Australia building a formidable junior lithium force
If only we resisted the annual siren call and, instead, heeded Casey Stengel’s advice: “Never make predictions, especially about the future”. For once, your correspondent is going to take that advice and let others stick out their necks.
A year ago, who expected oil at below $40/barrel? Or nickel losing 40% of its value? Or zinc 28%. As The Financial Times today recalls, back in January Goldman Sachs predicted that in 2015 zinc would rise by 16% and nickel by 22%.
And those paid millions to see what is coming didn’t see this one coming. Glencore, Anglo American and BHP Billiton have all taken severe body blows as a result of assumptions that proved far too optimistic.
Yet lithium defies gravity, as pointed out in my recent post, Lithium Looking Like a Real Star. And it seems to be almost alone as a sector that excites investors. Last week an Australian junior Dakota Minerals (ASX:DKO) rose by 232% on news it was quitting copper-gold and had picked up six lithium projects. And another, Metalicity (ASX:MCT) rose Wednesday on acquiring a lithium project in Western Australia. As I have remarked before, ; the progress by InvestorIntel partners Lithium Australia (ASX:LIT) and Neometals (ASX:NMT) has been well charted here.
Clearly the oil industry is rattled by the whole battery phenomenon (of which lithium is a major beneficiary). The latest World Oil Outlook report from OPEC shows that, in the organisation’s Vienna headquarters (funny how the international bodies like to base themselves in choice locations), there may be a state of wishful thinking. Take this example: “Battery electric vehicles should not be expected to gain significant market share in the foreseeable future”. OPEC’s researchers cite high purchase prices for these vehicles, range limitations and poor battery performance. For these reasons, they argue, vehicle electrification will be mostly confined to various degrees of hybridization. “Oil-based fuels will continue to dominate the market up to 2040 and beyond.” And beyond? If those in the flash office suites at the major miners can’t even figure out what will happen in a year’s time, then 25+ years offers its own challenges if you start making predictions.
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I’ll hand the microphone to the redoubtable International Business Editor on London’s Daily Telegraph, Ambrose Evans-Pritchard. Writing about the OPEC study, he says “this is a brave call given that Apple and Google have thrown their vast resources into the race for plug-in vehicles, and Tesla’s Model 3s will be on the market by 2017 for around $35,000”. He goes on to point out that Ford has just announced it will invest $4.5 billion in electric and hybrid cars with 13 models available by 2020. Volkswagen is about to unveil its new electric car concept.
As Evans-Pritchard points out, OPEC dismisses Toyota’s move to hydrogen fuel cars. (The OPEC report says the plan with its “anticipated high purchase costs, the lack of hydrogen refueling infrastructure, alongside relatively expensive hydrogen fuel, will make it less likely to become a global breakthrough technology for passenger vehicles for the foreseeable future”.) As the Telegraph columnist notes rather crisply, “one should have thought that that a decision by the world’s biggest car company to end all production of petrol and diesel cars by 2050 might be a wake-up call”.
With the OPEC lesson in mind, I shall refrain from making any predictions for 2016. John Manley of Wells Fargo Funds Management has made his: “The commodity picture could get out of control to the downside,” says he – although there are those who might venture that 2015 already produced that result.
But Julian Jessop, head of commodities research at London’s Capital Economics, has some rays of hope. His six key themes for 2016 are:
- Better news from China, that the bulk of the slowdown there has already happened, and economic activity will pick up in 2016.
- Diminishing headwinds from the US dollar. The surge in the value of the greenback is almost done.
- The return of inflation. Underlying price pressures are beginning to pick up. This in turn could revive demand for inflation hedges, including commodities, with gold in particular likely to benefit.
- An extended period of loose monetary policy, especially from the Japanese and European central banks. The People’s Bank of China has plenty of room to ease further.
- Supply cuts. He expects more mine supply cuts to gather pace in the next few months.
- Rebound in investor interest. Commodity prices may look increasingly attractive relative to the high valuations of equities and (especially) bonds.
These six themes, if they are borne out, should help commodity prices to recover over the course of 2016, says Jessop. Fingers crossed.
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