EDITOR: | October 15th, 2013 | 6 Comments

Critical metals — Critical insight: how the technology metals may be the best window into economic trends

| October 15, 2013 | 6 Comments
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rbcmiaHere’s a real big question: could it possibly be that the technology and critical metals are telling us more about the world economy than the more mainstream commodities?

That’s the only explanation I can find for what is happening across the minor metals sector, from rare earths to graphite to rhodium. We’re no doubt regarded as fringe-dwellers in the metals world, but those who follow the commodities we follow may be gleaning an insight into what is happening below the surface, an insight which seems to have eluded those who follow the major commodities and who all seem blithely unaware of the trends (assuming that the critical metals are providing a true reflection, of course).

One reason for this is that none of the products we follow here, from potash to rare earths to tin to graphite to niobium, is vulnerable to speculators. Those guys can play with the gold price, short copper, stockpile oil — but our ones reveal real demand. They may have been able to get involved in the uranium (2007), phosphate (2008) and rare earths (2011) surges in order to get equity prices up, but that is unlikely to be happening now.

The economics won’t affect the importance or the long-term value of those metals we follow here on Investor Intel. In the years and decades ahead we might find it wise to remember Bette Davis’ line in All About Eve: “Fasten your seat belts. It’s going to be a bumpy night”.

Conversely, many may be scared off — as so many investors have already. Since 2007 we have had stock market frenzies for uranium, phosphate, potash, and rare earths. All ended abruptly. But the fundamentals of those sectors have not changed. And they probably won’t. Just remember this if your confidence is tested.

Those who try and pick what is going to happen with oil, copper or gold have got it easy. No, I’m not suggesting that analysing those commodities is a no-brainer. What I am saying is that, by comparison with the technology metals, there are plenty of known-knowns, and some known-unknowns. On our side of the fence, however, we have very few known-knowns but great lashings of known-unknowns — and even a few unknown-unknowns.

Of those known-unknowns, why are prices across the board still so low? We have all these technology metals which are regarded as critical (so critical people like the European Commission and the British Geological Survey keep compiling lists of them) yet no one apparently wants to pay good money for them.

Just take rare earths. Even closure of China’s capacity for a while did little to give prices a boost. Tungsten is in short supply and much of the new capacity due to come into production is spoken for through off-take agreements, but the metal is failing to get anywhere near its 2011 high. Sure, tungsten producers will still be able to make good money, but it’s not exactly raining dollar bills.

Take lithium. Everyone’s been talking about the boon to Bolivia and Argentina once their brine lakes start to be exploited. Yes, sounds fine, but then we see that Japan’s big trading houses are moving to cut their dependence on South America for the key component of lithium-ion batteries. Itochu is starting to ship lithium carbonate from the U.S., from Simbol Materials which can take lithium chloride and can refine it into carbonate within 10 hours.

Marubeni Corp. is moving to sell to its Japanese customers lithium carbonate extracted from ore in Canada, starting this fiscal year. It plans to import 5,000 tons, or about 30% of Japanese demand, in 2015 from Canada Lithium Corp., which owns a mining site in Quebec. Production will cost around the same as in South America but take just a few days, says Nikkei.

In today’s edition of The Financial Times we hear that orders have plunged for three technology metals found in platinum deposits. The price of iridium has dropped 43% so far this year. Iridium crystals are used in screens for smartphones and flatscreen TVs. Ruthenium, used in computer hard drives, is now at its lowest price since 2005. Since 2005! That’s even lower than post-global financial crisis.

And rhodium has never recovered from its GFC tumble, having lost 90% of its 2008 high (and, according to Platts, should settle around $1000/oz). Rhodium is used catalytic converters.

Earlier this year it all looked quite different. Suppliers were expecting a price rally, but that never happened. In fact rhodium was then $1800/oz.

So confident was the industry that Ross Strachan at London’s Capital Economics put out a note forecasting rhodium to be at $2000/oz by the end of 2014. It may well be, but there are no signs yet. China is the biggest customer at 30% of world usage, followed by Japan on 24% and North America only 7%. Capital saw rhodium gaining for two reasons: one, vehicle emission regulations continue to be tightened and this will increase auto catalyst demand for rhodium; two, South Africa’s production of the metal is likely to fall by about 10 per cent due to industrial troubles and strikes.

Indium prices are down again this week, graphite prices look range-bound and poor old uranium wallows along at spot $35.25/lb.

What will be interesting is to see who starts moving in to secure operations and future supplies. Watch the critical metals space: it may reveal a great deal.


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Comments

  • J. Best

    As a new investor to this sector I found this article really helpful. Thanks Robin, look forward to more.

    October 16, 2013 - 1:01 PM

  • Veritas Bob

    Robin, I don;t understand how you were able to make the assertions made in this paragraph “One reason for this is that none of the products we follow here, from potash to rare earths to tin to graphite to niobium, is vulnerable to speculators. Those guys can play with the gold price, short copper, stockpile oil — but our ones reveal real demand. They may have been able to get involved in the uranium (2007), phosphate (2008) and rare earths (2011) surges in order to get equity prices up, but that is unlikely to be happening now”

    You say that 1) none of the products you follow here are vulnerable to speculators, and that they reveal real demand, but then say 2) speculators got involved in various surges in the past (I’m sure many readers remember the 2010-2011 rare earth surge, and as far as I can tell, there was quite a bit of speculation feeding the upward part of the surge, in the underliying REEs and in rare earth equity plays), and 3) that is unlikely to be happening now. Items (1) and (2) seem inconsistent, and I have no idea how you arrived at item (3). Please explain. Thanks.

    October 16, 2013 - 1:25 PM

  • Robin Bromby

    There is no inconsistency, but I may not have myself as clear as I should. What I am arguing is that, because there are largely depressed (realistic?) prices across the board, there is no leverage for speculation. There is no way that financiers can get the REE, uranium, potash, niobium prices ramped up, because in this market they cannot. Yes they could pre-GFC and then, with REE, in the unrealistic prices of 2011. But with gold, copper, etc. the leverage is the commodity itself. This was not the case with REE or uranium: the money that was made was through getting share prices to run, the guys making their money from unloading shares rather than from the underlying commodity. Whereas, as we are seeing now, someone is playing games with gold but with no obvious tie-up with gold shares. Does all that now make sense?

    October 16, 2013 - 3:32 PM

  • Veritas Bob

    Thanks. That’s a better explanation. But I’m still not sure how you can determine that pricing of “the products we follow here” reveal real demand – at least straightdforwardly. There is a time dynamic/feedback/evolution between price and demand, including impacts of stocking and destocking product inventory, and this can obfuscate the relation between price and end use demand (as opposed to stockpiling or destockpiling demand).

    While the average Joe punter reader made or lost money for the most part in rare earths on buying/selling shares and share options, undoubtedly there were professionals (including producers, users, and speculators) who were buying and selling product, and making or losing money in the process, and there was a (noisy) feedback over time between the share and product markets

    Now, of course, trading in gold is a much larger market than trading in rare earths, for example. And the average Joe or Jane is more familiar with the price of gold than of any particular gold stocks, whereas for those who follow to some extent, people have relatively more familiarity with share price movements for at least the most prominent rare earth stocks than for underlying rare earth prices – of course transparency, or lack thereof, comes into play in that as well, in addition to there being a multitude of different rare earth products vs. just one in gold. Whether the forthcoming Baotou Rare Earth Exchange will change things in that regard I don’t know, but there won’t be much transparency there, if at all, until futures contracts extending far into the future are incorporated, if ever. Lack of futures market complicates assessment of the rare earth market, and market expectations for future price and demand.

    October 16, 2013 - 3:53 PM

  • Tim Ainsworth

    Perhaps some insights in Iluka’s Q3 report:

    “MINERAL MARKET CONDITIONS

    After a first half recovery in demand for zircon in a number of markets, especially China, the third quarter saw more subdued market conditions in most markets relative to their robust first half run rate, reflecting both normally quarterly variations and continuing fragile business confidence levels, with the latter still impacted
    by prevailing and new economic and political uncertainties. This was reflected in a more cautious approach to ordering by customers during the quarter.

    Demand in the United States, which is mainly manufacturing related, remained on the whole robust, while demand in other regions – while higher than 2012 – is still volatile reflecting the aforementioned business confidence levels and fragile consumer sentiment.

    Iluka previously advised that it did not expect the typical second half zircon sales weighting to be evident in 2013 sales volumes and this has now been confirmed, with lower demand in the third quarter unlikely to be offset in full by stronger sales volumes in the fourth quarter.

    As the company has previously indicated, the pre-conditions for a recovery in pigment, and in turn high grade feedstock demand, are becoming evident. This is reflected in pigment producer commentary in relation to the reduction of pigment inventories to more usual levels and the intention, over time, to move back to higher yields at pigment plants and pursue higher prices.

    However, seasonal factors in the northern hemisphere mean that the industry is entering its typical lower demand period and it remains Iluka’s expectation that clear signs of recovery in high grade feedstock demand may not become evident until late 2013 or into 2014.

    Iluka’s expectation is supported by increased customer inquiry levels regarding future supply, especially for 2014, which are at levels not seen for over 12 months.

    Iluka’s full year sales expectations for high grade feedstock volumes are subject to further discussions with customers but remain at this stage as previously indicated, which is roughly in line with annual production of rutile and synthetic rutile of approximately 200 thousand tonnes combined.

    While year-to-date rutile prices to the end of September are in line with the commentary provided by Iluka at the half, the current pricing environment has weakened, based on some producers unable or unwilling to await demand recovery, to a level approximately 20 per cent below the first half rutile weighted average price level of approximately US$1,200 per tonne.”

    A range of basic industrial minerals to a multiplicity of markets by end use & by geography, and currently most in flux. While Iluka has come off the bottom demand wise it will not outperform until the majority of its markets start performing in concert, in effect a mid to late cycle play.

    Most of what you mention are small inputs to end products across diverse markets requiring broader industrial/consumer growth to build demand over supply.

    October 17, 2013 - 7:28 AM

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