October 11, 2021
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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.
By Chris Berry (@cberry1)
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How Humility, Skepticism, and Opportunism are Leading to a New Playbook in Commodity Investing
COVID-19 has forced a huge dose of humility on the investing public after so much continuous wealth creation. Many are skeptical that all is lost. The there is, however, a huge opportunity in the new economic future and particularly the commodity sector.
The best-case scenario of a V-shaped economic recovery could be looking more U or L-shaped with no identifiable end in sight to COVID-related impacts to the global economy. While a recession of some length and tenacity is all but certain, the duration is subject to an increasingly vociferous debate.
With upwards of 11 trillion dollars pledged by global central banks to stimulate demand and global interest rates near or below the zero lower bound, this may not be enough firepower needed to bring a global economy at a standstill back on its feet (if equity returns are any indication). Additionally, demographic and debt-fueled headwinds are stark impediments to generating the inflation global central banks are intent on desperate for.
This disinflationary shock spells trouble for producers of all goods along supply chains as margins will be tighter owing to diminished pricing power.
By Chris Berry (@cberry1)
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Amidst the once in a lifetime events we’ve endured in recent weeks, the simultaneous crash in prices across asset classes is one of the most notable. The US Dollar has been the singular beneficiary of the volatility and the worsening COVID-19 pandemic. Extreme levels of fear in financial markets indicate that this is likely to continue. The breathtaking collapse in the oil price, ignited by the desire of the Saudis and Russians to control the oil price and wipe out US shale, is also indicative of stagnant growth in the global economy. It remains to be seen if lower oil prices really are the “tax cut” consumers receive via lower gasoline prices given the sudden stop in the global economy.
This geopolitical tussle is an important one as the oil price, perhaps one of the most watched metrics in the world,
By Chris Berry (@cberry1)
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As I wrote last week, this is the first of five posts on the rapidly changing nature of global supply chains.
One thing I have continued to tell my daughters (ages 8 and 12) in the wake of what we’re all experiencing is to constantly pause and try to remember as much as you can about what’s happening to the world right now. Though concepts as abstract as bond yields, trade flows and globalized supply chains are hard for an eight and twelve-year-old brain to grasp, it is clear that these macro factors are changing irreparably before our eyes due to the coronavirus outbreak. After this and things return to some semblance of “normal”, the world my daughters grow up in will almost certainly be different than the one I thought they would grow up in and contribute to.
OPTIMIZATION AT ALL COSTS
By Chris Berry (@cberry1)
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In late 2018, we published a note examining whether volatility was a positive or negative for lithium investment. At the time, lithium pricing and lithium equity prices were at much higher (and ultimately unsustainable) levels. Lithium spot pricing has been more than cut in half and has wreaked havoc on the production plans of Alita, Nemaska, Albemarle and Mineral Resources, Livent, SQM, Galaxy, Altura, and Pilbara – not to mention their share prices despite the early run up in January 2020. The irony here is that the relative success of new hard rock entrants into the lithium sector has created an oversupply glut which has run well ahead of robust demand for the time being pressuring the whole sector. This has happened even as downstream players such as OEMs talk about battery shortages.
In short, nobody has been immune and a lesson here is that while lithium is indeed strategic and necessary for a lower carbon future, it is a commodity/specialty chemical not immune from the capital cycle. The same could be said for other metals, shown below.
