I had the opportunity to speak with Andrew Geoghan and discuss various commodities and some associated equity exposures.
Please click on the link below to access and watch the interview:
Commodity markets continue to be defined by near-term pessimism, balanced against longer-term optimism. The prevailing negatives impacting sentiment remain inflation, rates and recession, as well as a sluggish China recovery. The longer-term positives are obvious, based around growth in alternative energy and the corresponding increase in commodity demand that will accompany this. Markets typically tend to focus on the here and now, so commodity prices are being influenced primarily by current – not future – demand factors.
Iron Ore and Copper
A good example of the short-term focus is what’s happening with China. China’s post-covid economic recovery has so far underwhelmed, and this is best illustrated by the performance of iron ore and copper from January through to May this year, reflecting a solid downtrend.
The hoped-for reopening of China’s economy has not been enough to stimulate commodity demand or commodity prices, so China’s authorities have had to contemplate and implement monetary measures to boost activity and construction sector spending. Boosting construction sector activity is China’s tried and tested means of boosting overall economic growth, and if it works again then we’ll see an uptick in iron ore demand and pricing. This is being reflected in the uptick in iron ore and copper prices since May, with copper also being heavily exposed to China’s economic fortunes.
The performances of BHP and Rio pretty much directly correlate with the underlying movements in iron ore and copper, as the respective share price graphics show. Both companies will benefit strongly from any recovery in China, and benefit from exposure to both commodities – in fact representing the bulk of their earnings.
By contrast, a really good example of the bigger-picture at play is what’s taking place in the lithium sector. We’ve seen more data in recent days suggesting a supply crunch in the global lithium market toward the end of this decade, as EV demand ramps up.
Raw materials loom as a bottleneck, with about 300 factories that can produce batteries for EVs being developed globally, about 59 new lithium mines and plants are necessary, according to Benchmark Intelligence. A gigafactory can be built in two to five years, a refinery can be built in two, but the mines needed upstream of them take between five and 25 years to develop.
We’ve also seen a recovery in spot prices as buyers have returned to the market amid signs of a recovery in EV demand. We’re also seeing more car makers starting to enter into mining projects, and there’s likely to be a lot more corporate activity and an acceleration of industry consolidation over the next three to five years.
One of the stand-out performers in the lithium space has been Liontown Resources (ASX: LTR), having risen from 2c to $3 over the past few years. Its Kathleen Valley project in Western Australia will be one of the world’s largest lithium mines, supplying ~500,000 tonnes of 6% lithium oxide concentrate per year when it comes on stream in 2024. It has binding offtake agreements with Tesla, Ford and LG Energy Solutions and $300m in project funding from Ford.
In Western Australia, nearly all new gas discoveries have been bought up by three prominent Western Australian billionaires – Stokes, Rinehart and Ellison – who have their own priorities for the gas. It is questionable how much gas will be left over to meet the rest of the west’s demand, as fundamentals are tightening. Over the past couple years, contract prices have already more than doubled into the $8-10/GJ range. Western Australia hasn’t seen price levels this high since a little over a decade ago. Back then, contract prices rose to exceed LNG prices in order to bring new needed supply online. Unfortunately, no new viable offshore gas has been discovered since then, so even higher price levels may now be needed to bring about the next wave of needed gas supply.
Strike Energy (ASX: STX) really is in the right place and at the right time with respect to its emerging gas business. The focus of STX’s gas acceleration strategy is the target of bringing up to four onshore Perth Basin gas fields into commercial production by the end of 2025. STX is also advancing Project Haber, which involves a planned 1.4Mtpa urea fertiliser production facility to be constructed near Geraldton in Western Australia’s Mid-West Region, which will supply competitively-priced fertiliser to Australia’s agricultural industries by processing STX’s abundant, low-cost, Perth Basin gas resources (graphic attached).
EVs are forecast to account for more than 50% of the natural graphite market for the first time in 2023, and car manufacturers are looking to lock in graphite supply from outside of China (graphic attached). Auto firms have been slow to plan for graphite shortages, focusing mainly on better-known battery materials lithium and cobalt, even though graphite is the largest battery component by weight. Each EV on average needs 50 kg to 100 kg of graphite in its battery pack for the anodes, about twice the amount of lithium. The main use of graphite has been in the steel industry, but EV sales are due to more than triple by 2030 to 35 million from 2022.
Walkabout Resources (ASX: WKT) Lindi jumbo graphite project in Mozambique has a 24-year mine life and is on track for maiden production towards the end of this year. Lindi Jumbo will produce about 25% of its product suite, or around 10,000 tonnes per annum, into the battery sector. It’s the first major graphite project commissioned in a decade.