Disruptive Discoveries Journal

Emerging Markets at Stall Speed and the Silver Lining in Metals

Chris BerryComment

By Chris Berry (@cberry1)

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As China’s equity markets continue to sink, calling into question the ability of Chinese officials to prop up the market (and maybe the economy), it appears that collateral damage has already begun.

Both Kazakhstan and Viet Nam have devalued their currencies by 4.4% and 1% respectively in a bid to remain competitive with their Asian neighbors. The MSCI Emerging Markets Index has entered a bear market and a gauge tracking 20 currencies is in its longest slump since 2000, according to Bloomberg. Emerging markets as a whole are dealing with a major slowdown in global trade and collapsing commodity prices and must confront the cheaper Chinese Renminbi as a threat to their balance of payments in the absence of structural reform. The performance various currencies from last week is shown below: 

China at the Tipping Point

Chris BerryComment

By Chris Berry (@cberry1)

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Question: What is China’s #1 export?

Answer: Deflation

The correct answer to the question above is electronic equipment ($571 billion USD worth according to the CIA Factbook), however the PBOC yesterday made a compelling case for replacing electronic equipment with deflation as banking officials in the country devalued the Chinese Renminbi (RMB) by almost 2%.

A Closer Look at Magnesium

Chris BerryComment

By Chris Berry (@cberry1)

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Executive Summary

As materials science continues its inexorable push forward, a closer examination of the metals and minerals which underpin scientific breakthroughs seems prudent. While there is any number to choose from, this report focuses on magnesium, commonly referred to as the “lightest useful metal” which is 75% lighter than steel and 33% lighter than aluminum.

Numerous materials have the potential to substantially impact our quality of life (for the better) in the future. Lithium, titanium, and scandium also come to mind with their potential for impact. Magnesium effectively competes for attention here and so a deeper dive into the metal is the focus of this report. Production of magnesium compounds grew at a CAGR of slightly under 6% from 2002 to 2014 according to our estimates and demand grew at a slightly faster pace. This growth rate well in excess of global GDP is a strength. That said, the growth rate has moderated somewhat with the slowdown in emerging markets. China effectively controls the global magnesium market, responsible for anywhere from 70 to 80% of production. This has everything to do with cheap and abundant labor, lax environmental standards, and inexpensive magnesium processing technologies. Given the slowdown in China’s economic growth rate which many expect to continue, excess supply of magnesium compounds (magnesia) is a looming factor to weigh against any capacity expansion. It would appear that while there is no shortage of magnesium, security of supply may be the best lens through which to view this opportunity. This report is intended to look thoroughly at the magnesium market, from its discovery, to its uses, to the market participants, to the potential growth areas. 

Q2 Lithium Results: Full Steam Ahead, but Watch Where You Step

Chris BerryComment

By Chris Berry (@cberry1)

 

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In keeping with tradition, each quarter I take a look at earnings announcements of select companies involved in Energy Metals value chains. Today I look at lithium. The thinking here is that dissecting financial results of companies involved in lithium production or use can give clearer guidance on the narrative of looming electrification (and growing materials demand to underpin this sea change). While it is true that all financials can be twisted or manipulated to spin a story, the ability to analyze financial statements can give reasonable insights into trends of this relatively small but growing business. The devil is always in the details.

A Key Question in the Commodity Rout

Chris Berry2 Comments

By Chris Berry (@cberry1)

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To anyone involved in commodity markets, the events of the past two weeks should make one thing abundantly clear: a new paradigm in commodity investing is in play. The most recent iteration of the commodity super cycle (2001-2011) was unlike anything many of us had ever seen. Unfortunately, the aftermath (2011-????) and subsequent correction may also be unlike anything we’ve ever seen (at least in terms of duration and intensity). I’m fully aware of the cyclical nature of the commodities business, but clearly the greater the bull market, the more severe the bear market.

Here is the Bloomberg Commodity Index since 2011, down 28% over the past year alone:

The Collapse in Commodities: Miners at a Financial Crossroads

Chris BerryComment

By Chris Berry (@cberry1)

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The implosions of the Greek economy and China’s stock market have brought the mining sector to the crossroads that it desperately needs to face. We’ve discussed the need for this reckoning often over the past three years and believe we may be at the beginning of a correction in the equity markets that will further depress metals prices as the twin headwinds of excess supply and slack demand begin to dominate. The need for global debt deleveraging also looms on the horizon much to the chagrin of politicians everywhere – not only in Greece.

The precipitous decline in China’s equity markets with $3.2 trillion in value evaporating in three weeks has quite simply demolished the metals with gold, copper, iron ore, and oil serving as the unwitting poster children for what happens when things don’t go “as planned” in a centrally planned economy.  

A Strategic Shift in an Increasingly Tight Lithium Space

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By Chris Berry (@cberry1)

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$80 Million Deal Between Western Lithium and Lithium Americas Redefines the Junior End of the Lithium Market

On an otherwise quiet holiday week in North America for mining, the news of the effective merger between Western Lithium (WLC:TSX, WLCDF:OTCBB) and Lithium Americas (LAC:TSX, LHMAF:OTCBB) is an exciting and positive catalyst in the lithium space. I have maintained for some time that, despite the rosy demand growth projections for lithium, the market needs fewer players. The lithium market (at approximately 160,000 tpy of lithium carbonate equivalent) just isn’t big enough for numerous players to generate adequate cash flows (and hence returns). Further, the resulting players will need to demonstrate costs or competitive advantages that allow them to exist alongside the oligopoly in the space.

China, Minor Metals, and Supply Chains Over The Next Five Years

Chris BerryComment

By Chris Berry (@cberry1)

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China Repositions 

With attention focused on Greece and the brinksmanship on display, it was refreshing last week to focus on another topic and participate in a roundtable discussion on the development path for China and its minor metals business over the next five years. The seminar, held in New York and hosted by TREM and MMTA (two important think tanks focused on the strategic metals space), hosted numerous individuals across metals value chains, from traders, to strategists, to trade lawyers to investment professionals. I participated as a panelist with a group emceed by Clint Cox, founder of The Anchor House, an exceptional think tank on rare earth element matters.

 

What We Found Out

The seminar was more “macro” in substance and was a refreshing change from the typical conference where you’re pitched by a litany of REE juniors all trying to prove their worth. The conference centered on the methods China’s leaders are employing to build sustainable domestic supply chains and evolve China’s manufacturing base.

Confronting Dislocation in the Graphite Market

Chris Berry5 Comments

Co-authored by Chris Berry and Jonathan Lee

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It’s been awhile since I’ve commented on the graphite capital markets. Financing difficulties, slack demand, economic uncertainty, and investor apathy (issues facing much of the commodity complex) are also at play in the graphite space. Nevertheless, graphite will remain an important piece of current and next generation supply chains and so a sober look at the sector is warranted.

In order to take a “deeper” analytical dive, I’ve asked Jonathan Lee, an institutional mining analyst and President of JGL Partners, to assist with this piece. Investors have shied away from the niche products like graphite due to opaque pricing and the transactional nature of the business. With no futures market, price discovery is tantamount to guess work unless you are in the business. This is generally true across the value chain from juniors to integrated producers.