Shortages in Metals

Shortages in Metals

The commodity market is in a quandary at the moment. What I mean is that there is no doubt that there is going to be a shortage of metals on the market soon.  The lack of supply is well documented, and there is no shortage of news professing all sort of theories.  However, commodity pricing is not setting any all-time highs.  You would think that if there were going to be a shortage in metals or even a prediction that there would be a shortage, you would see signs of a resurgence.

Yes, the price has moved up over the period, but investors are not jumping up and down.  Fear is still in the market.  Even with a known shortage of metals and a rising price, investors are sensing FEAR.

 

Source: Photo by Rubén Bagüés on Unsplash

 

Lithium and Cobalt pricing has taken a beating and is still not showing any signs of a resurgence.  The darlings of the resource industry have taken a backward step as the world adjusts to the falling demand out of China.  The Chinese economy is dealing with a financial issue that has stemmed from their over-eagerness to generate a GDP worthy of a gladiator.  In that journey, a shadow banking industry developed, and it has since blown up.  A bubble that is a Chinese economy size is not an easy thing to fix, and I am sure this shadow banking bubble is more significant than many GDPs put together.

The fear of what may come in a decreasing consumption level is driving a market into a fear syndrome and most people sitting on the fence.  Take Palladium,  it is now worth more than gold, but try raising some funds to explore for the metal.  The demand for iron-ore is also showing some signs of slowing.

I cannot see demand increasing for commodities which would reflect a lowering of pricing shortly. However, the charts show a cautious to a complex scenario.

 

Nickel

Nickel sample. (Source Wikipedia)

 

History of Nickel
(Source:  Wikipedia)

Use of nickel (as a natural meteoric nickel-iron alloy) has been traced as far back as 3500 BCE. Nickel was first isolated and classified as a chemical element in 1751 by Axel Fredrik Cronstedt, who initially mistook the ore for a copper mineral, in the cobalt mines of Los, Hälsingland, Sweden.

The element’s name comes from a mischievous sprite of German miner mythology, Nickel (similar to Old Nick), who personified the fact that copper-nickel ores resisted refinement into copper. An economically important source of nickel is the iron ore limonite, which often contains 1–2% nickel.

Nickel’s other essential ore minerals include pentlandite and a mixture of Ni-rich natural silicates known as garnierite. Major production sites include the Sudbury region in Canada (which is thought to be of meteoric origin), New Caledonia in the Pacific, and Norilsk in Russia.

 

Nickel Pricing

Nickel 5 Year Price Chart (Source: LME)

 

There is no secret that the investing world has been telling everyone that there is going to be a nickel supply issue very soon. I have been a nickel, copper and zinc bull for the last two years.  Looking a the 5-year price above and the LME stock levels will hopefully give readers a clear view of the shortage scenario.  There is a clear correlation in a decreasing or an increasing nickel price with a corresponding increasing or decreasing supply.  If this were a reasonable demand and supply Economics 101 world, you would be excused for saying – what is the big deal? Its just market equilibrium.

I would agree too, but with the onset of an expected rush for lithium batteries for EVs, there will be a supply crunch. This is mainly due to the miners holding off on producing as they await a more stable nickel price. This is probably a smart move considering the last price crunch would have hurt a lot of them.

The other issue that readers need to understand is that reopening mines is not like reopening a cafe.  And some of the economics of these mines are very thin so if the integrity of the spreadsheets may be entirely dependent on a consistent and efficient system. Opening and shutting the operations could tilt the balance so much that the system cannot be recreated economically.

Speaking to some of the nickel producers in Perth, they tell me that consistent pricing in the USD7,000 per Ib or USD15,000 (currently USD13,000+)  per tonne is where they feel comfortable.  Some of the mines are now taking steps in anticipation of the price rise and gone ahead with re-opening the mines they closed.

 

Nickel LME Warehouse 5 Year Stock Levels. (Source: Kitco)

 

 

 

Copper

 

Source: Photo by Ilze Lucero on Unsplash

History of Copper
(Source:  Wikipedia)

Copper is a chemical element with symbol Cu (from Latin: cuprum) and atomic number 29. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity.

A freshly exposed surface of pure copper has a pinkish-orange colour. Copper is used as a conductor of heat and electricity and as a building material.  Copper is also used as a constituent of various metal alloys, such as sterling silver used in jewellery, cupronickel used to make marine hardware and coins, and constantan used in strain gauges and thermocouples for temperature measurement.

Native Copper. (Source: Wikipedia)

Copper is one of the few metals that can occur in nature in a directly usable metallic form (native metals). This led to very early human use in several regions, from c. 8000 BC. Thousands of years later, it was the first metal to be smelted from sulfide ores, c. 5000 BC, the first metal to be cast into shape in a mould, c. 4000 BC and the first metal to be purposefully alloyed with another metal, tin, to create bronze, c. 3500 BC.

In the Roman era, copper was principally mined on Cyprus, the origin of the name of the metal, from aes сyprium (metal of Cyprus), later corrupted to сuprum (Latin), from which the words derived, copper (Old English) and copper, first used around 1530.[5]

 

Copper Pricing

When you look at the copper pricing and its LME stock levels, you see the same patterns as that of Nickel.  Copper is usually the barometric indicator of the economy.  If copper goes up, things are going well.  The beginning of 2016 was effectively the bottom of the commodity slide, and the bounce ran for three years.  At the same time, Gold was hovering around the USD1050 mark.  It was at a point where many pundits thought it was going to break the USD1000 mark.

Typically, people look at the worst case scenario, but when you look at it logically, at that time, no mines would be able to produce gold at sub USD1,000 mark for an extended period.  If the price of gold had gone down that low, production would have ceased.  And what happens when you do that, the price goes up.

Copper 5 Year Price Chart. (Source: LME)

I feel that this is the case with Nickel and Copper. The two metals are like the main components of our civilisation.  Looking at the LME stock levels, you can see the sharp drop in supply with the price around the pre-2016 timing.  When you looked at the stock level dropping in 2018,  you noticed that the price is going the other way.  The price reacted much faster than the supply change, and this is consistent with the reversal in pricing in 2016.

 

 

Copper LME Warehouse 5 Year Stock Levels. (Source: Kitco)

 

Zinc

Zinc (Source: Nevada Zinc)

 

History of Zinc

Zinc is a chemical element with symbol Zn and atomic number 30. It is the first element in group 12 of the periodic table. In some respects zinc is chemically similar to magnesium: both elements exhibit only one normal oxidation state (+2), and the Zn2+ and Mg2+ ions are of similar size.

Zinc is the 24th most abundant element in Earth’s crust and has five stable isotopes. The most common zinc ore is sphalerite (zinc blende), a zinc sulfide mineral. The most massive workable lodes are in Australia, Asia, and the United States. Zinc is refined by froth flotation of the ore, roasting, and final extraction using electricity (electrowinning).

The element was probably named by the alchemist Paracelsus after the German word Zinke (prong, tooth). German chemist Andreas Sigismund Marggraf is credited with discovering pure metallic zinc in 1746. Work by Luigi Galvani and Alessandro Volta uncovered the electrochemical properties of zinc by 1800. Corrosion-resistant zinc plating of iron (hot-dip galvanizing) is the primary application for zinc.

Zinc is an essential mineral, including prenatal and postnatal development.[9] Zinc deficiency affects about two billion people in the developing world and is associated with many diseases.[10] In children, deficiency causes growth retardation, delayed sexual maturation, infection susceptibility, and diarrhoea.  Enzymes with a zinc atom in the reactive centre are widespread in biochemistry, such as alcohol dehydrogenase in humans.

 

Zinc Pricing

Zinc has a very interesting chart history.  For those people who have read my previous blogs ( Zinc Market- What happened to the price surge?  and 7 Interesting Zinc Companies on the ASX ) on zinc will know that I am a big bull on this commodity.  Like all the commodities, it rose from the ashes in 2016 and has continued the run.  Currently, like its other commodity cousins, the price has taken a rest recently, but it has also started to move again.

What is the most glaring is the steady reduction in stock since 2014?  You will find lots of commentary about how this commodity is going to be the darling of the market, but you will not find too many companies succeeding with mining zinc comfortably.

Zinc 5 Year Price Chart. (Source: LME)

The relentless slide in supply is not seen in Nickel nor Copper.  But you will see it in aluminium which I will discuss below.  This relentless slide in stock levels is due to the combination of a lack of investment in exploration and a lack of profitable deposits to mine.  When I did my research on the previous articles on zinc,  I struggled to identify the decent projects, and those that look decent appear to be lacking in the strike length which I assume will lead to a deposit that cannot be mined profitably.

 

Zinc LME Warehouse 5 Year Stock Levels. (Source: Kitco)

 

Aluminium

Aluminium (Source: Images of Elements)

 

History of Aluminium

Aluminium or aluminum is a chemical element with symbol Al and atomic number 13. It is a silvery-white, soft, nonmagnetic and ductile metal in the boron group. By mass, aluminium makes up about 8% of the Earth’s crust; it is the third most abundant element after oxygen and silicon and the most abundant metal in the crust, though it is less common in the mantle below. The chief ore of aluminium is bauxite. Aluminium metal is so chemically reactive that native specimens are rare and limited to extreme reducing environments. Instead, it is found combined in over 270 different minerals.

Aluminium is remarkable for its low density and its ability to resist corrosion through the phenomenon of passivation. Aluminium and its alloys are vital to the aerospace industry[8] and important in transportation and building industries, such as building facades and window frames. The oxides and sulfates are the most useful compounds of aluminium.

The history of aluminium has been shaped by the usage of alum. The first written record of alum, made by the Greek historian Herodotus, dates back to the 5th century BCE. The ancients are known to have used alum as dyeing mordant and for city defence. After the Crusades, alum, an indispensable good in the European fabric industry, was a subject of international commerce; it was imported to Europe from the eastern Mediterranean until the mid-15th century.

The nature of alum remained unknown. Around 1530, Swiss physician Paracelsus suggested alum was a salt of earth of alum.[51] In 1595, a German doctor and chemist Andreas Libavius experimentally confirmed this; In 1722, German chemist Friedrich Hoffmann announced his belief that the base of alum was distinct earth. In 1754, German chemist Andreas Sigismund Marggraf synthesized alumina by boiling clay in sulfuric acid and subsequently adding potash.

Attempts to produce aluminium metal date back to 1760. The first successful attempt, however, was completed in 1824 by Danish physicist and chemist Hans Christian Ørsted. He reacted anhydrous aluminium chloride with potassium amalgam, yielding a lump of metal looking similar to tin. He presented his results and demonstrated a sample of the new metal in 1825

 

Pricing of Aluminium

I think Aluminium is one of the most exciting commodity. I know I have stated that I like nickel and copper, but aluminium to me is the most significant part of EVs.  What is this considerable part, you may ask?  Aluminium is light, and EVs need to be light.  For it to go far with the battery, it cannot be carrying too much weight.  Like zinc, I have previously written two blogs on bauxite, and this is why I see the excitement.

To understand what I am talking about, have a read of  Bauxite – The next commodity rush? And The Best Small-Cap Bauxite Companies on the ASX – Canyon Resources Limited (ASX: CAY) and Metro Mining Limited (ASX: MMI).

 

Aluminium 5 Year Price Chart. (Source: LME)

 

The bauxite industry and hence the alumina industry took a beating a while back, and I don’t think that the supply team has been able to catch up.  As mentioned in my previous blogs, the bauxite industry is not as prevalent as other commodities. It is a tight market.  This means that there is a deficit game in catching up with demand.  When you start taking into consideration that the EVs will boost the need for more metal, that is just not a good thing.

 

Aluminium LME Warehouse 5 Year Stock Levels. (Source: Kitco)

 

 

Conclusion

In conclusion, as readers can see from the charts, the negative news in regards to the resource industry is not consistent with what we see in the price and stock charts.  All the technicals tell a situation where supply is low, and the price has to be rising.  Why is the market negative?  I believe that it is the FEAR factor.  The fear if the unknown and what is this big Chinese Panda bear is going to do.

Market sentiment tells us that the recent biggest consumer of commodities may appear to be in hibernation, but I think the bear is too big not to eat over winter.  The Chinese government will not simply shut consumption.  It needs to stimulate the industry. It needs to stimulate investments that will drive the GDP or at least keep it turning over.

Exploration funding is very hard to find, and pre-production or brownfield project funding are getting very expensive. Production funding, on the other hand, is getting cheaper as they are now the best bet in the game.

Those companies that I have mentioned in my other blogs will do well if they find what they are looking for with whatever funding they have received.  This shortage of metals and is not going to go away very soon.  I think the next boom that many people talked about post-2016 is just getting some legs.

I remembered in 2016 when I told many people that the bottom is near or at least the worst is over, and I was proven correct.  I sense that we are in a similar place with all the same parameters in play, just at a different price level.  The same signs are appearing, lack of funding, everyone is negative, China is slowing down, and consumption is not coming.  I heard that in 2000 and 2016.

 

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Samso is primarily a consulting company that delivers digital information to the market in terms of creating organic content.

Samso provides bespoke research and presentation for clients to engage their customers or investors. Bespoke research is useful for clients who require a two-way flow of communication with their customer/investor base by utilising a social media strategy.

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Samso has nearly 30 years of experience in developing business ideas and concepts in the Australasian region. Samso has worked primarily in the mineral resources industry, capital markets and corporate finance. Noel Ong is the founder of SAMSO.

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