ve got to make capital available to the upstream.
This year it’s going to be difficult for the second and third tier mining companies to be able to raise capital in equity markets. And it’s all very well funding the guys who are nearest production, and that might fill the gap for the late 2020s, but you’re not doing anything about the gap that’s emerging in the 2030s and the late 2030s.
What does ESG-focused investment mean to you and how do you see the role of ESG evolving moving forward?
I think that the whole ESG question in resources is very interesting. In Europe, ESG investors aren’t interested in investing in the mining sector. In Asia and North America, ESG investors aren’t phased by investing in primary extraction, but they want to know whether you can make an impact.
And I think the whole issue of ESG is nebulous because there’s too many people doing ESG ratings and ESG scoring, who aren’t experts in the industry.
The industry needs to be able to benchmark companies and projects on ESG. And we need to have a more consistent understanding of the challenges of the mining industry and the solutions that can be implemented by ESG investors. I’m a big believer that without development in the primary metals industry, there will be no energy transition. The energy transition is materials intensive. So, simply being an ESG investor and saying, “I don’t invest in mining”, is actually adding to the problem.
The ESG sector is going through a little bit of a watershed with the energy crisis in Europe and globally, because things that seemed important a year ago, now appear less important in the face of rampant inflation. And I think we maybe need to refocus on the things that are really important here from an ESG point of view, where are your red lines. Are your red lines decarbonization, or a lack of extractive industries, because the two are not mutually compatible? If you want to decarbonize, then you have to invest in raw material production.
And I think there’s a lot of miss-selling on various aspects. Particularly on the recycling area. Recycling is very important to the metals space. But at the end of the day, there’s such a demand for primary raw materials, particularly in the battery space, that there’s no way it can be supplied by recycling because there’s not enough material in existence yet.
If you look at Canada, there’s a huge amount of primary raw material but there’s also low carbon hydroelectric power. And the ability to build an integrated supply chain in Canada could lower the environmental impact of batteries and electric vehicles manufactured all in one region, very substantially. So for me there’s a lot of focus on ESG and on deglobalization and how much more friendly that can make the industry. And then obviously there’s the recurring mining issues of the social license to operate, suppliers, country regulations, and then the recurring issues of governance and management.
