The best performing commodities in the market so far in 2022 have been lithium and thermal coal, according to analysis undertaken by broker Liberum.
The broker swerved any comparison of the commodities on the basis of how ‘dirty’ or ‘clean’ they might be, and instead zeroed in on the remarkable strength of lithium.
“We’re just amazed that lithium’s prices are already up 35% year-to-date from last year’s record-high base,” wrote Liberum.
But does this tell us anything about how prices are going to go for the rest of the year?
“Multiple bullish drivers are still at play, so we expect the rally to extend post Lunar New Year,” continued Liberum.
Several factors are at play here, Liberum reckons.
First, there are plenty of incentives on offer to stimulate demand for electric vehicles, including in particular the US’s US$2.1tn spending package, which features a substantial EV industry allocation.
Secondly, the motor industry, now normalising after lockdowns, is increasingly securing supply on a contract basis. This means there is less supply to go into the spot market, and as a consequence, spot prices are likely to remain buoyant.
On the downside, an increase in mine supply could exert a downward pressure on prices.
The broker recommends Atlantic Lithium as an optimal way to gain exposure to the lithium market, but refrains from recommending any thermal coal companies.
But if there was to be a coal recommendation from Liberum it would be unlikely to be Anglo American, since it’s spinning off its coal assets for ESG reasons.
And it would be interesting to be a fly on the wall in the room where the valuation of those assets is being discussed. Should they be discounted, on the grounds that they offend all known rules of ESG. Or priced at a premium, on the basis that the commodity in which they are most vested has risen by 35% so far this year? And, yes, that’s exactly the same amount as lithium.
In truth, the coal price and the lithium price aren’t moving independently. As the world continues to move towards green energy, it’s necessarily cutting back on overall energy output. And so when there are energy supply shortfalls for seasonal or other reasons, and coal is called back into action, it’s going to be that much more expensive to deploy.
There’s less of it being produced, less capacity to generate power from it and, crucially it’s being demand at a point when it can command the highest price.
So, although there’s no recommendation from Liberum, a tactical holding of thermal coal may well do well over the near- and medium-term. Is it surprising that doubts have been cast over BHP’s plans to exit thermal coal?
Arch Resources Inc, a thermal coal producer listed on the New York Stock Exchange, this week hit a five-year high.
Who said coal was a bad investment?