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Priscila Barrera
VIDEO — Brien Lundin: Gold Price Doesn't Make Sense, Tipping Point for the Fed
Brien Lundin 02 youtu.be
Gold fell to just below US$1,815 per ounce this week ahead of the US Federal Reserve's meeting.
Unable to maintain its highest level of the year — more than US$2,000 in early March — the precious metal has been trading with volatility and at a lower price than might be expected given the current market conditions.
Speaking with the Investing News Network (INN) at this year’s Prospectors and Developers Association of Canada (PDAC) convention, Brien Lundin of Gold Newsletter said the current gold price doesn’t make sense.
“We are battling the perception that rising yields are negative for gold,” he said. “But in fact, we're in a situation where it's really irrelevant, because we still have very negative real yields, because the inflation rate is so high.”
For Lundin, the US Federal Reserve, which will provide commentary on interest rates this week, is powerless to really fight inflation. The central bank is expected to raise borrowing costs by 0.75 percentage points.
“I'm hopeful that sometime in the fall, it's going to be our time to see gold react, see the Fed start to get some headwinds,” Lundin said. “And we may see that long-awaited rally in gold begin.”
The editor of Gold Newsletter also said it is very likely that a recession is coming — a key concern for investors attending PDAC this year.
“Right now you can buy solid companies with real resources, some with economics on them, some even in development,” he said. “If the market just normalizes, those stocks will be trading at three to four times the levels they are today.”
Watch the interview above for more from Lundin on gold and other commodities, and his best piece of advice for investors during this tough market season.
Don't forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
At this year's PDAC convention, INN sat down with Brien Lundin of Gold Newsletter to get his thoughts on investing in gold today.
What Do Experts Think About Goldman Sachs' Lithium Oversupply Call?
Last week, the lithium market was shaken by a report from investment bank Goldman Sachs (NYSE:GS) saying that the bull market for battery metals was over for now.
Prices for lithium, which increased more than 400 percent in the past year, are expected to drop in the next two years, with a “sharp correction” happening by 2023, according to Goldman Sachs analysts.
They project that lithium prices will fall from current levels to an average of just under U$54,000 this year, from an average of above U$60,000. By 2023, the bank forecast is for an average price of just over US$16,000.
There’s been “a surge in investor capital into supply investment tied to the long term EV demand story, essentially trading a spot driven commodity as a forward-looking equity,” the analysts said. “That fundamental mispricing has in turn generated an outsized supply response well ahead of the demand trend.”
Analysts at the investment bank said investors are fully aware that battery metals will play a crucial role in the 21st century global economy.
“Yet despite this exponential demand profile, we see the battery metals bull market as over for now,” they said, adding that the long term prospects for the metals remain strong.
Following the report, lithium analysts and experts shared their concerns over a call that they say misses the fundamentals of this battery metal market.
Commenting on the Goldman Sachs analysts call on lithium, Rodney Hooper of RK Equity said he strongly disagrees with their findings on both supply and demand.
“My biggest issue with the report is that it will discourage upstream investment in mining,” he told the Investing News Network (INN). “We clearly haven't seen sufficient upstream investment to meet current and future demand.”
Also speaking with INN, Daniel Jimenez of iLi Markets agreed, saying analysts at the investment bank are overestimating supply and underestimating demand.
Goldman Sachs analysts are expecting a global demand of around 1.2 million metric tons (MT) of lithium carbonate equivalent (LCE) by 2025.
“We think that lithium producers have better industry insights and truthful talks with most of the OEMs they supply,” Jimenez said. Top lithium producer Albemarle (NYSE:ALB) is calling for around 1.5 million MT LCE while Chinese giant Ganfeng (OTC Pink:GNENF,SZSE:002460) is expecting around 1.6 million MT during the same period.
“On the supply side they are extremely optimistic in terms of the lepidolite production that could come from China in the coming years, which is also not realistic,” Jimenez said. “Bottom line — we believe it will be just the contrary.”
Similarly, analysts at Benchmark Mineral Intelligence said the industry cannot rely on China’s feedstock to meet the needs of the market.
“Known domestic Chinese spodumene and other hard rock resources are low quality, a key reason why there has been an increasing reliance by Chinese converters on Australia for supply instead,” analysts said in a note. “China’s deposits of lepidolite may have the potential to help bridge the deficit in coming years, but are unlikely to lead to oversupply.”
Forecasting the lithium market not an easy task
Goldman Sachs analysis of the lithium market is not the first one to be called out by experts in the field. Back in early 2018, when prices had been interestingly also on the rise for a couple of years, Morgan Stanley (NYSE:MS) predicted a decline in prices by 2021, with escalating fears of an oversupply in the market.
“We’ve seen this before, we will see it again. Goldman Sachs: you can’t just add up all the lithium mine level potential and make an oversupply call … the speciality chemicals world is more nuanced than iron ore,” Benchmark Mineral Intelligence’s Simon Moores said in a tweet when the recent Goldman Sachs report came out. “It’s why the world doesn’t rely on investment banks for research any more.”
Predicting how the lithium market will perform in coming years is not an easy task. As a specialty chemical, not all lithium is created equal and not all auto and battery makers' needs are the same. There have been countless constraints to bringing supply into the market, and as analysts would often point out, delays are as common for new projects as for producers expanding existing operations.
For Hooper, it is both demand and supply that some analysts usually get wrong.
“The best indicator of battery-grade demand is cathode production,” he said. “Historical analysis shows that demand linked to cathode production has the highest correlation to lithium prices — this indicator flagged a demand/supply deficit in late 2020.”
When assessing the supply side, Hooper does not consider projects until they are fully permitted, financed and under construction. And even then, he allows for a long ramp-up phase and qualification timeline, especially if it's a greenfield project.
“What happens when you use these indicators is that cathode production brings demand forward 6 months and supply adjustments push qualified material out 6 to 12 months,” he explained. “The net result is a structural deficit as analyst forecasts of the supply/demand balance in the market are out by 12 to 18 months.”
In a market like copper, that could mean a few percent of total demand, Hooper added, but in a market like lithium, growing at 30 percent, the difference is “enormous.”
Commenting on the biggest challenge for analysts to determine what will happen in lithium, Jimenez, who before iLi Markets worked at top lithium-producing company SQM (NYSE:SQM), said there is clear excess optimism in capacity increases and production ramp up times.
“Feasibility reports are, based on past experience, very optimistic,” he said. “Furthermore, the confidence that new technologies or resource types will be able to deliver are overly optimistic. In many cases we are talking of unproven technologies that have not been scaled from lab to industrial yet.”
Is the lithium market really facing oversupply?
At the end of last year, INN talked to analysts and experts on the field to get a better understanding of the outlook for lithium, with most agreeing demand would outpace supply on the back of electric vehicle (EV) sales. What has changed since then? Not much.
For Benchmark Mineral Intelligence analysts, the lithium market will remain in structural shortage until 2025.
“The lithium market will balance over the next few years, but it’s unlikely that an unprecedented ramp-up of marginal, unconventional feedstock will fill the deficit,” they said. “It is also unlikely that demand will weaken significantly.”
Similarly, iLi Markets' Jimenez doesn’t think supply will be able to catch up with demand at least until 2026 to 2027 mainly because of the difficulty to bring greenfield projects into production at full capacity.
“Over this period of time, lithium should be the limiting factor in EV sales,” he said. “Even with demand growing very strongly, the investments the industry is making today might yield additional capacity in 6 to 10 years from now that we are not able to see today.”
Another expert echoing these thoughts was RK Equity’s Hooper.
“Aggregate supply may match demand in the years to come; however, battery-grade supply qualified into the battery supply chain won't match EV demand,” he said.
“If OEMs continue to ignore battery raw material supply risks, they will pay the ultimate price soon enough. Signing meaningless binding (but not really binding) lithium offtake agreements with no associated capital flows or permitting assistance attached to them will lead to disappointment.”
As EV demand from around the world enters its rapid growth phase, lithium quality will be critical.
“We haven't seen sufficient upstream investment to cause oversupply for some time,” Hooper said. “The only way we see the market being balanced in the near future is if there is EV demand destruction and that is unlikely.”
Lithium prices expected to remain at steady levels
The lithium price rally has made news headlines around the world since 2021, with the world's largest asset manager BlackRock’s (NYSE:BLK) Evy Hambro, who is bullish on metals needed for the green energy transition, talking about the essential need for lithium into the future.
Lithium pricing is usually a common concern for investors new to the space, with experts generally reminding anyone interested in the battery metal that there’s no single lithium price. Lithium traded at spot prices only reflects a portion of the market. In fact, most lithium is locked up in contracts, which in some cases include fixed pricing.
Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 and 2024, according to Benchmark’s Lithium Forecast.
“Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021 and 2022 while spot prices will fall, with the two prices coming into more of an equilibrium than they are now,” analysts at the firm said.
Structurally, prices will remain high through 2025 to 2026, at least, iLi Markets' Jimenez said.
“Now high means above US$40 per kilo, which is significantly higher than the incentive price to develop a marginal cost greenfield project,” he said, adding that whether the price will be U$40, U$60, U$80 or U$120 is a difficult call to make.
For the expert, each year the industry will need to grow supply by 200+ kMT LCE per year, which was the total demand of 2017.
“The possibility that greenfield projects suffer delays is high,” Jimenez said. “Probably lithium units will be the bottleneck of the lithium-ion battery supply chain.”
China’s measures to contain COVID-19 have recently hit EV sales, and as a result the need for lithium, although this pullback in lithium demand is seen as temporary.
“When EV demand resumes in H2 2022, as China lifts restrictions, I expect spot and contract pricing to remain firm,” Hooper said.
Even for Wood Mackenzie analyst Allan Pedersen, who sees lithium prices declining by the end of 2022, a “sharp correction” like the one called by Goldman Sachs is not coming.
“We do not forecast a sharp correction but more a 'softer landing' as demand remains strong, providing a cushion for prices,” he told INN.
The research firm is expecting additional supply entering the supply chain both from brine and mineral concentrates to increase supply beyond demand in the short term.
“It is worth noting the surplus is fragile and small changes in electric vehicles forecasts can have a significant impact on the demand for lithium and therefore on the market balance,” he said. “We forecast that the supply surplus for battery-grade lithium chemicals will be less than the market in general as producing high quality battery grade lithium chemicals is difficult.”
Growth in the lithium industry is happening at a rapid pace, with changing market dynamics expected to emerge as a result.
“As the market wrestles between long-term supply security to fuel the lithium-ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning,” analysts at Benchmark Mineral Intelligence said.
Lithium stocks hit — now what?
Following last week’s Goldman Sachs report, top lithium producers saw their share prices plunge. Chile’s SQM was down 5 percent, rival Albemarle declined more than 7 percent and Argentina-focused Livent (NYSE:LTHM) fell around 14 percent following the oversupply and sharp correction in price calls from the bank.
Despite the recent slump, looking at how lithium stocks have performed in the past year paints a different picture — many lithium stocks in the US, Canada and Australia have been on the rise year-on-year on the back of improved market conditions, as the price rally for the battery metal saw many investors turn to the space.
For RK Equity’s Hooper, there is still value in the current market.
“My suggestion would be to look at current or near term producers that have been hit in the latest downturn,” he said. “Shares that are pricing in spodumene or chemical prices that align with Goldman Sachs outlook — which by 2023 sees spodumene concentrate at $1,100 and lithium carbonate ex VAT at US$15.6k/t. We see 2023 average pricing well above those levels.”
Giving his best suggestion for generalist investors who have jumped to the lithium market in recent months, Hooper said they would do well to look at history and decide for themselves how supply and demand have and will evolve over time.
“Will internal combustion engine vehicles sell in any great volumes after 2025 to 2027 given legislation and consumer preferences?” he said. “Then load in a realistic long-term price for lithium chemicals and decide if the company has a low enough valuation multiple and some room for error.”
Don’t forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Experts in the field weigh in on Goldman Sachs' lithium oversupply call and whether they think it accurately depicts what's happening in the market.
Lithium Prices Stabilize, Supply Risks Ahead
Lithium prices climbed over 400 percent last year, with other key battery raw materials such as cobalt and nickel also seeing prices rally as demand from the electric vehicle (EV) industry picked up pace.
But by the end of the first quarter, prices started to stabilize as demand took a breather, particularly in China, where the government has imposed lockdown measures to contain a new wave of COVID-19.
“We expect lithium and cobalt prices to peak this year, from dented but still strong demand and supply chain challenges,” Alice Yu of S&P Global Market Intelligence said at a recent webinar.
For the past year, the sharp rise in prices, which has seen lithium increase almost 130 percent year-to-date, according to Benchmark Mineral Intelligence data, has pushed major lithium miners to restart idle capacity and outline expansion plans, with juniors also moving ahead with their projects.
For Yu, supply should ease in H2 and into 2023 as new capacities commission and ramp up. “These will pressure larger price corrections,” she said, adding that she expects the annual price to drop by a third in 2023. “Lower lithium prices will be good news for the downstream and lift some of the demand resistance we have seen so far.”
COVID-19 restrictions are behind the recent demand pullback seen in China, where the measures have impacted the entire supply chain, from the closing of factories to shipping and transportation networks.
“There are also constraints on Chinese lithium chemical exports to Japan and South Korea due to port and logistical challenges stemming from the lockdown,” Yu said.
Overall, Chinese vehicle sales for April plunged almost 48 percent compared to a year earlier due to lockdowns, as per data released by the China Association of Automobile Manufacturers. Meanwhile, sales of EVs and plug-in hybrids in the country plunged 38.3 percent compared to the previous month, but jumped 45 percent year-on-year and more than doubled over the first four months of the year from 2021 levels.
According to the S&P Global Market Intelligence, plug-in EV sales across key markets China, Europe and the US were up 96 percent year-on-year in the first quarter of 2022, despite weaknesses in the overall vehicle market caused by the ongoing computer chip shortage.
The long-term EV sales outlook is positive, which means lithium's recent demand breather could be temporary.
“We don't know how long the lockdowns are going to last in China, but the underlying fundamentals are still there,” William Adams, head of base and battery metals research at Fastmarkets, said at a recent webinar. “The lithium market is very tight. We don't see that easing anytime soon.”
In fact, he added that to some extent the market may have seen some destocking coming into the pullback in prices. “So we could be set up for quite a sharp rebound once we see the end of lockdowns.”
Looking further ahead to mid-decade, in the period between 2023 and 2026, lithium prices are expected to remain above historical levels, and above prices in and before 2021, according to the S&P Global Market Intelligence.
“This is because the market expects a lithium deficit from 2024 onward, so a strong price environment will be needed to incentivize supply,” Yu said.
The high lithium price environment is accelerating product development and restarting idle operations, but whether they will be up and running fast enough is yet to be seen.
“One of the things which has surprised us is how long it has taken for some of the idle supply that was closed down during the weaker period into 2019 and 2020 to be reactivated,” Adams said.
Australia, Chile and Argentina dominate lithium production today, and they will lead the supply expansions, according to S&P Global Market Intelligence.
“At the same time, there'll be more diverse locations of lithium production,” Yu said. “We expect Mexico, Canada and Finland to start or restart lithium production over the next five years, especially as North America and Europe and their PEV supply chains in these regions seek more localized sources of lithium.”
But it has been stated time and time again how long lithium projects can take to ramp up, and how many delays they can suffer, with COVID-19 restrictions just adding to the mix of challenges.
“There's no shortage of lithium, it's all about can you get it? Can the supply chain keep up with the demand side of it in the time that is needed?” Adams said.
Don’t forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.
Experts believe the positive long-term outlook for electric vehicles means lithium demand’s breather could just be temporary.
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So if you are looking for a way to diversify your portfolio amidst political and financial instability, this is the place to start. Right now.
Copper Supply to Catch Breath in 2022 Before Heading for Significant Deficit
Copper prices have been on the rise since last year, reaching a fresh all-time high in early March at US$10,674 per tonne, partially on the back of concerns over low inventory levels.
In the short term, demand may rise in 2022, but still come in lower than supply. Top consumer China’s growth seems to be taking a pause, and supply for the red metal is forecast to increase, supported by a recovery in mine output, expansions and new projects expected to come online later this year.
Looking longer term, the picture gets tighter — almost half of global copper supply is used in construction, but demand from sectors like electric vehicles and energy storage has increased investor interest in the base metal.
With governments pushing for green energy transitions and carmakers committing to more electric models every year, future demand for copper is looking up. Read on to learn what expert see coming in 2022 and beyond.
Don’t forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Copper supply is expected to increase this year, but will it be able to keep up in the long term? Experts are forecasting a major shortage in the years ahead.
Nickel Price Hits Record US$100,000 on Short Squeeze, LME Suspends Trading
Nickel doubled in price to hit a record level of US$100,000 per tonne before the London Metal Exchange (LME) decided to suspend trading on Tuesday (March 8).
The base metal, used mainly in stainless steel, but gathering attention for its use in electric vehicle batteries, was up an unprecedented 250 percent in two days on the back of a short squeeze.
The largest-ever move on the LME kicked off as investors' worries over supply climbed following Russia’s invasion of Ukraine. Russia is a top nickel-producing country.
“Nickel is clearly trading in crisis mode,” ING senior analyst Wenyu Yao said in a note. “Market positioning could be the trigger, but the industry has long faced structural issues.”
Nickel prices were 66 percent higher, at US$80,000, when the LME decided to suspend trading for at least the rest of the day. Earlier on Tuesday, nickel had soared to a record US$101,365 ― 111 percent higher than its closing price on Monday (March 7).
The 145-year-old exchange had been monitoring “the effect of the evolving situation in Russia and Ukraine,” saying it is clear the nickel market in particular has been affected. The LME later said it would cancel all nickel transactions that had taken place earlier in the day.
The latest price increase has been attributed to the additional time given to China Construction Bank (OTC Pink:CICHF,SHA:601939), a big state-owned lender, to make payments on margin calls it missed on Monday. Payments have now been made.
Additionally, Bloomberg reported that Chinese tycoon Xiang Guangda — who built a large short position in nickel futures and controls the world’s largest nickel producer, Tsingshan Holding Group — is facing billions of dollars in mark-to-market losses.
Low inventories have added volatility to the market, with stocks of nickel in LME-registered warehouses standing at 75,012 tonnes, their lowest point since 2019.
“Fundamentals, though supportive of stronger prices, do not justify this frenzy,” Yao said. “It remains to be seen how this crisis ends. However, the market has long been faced with structural issues.”
Nickel prices were already expected to remain strong in 2022, according to the nickel outlook from many analysts. Nickel stocks have also seen share price gains so far this year.
Don’t forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.
An unprecedented increase in nickel prices pushed the London Metal Exchange to halt nickel trading.
