OZL 5.17% $25.03 oz minerals limited

Supply and Demand - Cu Ni Co Li

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    I share excerpts from an article in today's AFR for those without access:

    Net zero to be bonanza for minerals

    Australia is in pole position to benefit from a sixfold increase in demand for so-called ‘‘critical minerals’’ worth $US12.9 trillion ($17.6 trillion) over the next two decades, driven by the race to hit net zero emissions, according to analysis from the International Monetary Fund.

    In its latest World Economic Outlook, the Washington-based multilateral lender projects that a steady 15 per cent increase in its metal price index will bolster Australia’s annual economic growth by 1 percentage point, further strengthening government finances.

    The IMF specifically selects nickel, copper, lithium and cobalt as the top four energy transition metals likely to see surges in prices and production as the world works towards net zero emissions by 2050.

    The four minerals are all used as key components in batteries and other renewable energy technologies that are crucial in the transition from fossil fuels to low emission electricity.

    ‘‘Prices would reach historical peaks for an unprecedented, sustained period under the net zero by 2050 emissions scenario. The prices of cobalt, lithium, and nickel would rise several hundred per cent from 2020 levels,’’ the report said.

    ‘‘Under the net zero by 2050 emissions scenario, the demand boom would lead to a sixfold increase in the value of metal production – totalling $US12.9 trillion over the next two decades for the four energy transition metals.

    ’’According to forecasting contained in the IMF report, copper production would need to double under a global push towards net zero by 2050, while nickel production would need to increase almost fourfold. Lithium and cobalt production would need to lift about sixfold above current levels.

    The modelling from the International Energy Agency is based on a global push towards 2050, which the IEA indicates requires more than the current ‘‘insufficient action’’ scenario that assumes a more gradual approach. The net zero scenario implies the growth in metal demand would initially be high between now and 2030 and slow down over time because the switch from fossil fuels to renewables requires large initial investments.

    ‘‘The supply of metals is quite concentrated, implying that a few top producers may stand to benefit,’’ the IMF said.

    Australia already has among the top three global reserves for each of the four critical minerals, leaving the country in a prime position to benefit from the new electricity storage and generation shift.

    ‘‘Countries that stand out in production and reserves include Australia [for lithium, cobalt and nickel]. The economic benefits of higher prices for metal exporters could be substantial,’’ the IMF said.

    (T)he US government (is) set to announce nickel as an addition to its critical minerals list, lighting up Australia’s already dominant 24 per cent share of global production. The metal is used to strengthen alloys found in batteries, electronics, military hardware and a range of energy technologies.

    Companies such as BHP, Rio Tinto, Lynas and Ioneer would benefit from the surge in demand for the four minerals that the IMF has highlighted. However, it is not just companies but the economy that would benefit from a new boom in critical mineral exploration, production and sales.

    ‘‘A 15 per cent persistent increase in the IMF metal price index adds an extra 1 percentage point of real GDP growth (fiscal balance) for metal exporters compared with metal importers,’’ the IMF said in its report.

    It noted that producers were likely to be price setters, not price takers, given how long it takes to gain approvals and set up a new mine.

    ‘‘Supply is quite inelastic over the short term, but more elastic over the long term,’’ the report said.

    ‘‘A demand-induced positive price shock of 10 per cent increases the same-year output of copper by 3.5 per cent, nickel 7.1 per cent, cobalt 3.2 per cent, and lithium 16.9 per cent.’

    ’Supply elasticities summarise how fast firms raise output in reaction to a price increase.

    ‘‘After 20 years, the same price shock raises the output of copper by 7.5 per cent, nickel 13.0 per cent, cobalt 8.6 per cent and lithium 25.5 per cent.’’

    ___________________________________

    Ash here.

    The projections for metals demand are staggering, yet they look about right to me.

    EV's will need tons of Cu and Ni. Also, the value of big batteries in managing electricity grids has been proven in South Australia and set to be rolled out world-wide.

    Where will the extra supply come from?

    The supply elasticities outlined above suggest very large price movements AND demand destruction - some wannabe EV producers will have to capitulate before they even begin while those who grimly persist will have to pay through the nose for these metals - there is no substitute!

    The electric dreams of the conservation-minded will be, ahem, delayed.

    The competition for metals means existing producers will trouser large amounts while marginal projects suddenly become viable and sorely needed.

    I recommend serious overweight to the metals sector.

    Ash
 
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