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deflation

The Wall of Worry in Battery Metals

Chris BerryComment

October 11, 2021

For a PDF version of this note, please click here.

Should investors be focusing on cost inflation along the supply chain rather stretched valuations?

With some lithium prices up over 200% in 2021, is it time to start to worry about an overextended run? Lithium pricing as per Benchmark Mineral Intelligence is at an all-time high on a nominal basis. The last time lithium prices were this high (2018), the adage of “taking the stairway up and the elevator down” became all too real and reminded us of just how violently cyclical and unforgiving dynamic markets such as lithium can be.

The Strategic Metals Supply Chain in an Era of De-globalization

Chris Berry1 Comment

By Chris Berry

Ed Note: **This piece is a shorter version of a book I am writing on the economic, financial, and geopolitical aspects of the energy transition and will publish in 2020.


 

What a difference a year makes. The Summer of 2018 can arguably be remembered as a time when investor sentiment for lithium and cobalt took a turn for the worse. Since then a paradox in the sector has only become more glaring: while prices for lithium and cobalt in various forms have continued to fall, long term demand projections haven’t budged and are still very much intact. This disconnect has caused many investors to leave the sector for the “safety” of index funds or cash.

While it’s true that spodumene originating from Western Australia has flooded the market as I believed it would, pushing lithium prices down, conversion capacity in China remains somewhat of a question mark. How much is existing? What is the spare capacity? How much is under construction? When will a new equilibrium be reached?

As someone who has been to China recently, these questions have answers that change more frequently than you’d like to believe. Once built, scaled, and fine-tuned, investor logic dictates that this will push prices for lithium carbonate and lithium hydroxide down further. While some sell side banks might agree here, the truth is, as always, somewhere in between.

Much the same can be said for cobalt which has a truly ugly chart (below). The recent decision by Glencore to put Mutanda, a truly world class copper/cobalt asset, on care and maintenance for the foreseeable future due to poor economics says volumes about resource nationalism and royalties hurting profitability (to put it mildly), but still says nothing about long-term demand for cobalt, which appears firmly intact.

Mike's Presentation to the NY Chapter of the SME: "The Revival of Natural Resources - Inflation or Deflation

Chris Berry3 Comments

Recently Mike delivered a presentation to the New York Chapter of the SME which takes a renewed look at the inflation/deflation debate and its effects on natural resources. He tackles topics such as negative interest rates, "helicopter drops", Central Banker potential to reignite growth, currency implications, some preferred commodities, and most importantly the verdict which calls for deflationary forces to predominate before inflation, again, rears its ugly head. 

In either event, gold and silver should benefit from the forthcoming extraordinary central banking programs to stimulate escape velocity growth and hit the Feds long sought inflation target. He argues that diversification into gold and silver exposure is an appropriate risk management investment policy. 

 

Click here for a copy. 

Macro Strategy Note: The Case For Energy Metals (Revisited)

Chris Berry2 Comments

By Chris Berry (@cberry1)

For a PDF copy of this note, please click here. 

 

In reading the Berkshire Hathaway annual letter this weekend, I was reminded of a response Charlie Munger gave to an investor on how he tests the validity of his investment thesis. Munger’s response was, “Invert. Always invert.” The meaning here is to consciously take the other side of your thesis and try and disprove your beliefs/biases.

I’ve spent the past month or so on the road at conferences and meeting with investors to take a temperature check and “invert” our investment philosophy. We’ve also witnessed a huge increase in our subscriber base in recent weeks and so an outline of our view of the world and how we’re positioning is in order and likely overdue.

While the content here may be repetitive for long-time readers, I welcome any (constructive) comments as they can only help refine and strengthen our outlook.

Despite the overwhelming complexity of the global economy, we see a huge struggle against two headwinds. Though we’ve been involved in commodity investment for over a decade, we view the commodity super cycle (2001 – 2011) as definitively over. The end of the super cycle has left the economy with additional supply of commodities now coming on stream just as demand continues to soften.

Negative Interest Rates: A Primer

Chris Berry1 Comment

By Chris Berry (@cberry1)

For a PDF copy of this note, please click here. 

 

It is widely acknowledged that credit is the lifeblood of an economy. It provides the leverage for growth. The interest rate assigned to a fixed income security can then be thought of as the “cost” or “price” of the credit.

This makes sense as lenders want to ensure their assets (cash, typically) earn a return above the risk free rate. To be clear, there is much more to determining an interest rate, but this is the basic premise.

What happens, though, when that rate goes negative?

This note is a primer on negative interest rates, a phenomenon not unheard of, but increasingly en vogue in the wake of the Bank of Japan’s surprising (or maybe not so surprising) announcement to set the interest rate they charge commercial banks to deposit money at the BoJ at -0.1%.

Is this the Final Leg Down in the Commodity Cycle? How Much Lower for How Much Longer?

Chris Berry2 Comments

By Chris Berry (@cberry1)

For a PDF version of this note, please click here.

 

If anything is clear after the start of 2016, the global economic rebalancing that central banks around the world are trying to engineer is not proceeding according to plan. The circuit breaker fiasco in the Chinese equity markets is the latest example giving investors pause with respect to what is truly “going on” in China. The Shanghai composite equity index has lost almost 15% of its value YTD and few see good reason for this slide to halt aside from intense government support and RMB devaluation. Money continues to flow out of China as we speak.

2016: There's Something in the Air

Chris Berry2 Comments

By Chris Berry (@cberry1)

For a PDF version of this note, please click here.

As is the case this time of year, we start to close the books on 2015 and position for 2016. While we have effectively and indefinitely moved “to the sidelines” with respect to stock picking in the junior mining space, there were some notable successes, in particular with the merger between Western Lithium (WLC:TSXV) and Lithium Americas. This combination positions the new company in a unique strategic light as electrification, underpinned by the lithium ion battery, gathers steam in 2016. Galaxy Lithium’s (GXY:ASX) restructuring is another positive development. We’ll be watching the developments with these two companies closely.

In 2015, there was very little to be cheerful about in the metals markets and to be blunt, we expect this malaise to continue into 2016. China’s RMB devaluation last summer...

Four Questions for 2016 - Donald Trump, Deflation, China, & Oil

Chris BerryComment

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.

The Revival of Natural Resources: How Did We Get Here? When Will We Escape the Downturn?

Chris BerryComment

 

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.