Is the Commodities Shortage a Mirage?
For the moment you can be forgiven in thinking that the much-anticipated depletion or commodities shortage is more a mirage than a reality.
The situation feels like someone copying a famous quote and then not crediting the author. The phrase “Commodities Shortage” seem to resonate excitement and fear in the market, but there does not appear to be any substance, for now. It is a bit like a case of Missing In Action. The lithium and cobalt space was once great and had a lot of fanfare in the last two years. However, when you look at the market conditions, you will have to think that the lithium and cobalt market has come to some equilibrium. I don’t see that rush that was present previously. All the content on the subject has been taken off the screen. A comment I heard from a very respected resource group said one should not bother with cobalt. The DRC now can turn that on and off. Go chase nickel. I am fully on board with that.
According to Reuters, Tesla is trying to cut its use of cobalt. The US electric carmaker said that it needs more nickel. For those that have read my earlier Insights, they would have remembered that I am a big fan of Nickel, Copper and Zinc. Although, I am losing faith with Zinc. This lost in faith is because I think that the present stream of suppliers may fill any future shortages. Nickel and Copper, on the other hand, have been the main components of human civilisation, and they will continue to fill that role. That is my opinion, anyway. You can have an electric or a hydrogen vehicle and not have or have very little lithium and cobalt, but you cannot have no or little nickel and copper.
Copper pricing is just coming to its 50% retracement from 2015, and it will be interesting to see if it takes off positively from here. The bottom was in 2016, so it has only been less than three years of recovery. Although May 2019 has not been a good month, with Copper dropping from US$6,400 to almost US$6,000. It has since recovered, but I think there will be some weakness still to come. There is no doubt that this trade war happening is creating headaches on both sides. Trump is doing what most bullies do with lots of noise and China is doing what people who know they have absolute power is doing. The stand-off will remain, and the markets will keep reacting to every word.
People talk about LME decline and deficit in supply, but what I see in the market is weakness and steady growth in pricing when it is recovering. There is no signs of a deficit issue nor a shortage of supply issue. Like the iron-ore pricing, some people would say the surge in pricing is more to do with a supply issue than a demand resurgence. I wrote an article recently, Shortage In Metals and I could not explain the rapid decline in supply and rather slow and half-hearted rise in pricing. Now I think that the demand is not there more so than a shortage in supply.
According to Reuters, • COPPER STOCKS: Copper inventories in warehouses approved by the London Metal Exchange (LME) MCUSTX-TOTAL on Friday hit 203,750 tonnes, its lowest since April 25, the latest data showed. • COPPER DEFICIT: The copper market should see a deficit of 189,000 tonnes this year, widening to 250,000 tonnes in 2020, the International Copper Study Group said on Monday
The copper producers are very dull. They are all the big players, and they are either in Latin America or Africa. Sandfire Resources (ASX: SFR) is a copper and gold miner, but their mine life is now limited. There is Oz Minerals (AX: OZL) who is a large company with big mines. Probably not too much upside in capital growth but still a good investment for steady growth. Apart from those two companies, I can’t think of anyone else. There is BHP, but they are boring. 🙂
I just don’t see too many of these copper explorers as exciting. As I said, when you look at all the copper mines, they are big and all discovered from deep drilling stuff. The Olympic Dam story is one that comes to mind. Some explorers could have a good chance, such as Ausmex Mining Group (ASX: AMG) of which I am a shareholder. I am hoping for big things with this company but I will say that the exit from that stock will be when they hit great grades and the share price blossom. The other exit possibility is that a big brother comes over and say thank you very much.
The Nickel price chart is also not so exciting. What I do see is a break in the downward trend but a slow movement up. I guess that is a good sign as recovery is quiet, and a good base building exercise is always a good thing. I like nickel as a commodity more so than copper because Nickel Sulphide (NiS) is harder to find than your average copper deposit. One could say that Latin American projects are always pretty copper-related. If the market supply does get tight, some of those projects will quickly reach the green light. Don’t forget the African projects. There are a few there that will become a player once the price allows it to happen.
For Nickel, in my opinion, the best projects are the nickel sulphides variety, and there are not too many of those laying around in the paddocks. These are hard to find and hard to make economical. There are plenty of Nickel lateritic styles but the projects During the recent nickel pricing “crises”, those projects that held together were the high-grade NiS plays. This brings me to the town of Kambalda in, Western Australia is synonymous with the name nickel. It was here where the birth of the Komatiite nickel phenomenon took roots. I remember learning this in University, but as I was not such a great student ( I wish I were), I got lost with all the terminologies…etc. Anyway, my point is that NiS is the prize. The Kambalda story and the Forrestania story were great discoveries. They are what the likes of St George Mining Limited (ASX: SGQ) and Artemis Resources Limited (ASX: ARV) are looking to discover in their respective regions.
I was looking at Rox Resource (ASX: ROX) but they seem to have taken a strange turn to go into Younmi Gold mine. That has got to be the most interesting move as my thoughts of that project is refractory and isolation. There are some oxides but that is going to make it worst as you have a bag of two ore types. Unless you are flush with cash, you want to be one or the other. They have seemed to have taken the focus away from the Mt Fisher project. I think that is a mistake as I do think that the demand for nickel is going to come.
The lateritic nickel game is just too big. Indonesia and the Philipines are major sources of these type of deposits. The downside for them is that they are plague with issues, political, local corruption, greed, you name it. The interest in this sector took a turn for the positive as all of these deposits have some cobalt. Some deposits have more and when the cobalt price was running, these were a cobalt and not a nickel project.
The main stayers such as
Western Areas Limited (ASX: WSA) – two of the highest grade underground nickel mines in the world, Flying Fox and Spotted Quoll mines, near Forrestania.
Mincor Resources NL (ASX: MCR) – several ex-WMC mines all near Kambalda.
Panoramic Resources Limited (ASX: PAN) – Savannah (East Kimberley), Lanfranchi, Gidgee and Copernicus mines.
Independence Group Limited (ASX: IGO) – Long Nickel mine (ex-WMC) near Kambalda.
MMC Norilsk Nickel (Not listed on the ASX) – Emily Ann and Maggie Hays nickel mines.
BHP Billiton Limited (ASX: BHP) – Mount Keith Mine and Leinster Nickel Mine.
Minara Resources/Glencore – Murrin Murrin Joint Venture.
First Quantum Minerals (took over from BHP Billiton in 2009) (TSX: FM) – Ravensthorpe Nickel Mine.
Poseidon Nickel Limited (ASX: POS) – Windara Nickel Project (currently under care and maintenance).
I would say that the best on that list has to be WSA. I remember in 2015 when I went to one of the conferences on Nickel and was surprised to learn what a great buy WSA. The geology was fantastic and it was by far the best project I had ever since in terms of grade and peer comparison. I still think the same. I was a shareholder for a period of time and traded out of that 12 months ago.
As I have mentioned, in the explorer’s sector, I like St George Mining Limited (ASX: SGQ) and Artemis Resources Limited (ASX: ARV). The two companies have what I call a region that is known for nickel mineralisation. Nickel is so hard to find, it small and it’s like a pod and not continually mineralised in a continuous manner. Looking for a high-grade deposit is not easy and it’s better to be in a known space rather than not, in a simplistic way of thinking. What I don’t like about Kambalda and Forrestania region for new explorers is that WMC, Western Mining Corporation, who were taken over by BHP would have looked at most of the low hanging fruit prospects. The chances of finding are lower. I agree that there are still holes and these holes are definitely there, it’s just that these holes would be less prevalent. WMC would have been very diligent and persistent in their search.
There are some other explorers but I have not looked much at them so I can’t comment. Maybe I will do some research on them at a later date.
The shortage that people speak about in commodities does exist, in terms of stock levels. However, when you talk about world resource, there is plenty. Copper is everywhere and there is a good supply in the ground. The LME stock levels will change but I don’t think it is a measure of availability. What the LME levels tell us is the demand from the market. China in the space of 30 years now dictates the way of the world. It dictates the same way as we how when the Dow Jones sneezes and the ASX catches a cold. When China is not buying the world commodity market goes back significantly.
The world market as we know it now is not the same as the way of the old. What economists love to do is to look back and then say that is how it is. Who would have known that little old China 30 years ago will today be a power in almost everything but speaking fluent English? Listing what they are good and not good is now a waste of time. The domestic market in China is suffering and have been for at least three years and possibly five. The trade war is not making it any better. This trade war hurts everyone but Trumps political and personal profile aspiration.
It is absurd to think that the trading partners, the “allies” of the US are not hurting. The farmers that he is protecting are suffering. On the other end of the war, the Chinese are hurting….and the list goes on. The delay in shortages, the delay is a rising commodity pricing that we are all anticipating, need to take into account that demand is not there for the moment. The proposed demand rises that are being proposed by the economists and promoters of companies are wrong.
All the so-called projections are off because domestic demand in China is down due to factors that are not market driven. Factors such as a need to meet environmental measures and in China, which is not a free market, businesses are “required” to comply. If you don’t comply, you are out of business. There are no market forces to do this. Subsidies are taken away so your factory of EV vehicle manufacturing is not less profitable. You are going to use less of everything. The good news to this is that you will get premium on high-grade coal, high-grade iron ore, items that are environmentally better.
The zinc story is classic. The supply crunch sort of never came. There are so many moving parts now that I feel is contributing to the lack of obvious signs. In some ways, it is confusing and complicating the market at the same time.
What I do see is opportunities to get into things that are not apparent. It feels like when people were looking at lithium when the obvious was not happening. I called that nickel will be the best flavour two years ago. I think this is still the case as the market is reequilibrating.
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