The recovery of economic activity around the world in the wake of the coronavirus crisis offers a return to prosperity for businesses and consumers, as well as a chance for governments to ‘build back better’, according to commentary put out by Baker Steel Resources Trust Ltd (LON:BSRT) this week.
The specialist commodities investor doesn’t think it will all be plain sailing for the global economy though.
Instead, it talks of a “fast-developing shortage of critical materials” that threatens a reality-check for executives and policymakers.
“The current global shortage of semiconductor chips is a prime example of such supply-side issues, having resulted in 1.4mln fewer cars being produced worldwide during the first quarter of 2021, and seems likely to persist given the higher volumes of semiconductors required for electric vehicles,” Baker Steel pointed out.
“We believe the semiconductor shortage can be seen in the context of a much larger issue for green technology manufacturers and governments around the world, in terms of supply chain management in an increasingly uncertain and polarised world. We believe that a transformational bull market is underway for speciality metals, as the green revolution gains pace and the ‘green recovery’ from the COVID-19 crisis offers the sector a boost from stimulus and regulation.”
The context for this bold assertion is fairly clear. Commodity prices have been well-supported for some time now as economic recovery, vaccine-rollout and rising inflationary pressure put upwards pressure on raw material prices.
But, says Baker Steel, certain sub-sectors appear poised to benefit disproportionately, most notably those with ‘future facing’ applications in green technology, renewable energy and the broader shift towards sustainability.
“In particular, battery metals, along with copper, are supported by expanding demand forecasts, driven by the development and adoption of green technology,” Baker Steel said.
“As long-term value investors in the speciality metals sector, we consider how certain metals markets are likely to be impacted from a shift to a ‘just in case’ manufacturing philosophy. Alongside this, we look at the impact of a more competitive and less collaborative relationship between the US and China on the sourcing of these raw materials and downstream products.”
The supply-side changes that Baker Steel refers to are taking place within the context of unprecedented forecast increases in demand for these metals, the implications of which range from potential price spikes in some cases, to sustainably higher prices in others.
Both scenarios offer opportunities for the Baker Steel-run Electrum Fund, which invests in producers of these future-facing metals. Demand forecasts for the adoption of many green technologies have soared over the past year, though largely as a result of stimulus spending.
So far though, the market has not reflected the extent of the change in demand expectations either in the price of the enabling commodities or the equity valuations of the mining companies.
Mining is an inherently cyclical and capital-intensive business with long lead times to production and with multiple stakeholders.
Baker Steel also noted the recent report written by the US administration on building supply chain resilience.
As it stands, the supply chains for lithium-ion batteries and many green tech manufacturers from wind turbines to solar cells are complex and elongated, with production and reserves of critical metals geographically concentrated.
This vulnerability is increasingly of concern for governments and other end users as they audit their supply chains and understand the risks.
The Chinese are a long way ahead in securing the necessary feedstocks with about 90% of Australian lithium going into China, as well as most of the Indonesian nickel and DRC cobalt.
Nearly all the world’s natural graphite and manganese is processed in China.
“We should not think of the fragility of supply chains themselves as new and nor should we think of the price volatility of many of these opaque commodity markets as new either,” said Baker Steel.
“What is different this time is the consequences of such inefficient price spikes, driving commodity prices to demand destruction levels, will be much more costly as the end markets are substantially larger and growth forecasts higher still.”
Strategic stockpiles of these metals will not be possible to achieve on a sufficient scale. Recycling is the longer-term answer, but the products need to be built first before they can be recycled and there needs to be an increase in the amount of metal available to meet that demand. This can only come from mining in the first instance.
It’s in that context that we are increasingly seeing the polarisation between China and the USA starting to be played out in the production of these “future facing” metals and downstream products. Sustainability is often becoming the differentiating factor between a Chinese or western sourced product.
Developments such as the copper mark for sustainable production could in future be paired with blockchain inspired sourcing models currently being used in diamonds and trialled in cobalt. As the anonymity and fungibility of goods erodes, it is much easier to implement a global price for carbon or imagine an environmental, social and governance premium for green metals.
At the same time, as political tensions rise between the west and China the bifurcation of supply chains looks both more possible and likely. Clearly the western world has had plenty of warning around the fragility of supply chains in relation to metal availability.
More than a decade on from the rare earth spike in 2010, no integrated mine to market solution for the full range of these crucial components exists outside of China.
“We believe the coming months and years will see a bull market for speciality metals equities, offering some compelling opportunities for those invested in the mining sector as it undergoes enormous change,” reiterates Baker Steel.
“The development of sustainable supply chains is critical for green industries, yet the path to achieving this is likely accompanied by higher prices across a range of metals, including price spikes in some cases. Furthermore, the prospect that we may be entering a period of increased inflation may also contribute to stronger pricing for speciality metals as well as exacerbating supply growth constraints through higher capital costs.”