Lithium: the lucky commodity?
Lithium seems to be lucky: it has roared into prominence just when most other things are doing badly, which has given it more pronounced (or at least more noticeable) thrust than probably may have been the case if all boats were rising. Call it the after-burner effect. It is the space capsule that keeps on going when the booster rockets fall away after take-off.
In the past, whatever was the latest fashion in commodity investing had surged in unison with the market in general. So when uranium went crazy in 2007, and hit $136/lb, or when phosphate and potash had their moments in the sun, or nickel went to $50,000/tonne, or gold threatened to get to $2,000/oz, they were not the only shows on the road. Today lithium pretty much is the only story in the minerals sector that is stirring the blood.
(However, this needs some qualifications: one, many of the late-starting lithium hopefuls are going to be a disappointment, just as they were in previous bubbles. Two, this does not imply that lithium, and lithium companies, will keep rising in the longer term. No, all I am saying is that in the shorter term the lithium story seems bullet-proof; but even that may be proved wrong.)
Even when rare earths soared in 2011, the metals commodities generally were doing comparatively well. But the REE phenomenon was, unlike graphite and lithium, a story not so much of technological revelation as a political one – the REE story had been around a while and the technology developments influencing its end use were well known and demand was not expected to balloon dramatically (the projections indicated a rise in demand, but no gold rush-type stampede). The rare earths story was overlain by supply threats and geopolitical concerns; that is, the fear that China would reduce exports and leave Japanese and Western end-users up the creek without a paddle. Moreover, there was concern that key sectors – defence mainly – would be compromised in terms of REE for weaponry and other needs as a result of China playing power politics with its rare earths.
Apart from REE, all those earlier frenzies were occurring in the contexts of a reasonably buoyant market for mineral commodities and non-technology factors.
Lithium is different: things are looking grim for the miners of other commodities, but nothing seems to be able to stop the lithium bulls. All those batteries that will be needed! Lithium is almost totally delinked from the general economic situation if you feel the pulse of the market and looks as if it could power on even when there comes the general commodity correction.
Get our daily investorintel update
That correction won’t happen, you say? With zinc within breathing distance of $2,000/tonne, nickel leaving $9,000/tonne in its dust and copper pulling itself above $5,000/tonne, you could mount an argument that the worst is over.
One of the best informed – yet surprisingly not widely quoted – analysts in Australia (in my opinion), Vivek Dhar of the Commonwealth Bank (the biggest Australian bank), laid out a very persuasive case this week.
“Prices to peak in 2Q16 on Chinese stimulus”, was the headline on his note.
Dhar says that base metal prices (and bulk commodities including iron ore and coal) will peak in the current quarter. This will occur as a result of China’s latest big stimulus burst. But after mid-year, the story changes and the outlook becomes more negative when the market has another look at surpluses. It will need prices to fall to get marginal producers out of the markets.
How bad? Well, Dhar sees copper losing near a quarter of its value next year. That means getting down to about $3,420 a tonne. That will hurt. The red metal will be hit as construction slows and power grid investment weakens in China.
Aluminium prices have been rising in Shanghai trading. That is expected to mean that presently idled capacity will be brought back into production. Dhar sees aluminium prices down 8% next year.
He thinks the nickel ore shortage has been overstated. Despite the rebound in prices, nickel producers are still facing higher cash costs than other commodities. His forecast is for nickel falling to $8,110/tonne next year and mines closing.
(Gold is not in the same category as the bulks or base metals: it marches to its own tune. And the problems in the global financial system are already baked into the gold cake.)
Lithium may or may not be affected by any general turning of commodities sentiment, but its record so far suggests that may be avoided. Think all those batteries: that scenario has the market bedazzled.
There is also another point: for once in the commodity story, the lithium outlook does not hinge on China. It is seen rather as the Tesla story. So that is the key one to watch.
InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.