Forecasting disruption in the commodity market has always been a futurist’s game. With the sector exposed to such a wide variety of economic, environmental and demographic factors, the broadest of predictive scopes is needed to gain insight into the market’s future stars.
Over the last half century, the majority of boutique commodities have been catapulted into the spotlight by technological innovation. The most notable burgeoning market making headlines in recent years has been battery technology, specifically the units used in electric vehicles (EVs) and energy storage systems.
Hype around the EV market is backed by solid data. Moody’s predicts battery-dependent EVs will represent approximately 7 to 8 percent of global new vehicle sales by the mid-2020s, rising to 17 to 19 percent by the end of the decade as battery costs drop, cell life improves and charging infrastructure expands.
This forecast is validated by a variety of factors: principally increasing emissions concerns, shifting consumer sentiment and growing policy support.
On the international stage, members of the Electric Vehicle Initiative (made up of Canada, China, France, Germany, Japan, the Netherlands, Norway, Sweden, the UK and the US) have already announced a joint commitment to increase the market share for EVs in their respective states to 30 percent by 2030.
Similarly, 14 member countries of the International Energy Association last year announced quantitative targets for EV adoption. These targets will be supported by subsidies and sizable investment in charging infrastructure.
At the national level, the most notable policy push has come out of China. Commitments made in 2017 to fully electrify e-bus fleets in several major Chinese cities were an early indicator of Beijing’s interest in the emerging industry.
The country has since announced its “New Energy Vehicle” credit system, described by Bloomberg as the “single most important piece of EV policy globally”.
Modeled on a similar program launched in California, the policy effectively acts as an EV production quota. Car manufacturers must sell electric vehicles to earn credits, and automakers who fall short are made to buy credits from their competitors to reach the benchmark.
Bloomberg analysts have also predicted that Beijing will raise the New Energy Vehicle quota in coming years. The government is keen to spur production to keep the country’s car manufacturers on track to hit the 2025 target of 20 percent EV national vehicle sales.
The culmination of all this forecasting is bullish prospects for the metals and minerals that are essential to EV production.
So which commodities does this entail? And which small-cap ASX players stand to benefit the most?
As the key component of lithium-ion batteries, lithium is widely regarded as the metal most likely to dominate in the wake of EV disruption. By 2028, it is predicted that 95 percent of electric vehicles manufactured, and around half of battery storage units, will rely on Li-ion batteries.
BloombergNEF’s annual Lithium-Ion Battery Price Survey estimates the metal’s demand could grow 14 times its current level by 2030. Deloitte’s estimates are far more conservative, but still predict a minimum demand increase of 2-3 times the current levels.
This forecasting bodes particularly well for Perth-based AVZ Minerals (ASX:AVZ). The company is the 60 percent owner of the Manono Lithium Deposit in the Democratic Republic of the Congo (DRC), the largest hard rock (non-brine) lithium resource in the world.
Independent research conducted by British analytics firm Roskill estimates Manono is capable of producing more than 300 kiloton per annum of LCE (lithium carbonate equivalent) in concentrate, enough to meet all of the projected lithium demand worldwide in 2019.
Crucial to the manufacturing of anodes used in battery power and storage, graphite demand has seen bullish predictions similar to that of lithium.
In 2017, the price of synthetic graphite electrodes increased by nine-times, jumping from $1,748 per tonne in January to $16,309 per tonne in September.
Between December 2017 and May 2018, aggregated graphite prices were up 40 percent, with May pricing for large and extra-large flake sitting around US$1,600 per tonne. Deloitte predicts the demand for battery-grade graphite will triple by 2020 as China approaches its first major EV production target.
The graphite market is also going through a notable supply transition. In 2016, China supplied 70 percent of the graphite used globally, however issues with grade depletion, rising costs and stricter environmental regulations mean the country’s grip on the market is likely to loosen.
Triton Minerals Limited (ASX: TON) is one such graphite producer looking in positive stead in the wake of EV disruption and dropping Chinese production levels. The company’s flagship asset is the Mozambique-based Ancuabe Project, a sizable deposit of large-flake high-grade graphite.
The unique properties of Ancuabe graphite mean it is suitable for supplying the lithium-ion battery market and the expandable graphite market, which is experiencing rising demand as governments around the world mandate the use of fire-resistant materials in all new construction.
Triton also lays claim to the Balama North and Balama South Projects in Mozambique, which include the world’s largest combined graphite and vanadium deposit, Nicanda Hill.
Increased electrification of vehicles has also translated into positive forecasts for copper, with 75 percent of the 28 million tonnes used annually consumed in wiring applications. Crucially for copper players, EVs require four times the quantity of wiring than traditional combustion engine vehicles.
Since 2016, the price of copper has jumped by 38 percent, partly the result of broader changes in the energy market. Renewable energy technologies like photovoltaics (solar cells) are five times more copper intensive than conventional power generation systems.
Xanadu Mines (ASX: XAM, TSX: XAM) is a copper (and gold) exploration company well placed to benefit from an EV-disrupted market. Xanadu’s flagship asset, Kharmagtai, is one of the most promising porphyry copper-gold projects in Asia.
In late 2018, the company delivered an updated open pit resource for Kharmagtai of 598 million tonnes, containing 1.98 million tonnes of copper and 4.3 million ounces of gold, and studies have begun on a starter pit project that is expected to pave the way for development of their broader Kharmagtai resource.
Cobalt and nickel
Cobalt and nickel are another commodity pairing with a bright (though somewhat uncertain) future pegged to the EV market.
Used in a variety of energy storage applications, the majority of the cobalt currently mined is used in the manufacturing of rechargeable batteries.
Cobalt does however, face some supply issues, with Bloomberg predicting there may be significant shortages of the metal as soon as 2020. To give an idea of the narrowness of cobalt supply, more than 70 percent of the world’s cobalt is currently mined out of the DRC.
These supply reliability issues have been pushing innovations around better recycling and manufacturing usage reductions, with both Tesla and Panasonic announcing in 2018 they were putting research spend towards the viability of cobalt-free batteries.
Of the future commodity picks discussed by analysts, nickel is perhaps the least certain. The price for nickel laterites (which currently accounts more than 70 percent of the world’s nickel resources) are likely to remain low, with the commodity in oversupply. However, Deloitte predicts that demand for nickel sulfides, commonly referred to as battery-grade nickel, is expected to increase 50 percent by 2030.
Star Investing has a commercial partnership with some companies mentioned in this article. This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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