As we look back on the last twelve months, it is bewildering how and why a world pandemic could create one of the strongest moves in commodity pricing for decades.
Will the Bull keep the Bear in hibernation or is the Bear starting to wake up? Or has the Bear entered the woods already?
This commodity price movement has made the mineral exploration sector so hot that you could cook an egg on it. That was how I used to describe the current state of the market to some associates in Singapore. I think this is not too far from the truth as you look at the series of price charts in Figure 1 below.
Figure 1: A summary of metal pricing since the Covid-induced crash in March 2020. (Source: www.lme.com)
I remember prior to March 2020, the common narrative on metals such as nickel and copper was that there was a shortage on at the LME (London Metals Exchange) and hence the pricing must soon reflect deficit. However, the price increase never materialised which got a lot of commentators wondering.
The excitement that is in the market is best represented when you look at the ASX 200 (Figure 2), which is now currently higher than the high prior to COVID, at the time of writing this article. The recovery was observed in all sectors.
Even the great Rick Rule was surprised at the rate of recovery. My last conversation with Rick was published on March 5th 2021 Commodities and Equities: Advice from Rick Rule.
In this episode, Rick talked about what had happened since our first conversation twelve months before when we had our first two conversations.
Rick mentioned that he had underestimated the rate of recovery but I think that readers should take note of his initial reservation on the market. Rick may have been wrong on his initial thought in May 2020 but I think the pull back in gold price earlier this year shows that even the market knows that things are moving too fast for its liking.
Figure 2: ASX 200 chart for the last 5 years. The S&P/ASX 200 (XJO) is Australia’s leading share market index and contains the top 200 ASX listed companies by float-adjusted market capitalisation. It accounts for 88% (December 2020) of Australia's equity market. (Source: www.marketindex.com)
Today, when you talk to industry people, the mood is that the market is slowing down. The hype is lesser talked about and this is certainly a good sign. Why would that be a good sign, you may ask. Let´s see how I can make it clearer.
Why is a "slow down" in the resource market a good thing for investors?
Over the last twelve months, there has been an increased wave of noise on the ASX being generated by social media and publishers of investor relation products. Samso can be counted as being one of the contributors of the noise.
However, Samso would like to think that we are trying to create content that attempts to reduce the noise. The results of our approach can be argued but the point of the statement is that there are many investors out in the market now that have very little understanding.
As the market created so much momentum, investors were looking at a 500% or a 1000% gain as an acceptable investment. Anything short of that was looked upon as selling out too low or the trade underperforming. To me, these kinds of news are short of being dangerous.
For those that have been following Samso, you would have noticed that we have mentioned continuously that investors should understand the story and not to just base their investment solely on someone's narrated version of investment attributes.
Hence, this slow down in the market, or a sense of slowness in the market is a good thing. There was a pull back for many companies and even one of my favourite explorer-turned-potential miner came back (Figure 3).
Figure 3: The share price chart for Musgrave Resources Limited (ASX: MGV). (Source: www.commsec.com.au)
This pull back all happened across the board in this sector. As you can see, the recovery was imminent but not at the break neck speed from the last twelve months. I and many observers have said that a slow rise is many times better than one that climbs vertically.
Hence, the gentle recovery from these stocks are great. Those companies that did not have a strong story behind the rise are now having to work hard to regain some momentum. Don't get me wrong, speculation is still around, but they are not indiscriminate like the previous months.
What does all this mean?
When you look at the path forward in terms of world economic growth, one has to feel the optimism that is in all miners. Almost everything that you read or watch involves the electrification of the world. I wonder if the "Green Movement" realises that to make the world "Electric" there is going to be a lot of pivoting of businesses.
Hence, one would think that the need of the basic building blocks of mining and changing the way we do things now will create more anti-electric actions. When people think of the EV revolution, they think of Lithium, Cobalt, Graphite, REE and recently Nickel. When you think about my earlier statement that to make the EV revolution a reality, the metals that build the infrastructure to create this new world are the not-so-sexy metals such as Molybdenum, Nickel, Copper, Aluminium and Silver (Figure 4).
There are more metals involved in the new EV movement than Lithium, Cobalt and Graphite. If you look at Figure 4, you will see the limited roles of these minerals. They may be the VIP guest but if the room is empty, these VIP guests will not be able to do too much by themselves.
Figure 4: This graphic takes the data from the World Bank’s Climate Smart Report and outlines what metals each renewable technology will require and their overlapping uses. (Source: www.elements.visualcapitalist.com)
There is no denying that there will be an increased need for all the metals that are shown in Figure 4 but the greater spread of needs in all forms of "clean energy" will require a greater expense of metals than most people would realise. I suspect that this will create a greater demand than supply can provide.
Mining is not like Baking Bread
The process of mining is complicated. It is made even more complicated by the process of proving the viability to mine and then to maintain the sustainability to mine. As we know, the demand-supply curve is the ultimate determinant for the viability of any business but when you add factors such as ESG (Environmental, Social and Governance), Sovereign Issue and lastly an artificial demand to make the EV revolution happen, there is going to be a big strain on supply.
Figure 5: The raw material demand of the EV Revolution. (Source: www.elements.visualcapitalist.com)
As you look at both Figure 4 and Figure 5, one will notice that there are a lot of minerals being used over a range of products. The process of clean energy is more mineral intensive than the old fossil fuel source of energy.
So without getting into a debate about which source of energy is cleaner, we can all agree that we are going to need more minerals than the fossil-fuel revolution. Molybdenum, which has been one of the quietest metals in the recent commodity rush is now treading at levels near the last iron ore boom of 2010.
Figure 6: Molybdenum price over the last 15 years. (Source: www.tradingeconomics.com)
General investors would not look at Molybdenum as being part of the commodity rush but it is actually a critical component of steel making. It has just been listed on the LME (London Metals Exchange) but the pricing is still strongly controlled by contractual buyers. China is the main player and the price is typically aligned to the perceived demand for steel.
Hence, like Dr Copper, it does give an impression that the market players may be indicating an increased demand for steel. The recent rise in the fortunes of Molybdenum is important as it may give a clue to the coming fortunes for the steel making process.
This is another clue to the potential of the coming commodity market. If something like Molybdenum is moving in such leap and bounds, what would the rest of the list of metals be doing?
Market Prices Are Aligned for Growth
The market indicator of progress has been Copper. The term Dr Copper is coined to say that if the good Doctor is up, then the world economy is doing well or going to do well.
Copper price has seen some good movement lately with a short hiatus when it lost traction. The drop in price occurred around the same time that iron price dropped to USD180 from a high of USD200+. This has been short lived and it looks like the prices of both commodities have since recovered to their recent levels.
Figure 7: (1) Copper price from June 2016 to July 2021. (2) Historical copper price from since 1960. (source: www.macrotrends.net)
In 2015, we saw the bottoming of commodity prices in unison. This also followed a unison rise in pricing following the bottom. I uses to tell people that I have not seen minerals and oil all moving in the same direction and many people at that time was saying metals were rising due to a shortage on the LME.
Although this was in general correct, the real shift in pricing did not really happen till the end of the COVID crash of March 2020.
If you look at Figure 1, you will see the alignment of metal pricing. It looks as if the metal pricing are all being chased by something. What is not so apparent is the mix of metals that are experiencing such attention.
Tin is another one of the forgotten metals from the past. Even this humble little metal has taken a leap in its price (Figure 8). An article by Wood MacKenzie entitled - Tin – the forgotten foot soldier of the energy transition tells a great story about why Tin may become the next Cobalt (remember when it ran to USD92K). It is a great read which basically says that up to 90% of the world´s supply may be affected by ESG. If that is the case, the current high price of USD32K could be sustained or may even reach a much higher price.
So What Does All this Mean?
I have to say that in my 30 years in the mineral resource industry, I have never felt that this continuing run of good fortunes in my industry may actually have very long legs. When you have seen as many boom-bust cycles as an exploration geologist, you are constantly in disbelief of any market rise.
The need to execute the EV revolution will create the situation for a greater need for all metals. In Figure 4, we see that there are five metals that are spread over a minimum of 5 sources of renewable energy. The fact that we are needing more Nickel, Copper, Aluminium, Molybdenum and Silver tells me that the shortage that was been narrated in the last 7 years will get worse. The shortage of base metals such as Nickel and Copper is well known and there are no arguments, but now the equation will be significantly and critically imbalanced.
The recent dip in copper and iron ore price was very short lived as we are now seeing that the price is near or as high. There were talks that the Chinese government was trying to instigate selling pressure to decrease the price of metals but it seems that has not happened.
If the Chinese selling theory was correct, then potential rise of future metal prices will be a matter of fact. I don't think Lithium supply will be a driver as there is no shortage of Lithium. If the world needs more supply, there will be investment and producers will just produce more to meet the demand. Nobody needs to find more Lithium.
Now, Nickel Sulphides is another story. There is actually a problem with finding more metal and because of that, the price of Nickel will rise. An additional factor for pushing nickel prices up is the projected demand. If you cannot find more and you cannot feed supply, you have a growing problem.
The issue with Copper is not a lack of supply. It is a lack of mines and mining grades. The current mines are all mining lower grades and hence the cost of production will rise. Similarly, like the search for nickel sulphides, projected demand and the slow process of market equilibrium will create tension in price and supply.
As the world wakes up from a pandemic, the increasing need to revitalise the world economy itself will make the need for metals a priority. In my opinion, there is ample evidence to support a continued run on commodity prices.
Another reason why I think this market is here to stay is that brokers are telling me that a portion of the industry will only look at AUD10M to AUD15M raise for new IPO. The other half of the broking industry is telling me that they can do the small AUD6M raise but also to get in the back of the line of six other companies waiting.
All this work and money, coupled with an extremely tight labour market, is why I cannot see a slow down anytime soon.
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