Ideas for an electrified future

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Technological, environmental, and political changes could result in the commodities sector changing significantly in the coming decades. Following our recent discussion of the major commodities and mega-cap miners, we asked our contributors to look into the future and tell us about the commodities that will matter most.

Rare earth processing: it’s rocket science!

Jim Copland, IFM Investors

It’s hard to go past the rare earths, particularly Neodymium and Praseodymium Oxides (NdPr), and Lynas is the way to play it. We had a false start with rare earths in 2010/2011, when the price spike destroyed demand. Since then, the demand outlook has materially improved on the EV and renewable energy thematic, and China has become serious about the environment, rationalising its hazardous sources of rare earth supply. Rare earth processing IS rocket science, creating high barriers to entry, and Lynas has done its time in purgatory refining its process and improving its balance sheet. It is on the cusp of hard-earned, strong free cash flow generation.

(Disclosure: IFM Investors owns shares in Lynas Corporation).

Battery demand driving cobalt prices higher

Stephane Andre, Alphinity Investment Management

Lithium, graphite, nickel, and cobalt have the potential for significant demand growth due to the increasing use of batteries and increasing popularity of Electric Vehicles (EVs). Cobalt is the smallest (100ktpa) and is already dominated by the end-use of rechargeable batteries (52%) of which only 7% comes from the use of EVs. Investor anticipation of the EV demand surge has prompted aggressive stockpiling, lifting the Cobalt spot price from $11/lb a year ago to $29/lb. The EV demand could potentially account for an additional 60kt by 2025.

One would expect the lift in prices to trigger a supply response, but in the case of cobalt, the response is relatively price-inelastic as most of the cobalt supply is derived as a by-product of copper and nickel mining. The market might, therefore, become quite tight.

It is difficult to get exposure to this commodity. Glencore dominates global trade, but cobalt accounts for less than 5% of its revenues. Cobalt 27 Capital Corporation is a small pure TSX (Toronto Stock Exchange) listed exposure.

Double-digit growth in lithium demand

Craig Evans, Tribeca Investment Partners

We believe a number of small niche commodities will become globally important in the coming years as the world becomes ‘electrified’. Of particular interest is lithium, which is a key ingredient in lithium-ion batteries. With the continued growth of smart phones and other portable devices and tools, lithium-ion batteries use has increased materially. With the government supported push in many major economies towards Electric Vehicles and personal storage units, the use of these types of batteries is set to accelerate even further. Market participants expect demand to grow 14% in 2017 and with future demand growth of 12-18% per annum.

Our preferred exposure to lithium is through the raw material producers who extract the metal in its original mineral forms. One such company is Galaxy Resources, which produces lithium from its hard-rock deposit at Mount Cattlin in Western Australia. Galaxy also has the opportunity to ramp up production through its projects in Argentina and Canada in the medium term.

In case you missed it...

In part one of this series, our contributors told us about their outlook for commodities broadly, and the mega-cap miner they think is best placed in the current market. Access it here.


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