By Chris Berry (@cberry1)
For a pdf copy of this note, please click here.
Ed. Note: The following remarks were those I made to investor audiences during a recent bus tour in Munich, Geneva, Zurich, and Frankfurt.
Ladies and Gentlemen, thank you for coming today and investing your most valuable asset in us, which is of course, your time. Speaking of time, what I’d like to do today is take a look back and a look forward and briefly offer some thoughts on where we’ve been in the global economy in the past year and what some of the key questions are in 2016 likely to drive the commodity and broader markets altogether.
Rather than make excuses or guesses as to why commodities continue to under perform, I’d like to examine some of our thoughts from a year ago when we were last here in Europe and see what has transpired.
Mike recently presented the attached paper (here) at the Association of Quebec Mineral Exploration (AEMQ) Conference in Montreal. In it, he looks more closely at where we are in this bear market for resources and more importantly, why we're here. Finally, he looks at some possible solutions and time frames for recovery.
We are gearing up for two trips to Europe in November (Munich, Geneva, Zurich, and Frankfurt) and December (London) and will be back shortly with details.
By Chris Berry (@cberry1)
As contrarian opportunities go, nickel offers an interesting case study. Throughout much of 2014, nickel market participants were almost universally bullish based on the Indonesian government’s plan to ban exports of nickel-bearing laterite ore. Nickel ore exports from Indonesia account for approximately 15% of global supply, so any curtailment in exports would have a material effect on pricing. It was also believed that other metals including tin would follow suit.
As China, the main destination for global nickel supply, had no real options to satisfy its insatiable demand (the Philippines is an exporter but on a smaller scale), the belief was that upward price pressure on nickel would ensue. While there was a rally after the ban went into effect, it was not sustained.
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
Regular readers will know of my optimism regarding cobalt. The fundamentals look sound in a metals market that, already under pressure, appears headed lower. To wit:
· Cobalt demand is growing by 6% overall with demand in the battery supply chain growing by some estimates at a CAGR of 10% out to 2020 - a good chink of the overall market. Current estimates for battery usage put the actual tonnage demanded at between 35,000 and 40,000 tpy. This is driven almost exclusively by cobalt’s use in the cathode of the lithium ion battery.
· Cobalt is mainly a by-product, produced as a consequence of nickel and copper mining rendering cobalt production hostage to the bullish or bearish tendencies of these other metals.
By Chris Berry (@cberry1)
For a PDF copy of this note, please click here.
Recent events in the lithium and electric vehicle (EV) spaces have conspired to light a fire (pun intended) in this corner of the metals market. To wit:
Apple’s (AAPL:NASDAQ) recent public announcement of its intent to have their own EV ready by 2019 is a strong indication that a redefinition of transport is here to stay. While not a surprise, this announcement is good news as AAPL, a company with a history of transformative product development and extraordinarily deep pockets, is intent on making its mark in the EV business. While details are sketchy at this point (autonomous? Fully electric?), having a company of AAPL’s stature enter this space will accelerate adoption and interest – not to mention shine a light on raw material access and supply chains.
Regarding raw materials, the general trend of increasing prices for lithium compounds is intact with FMC Corp’s (FMC:NYSE) announced intention to raise prices for their lithium products by 15% starting October 1st. In the current market environment, there are no commodities with the same pricing power as lithium (See below for YTD metals performance). This pricing momentum's contribution to FMC’s bottom line and cash flow is likely marginal, but the price increase is an important signal.
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
In the 19th century, geopolitical tensions were at the fore as Great Britain and Russia jockeyed for position in much of Central Asia with an eye on protecting British interests in India. At risk was control of land and sea routes for trade. Ultimately, other countries including China, Afghanistan, and some in Europe would be drawn in and would set the stage for geopolitical rivalries which still exist today.
This geopolitical chess match became known as The Great Game, a phrase coined by Arthur Conolly, a British intelligence officer in India at the time. Control of land and sea meant not only economic security, but also the ability to project economic and political power far beyond one’s borders. The common belief that the sun “never set on the British Empire” was at risk.
About the same time (late 19th Century) in Germany, a self-taught engineer named Ferdinand Porsche built what is widely believed to be the first electric vehicle. Mr. Porsche wouldn’t found his famous automobile company until 1948. He could have hardly realized it at the time, but this invention would be the eventual catalyst for the emergence of a “new” Great Game. However, today it isn’t countries that are the main players and it isn’t trade routes that are at stake. The new players are companies and what is at stake is energy usage for mobility and continued enhancement quality of life.
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
It’s been interesting to read the mainstream media’s impression of the recently announced lithium hydroxide supply deal between Tesla Motors (TSLA:NASDAQ) and Rare Earth Minerals PLC (REM:LON) and Bacanora Minerals (BCN:TSXV, BCN:LON), a joint venture with lithium concessions in Mexico. Arguably the biggest misconception is that TSLA has consummated a deal with companies operating an existing mine. This is not the case as the deposit at the center of the agreement is just that – a deposit.
Semantics aside, the agreement between the companies offers an interesting window into TSLA’s supply chain strategies, and in the end what the company has really done has purchased an out of the money call option on future lithium supply.
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
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:
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
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%.
