Critical: Metals and minerals in a green tech future

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Sam Humphreys:

Hello, you're listening to EnergyCents, an S&P Global Commodity Insights podcast where we discuss all things energy and finance. My name is Sam Humphreys and I am here as always with Hill Vaden. Hill Vaden, how are you doing?

Hill Vaden:

I'm doing very well, Sam Humphreys. How are you doing?

Sam Humphreys:

I'm good. Sorry. Word fart then. Did you have a nice weekend?

Hill Vaden:

I did. My son had a soccer tournament, so we spent a lot of time watching youth soccer.

Sam Humphreys:

Fabulous. Did they win?

Hill Vaden:

They did, yeah. They actually did win. It was a tournament that they sponsored, so it's I guess good that they won their own tournament.

Sam Humphreys:

Absolutely, it is. Well done to him.

Hill Vaden:

Yes.

Sam Humphreys:

Anyway, we're not going to talk about soccer today. We are going to talk about metal markets and how that relates to green tech. You can't really segueway into that naturally.

Hill Vaden:

Soccer to metals from youth soccer to metals.

Sam Humphreys:

Soccer metals. There's a link there somewhere that some better than I can make. Anyway, so we were joined by our metals expert, Nick Trickett, who has been on the podcast before. Obviously quite a lot has changed since that time, got new administration in the US, but can you highlight a few things people should be listening out for today?

Hill Vaden:

Sure, yeah, I enjoyed the conversation. Nick is somewhat of a brave soul, I guess to talk about kind of metals and tariffs and global trade with all that change that is happening led by the US administration right now. So it is early February. We talk about how much can change between now and release, but the big things I think metals obviously being an important part of the energy story as electrification particularly clean tech, become more commercial and more scalable. But I think Nick does a good job kind of outlining some of the above ground considerations, some of the below ground considerations.

And really the three things that I would emphasize, and I'm parroting Nick here, but for us to watch China of course, and particularly their domestic demand for some of these metals, the political induced shortages as opposed to geological induced shortages of metals and then watching where companies put their money to metal makers, if that's the right way to think of it, the miners. There's going to be a lot of things said and there's going to be other things done, and to watch the actions real closely as we're trying to dissect the different press releases and announcements from leaders around the world. What about you?

Sam Humphreys:

Yeah, I mean, just to echo what you've just said, really. There's an awful lot to go into. This is different markets, not just talking oil or gas. Metals obviously covers a much broader range of commodities, but really emphasizing I won't give it away the one to watch in the near future and we know what we should be looking out for. So yeah, give it a good listen. It was a really enjoyable conversation and I hope you like it.

All right, well welcome Nick. You're returning to EnergyCents. So good to see you again. How are you doing?

Nick Trickett:

Thank you for having me again. I'm doing good. Yeah, I think the year's off to a really, really chill start.

Sam Humphreys:

Always a nice way to enter the year.

Nick Trickett:

Sarcasm?

Sam Humphreys:

Well, no, we're being optimistic. It's all good. So kind of on that note, we've brought you back in to talk about the metals markets and how they're looking at the moment. Obviously there's been quite a few changes. We've mentioned a few times in the last few weeks that we've had a new administration in the US that might make things slightly more exciting going into the year ahead. And of course you've got the emergence of this clean energy technology and how that's impacting the metals market. So before we get into the ins and outs of what's going on, can you just sort of frame us after, what are we looking at today?

Nick Trickett:

That's a good question. The way that I would talk, I would think about how to conceptualize where metals are broadly right now is metals are kind of stuck in between two ultimately deflationary or negative forces. One is China, and by that I mean that China's kind of slowing rate of economic growth and underperforming consumption of at large because the real estate sector hasn't really recovered even, there's been some improvement financially, but it's largely completions of existing projects, not new projects, so that's not new metals demand being created. And also Chinese company's ability to keep expanding supply and refining, etc to meet demand for these manufacturing value chains.

And then on the other side, you have the advent of the Trump administration what appear to be relatively the systemic changes in the US trade policy. Obviously that varies day by day and week by week. I think that the China element of that trade policy increasing tariffs on China imports is relatively safe to assume is going to continue indefinitely.

But tariffs on other trade partners as well do create this dynamic where a lot of investments that might've been made without that element of Trump's policies. Obviously in the first week you have these expectations of permitting reform kind of being one of the agendas for this year ahead. And I think that's probably going to happen in some form, but we'll see what form that takes. That is obviously a net positive for projects in the United States.

But then the flip side is that any permitting reform that might make it easier to build a mine or a processing plant, smelting, etc, has to be paired with a manufacturing project that needs the off take and that manufacturing project now might be affected by the tariffs on the inputs they used to import. So you have what is effectively a drag on investments in the United States to some extent from that perspective. And then the flip side is obviously you might then also have companies race to invest in the US to get ahead of these tariffs. And if that happens, that's likelier to keep inflation more elevated for longer just because obviously there's going to be a lot of labor needed to do these things. And that kind of puts the Federal Reserve in a tough spot and it means that rates come down more slowly, it leaves the US dollar stronger for longer and it kind of creates an environment that typically would be considered bearish from commodities in general.

Hill Vaden:

So I want to be, I guess cautious in how we talk about all of this in a podcast because we're not live. Today's February 4th and so much is changing by the minute, by the hour, by the week. Can you help to put into perspective the overall kind of metals trade dynamic? That oil moves around the world daily, gas moves around the world, that anything in a molecule structure moves quickly and is needed almost on a daily basis or on a daily basis. Is the same true for metals or is it more of a kind of an inventory build type shipping or trade complex?

Nick Trickett:

It's closer to an inventory build. So I would say that physical products do move every day, right? There is a physical trade that is constant over the counter on exchanges, et cetera, but you don't have the same problem you have with products accrued, but more for products where you're worried about the actual chemical qualities of your product decaying over time in storage. You can basically bung a lot of stuff into storage for a long time. So it's more inventory driven. The issues around trade have more to do with price formation.

So, the way that exchanges actually play a role in forming prices is affected by tariffs because in the same way you have these crude blends, you have brands in the metals markets and brand brand basically refers to a specific kind of cathode for metal or metal product that is deliverable to an exchange's warehouses. And in the US case, you obviously have COMEX on the United States as the main exchange. And then for metals, generally speaking of western markets or global benchmarks, you have the London Metals Exchange and then you have exchanges in China.

And if you have US tariffs in place on metals imports, which seems to be part of the agenda, then that would distort the actual prices you're getting for those metals on the US exchange and COMEX versus elsewhere. So it's less to do with the physical flows though they're going to be affected somewhat. It has more to do with the way that you actually form prices for futures and future deliveries.

Sam Humphreys:

So with oil, that's one commodity that's fairly or has been fairly consistent, not necessarily in price, but that is it's one commodity. That's what we're following. With metals, particularly with the introduction of clean technology and the use of metals that we hadn't previously used in the quantities that we are now, is there one metal in particular that could sort of be that sticking point that's kind of guiding the market, whether it's copper or lithium or is it still up for change because we're evolving quite quickly within this market or is it kind of pretty certain at the moment?

Nick Trickett:

It's a million-dollar question.

Sam Humphreys:

Sorry.

Nick Trickett:

A lot of it will come down to prices and it's hard to look that far ahead. So the main example in the case what you're talking about is that copper and aluminum can substitute each other, more so aluminum to copper in the other way, but aluminum can be used as a substitute for wiring certain things. It's not necessarily as efficient, but if the price kind arbitrage between the two per ton it's the right place, then it works and it's kind of around that level now. So the longing fruit's been picked as it were, but it could accelerate if there's a kind of bigger change in the price gap.

I would say the big problem is really that virtually every metal that's important is either in glut or relatively well supplied. Now copper is the exception in so far as on a longer-term basis we're worried about mine supply. I think that those fears have been around for a while and they keep not materializing in time. And part of that's because demand's been weaker actually than expected out of China. But some of it's also supply-side stuff.

I don't think that you can talk about one metal being the sticking point or the best leading indicator individually in terms of the global balance, but what you can think of are these individual metals that become a problem on markets because of politics. So it is more about the availability of a metal if you're like a US manufacturer and suddenly your value chain's been disrupted than the availability of that metal in general.

Copper is a bit of a weird example only because prices are still elevated compared to where they were, let's say three years ago, three and a half years ago. And they've kind of stuck at a higher overall band, but they're not really moving up significantly. The announcement of the permitting reform, for example early on after Trump came into office kind of points to a significant supply upside in let's say the next five, six years compared to past projections, assuming it happens obviously. So yeah, I think it's less helpful to think of one metal as a sticking point. It's more helpful to think about how these metals have become a political problem in terms of what's happening in the market as opposed to a market supply demand balance problem.

Hill Vaden:

All right. And so part of the reason that we're talking about this now is a confluence of two things. One is the emergence of clean tech as a much larger commercial energy domain. The other is trade friction or trade wars that are now, there are several countries or the US in particular who are driving trade concerns that will force people to rebuild supply chains of existing trade and or think twice about how they build new supply chains. Oil is a well-connected supply chain that's been around forever. That is true also I assume for metals, but there are new, if the three of us wanted to start a solar factory in the US, we would in some respects be building that supply chain from scratch as opposed to if we were starting a blue jeans factory in the United States.

So could you help to describe what supply chains are mature and perhaps going to be disrupted and how one is thinking about something that is a new build supply chain, if that's the right way to describe it?

Nick Trickett:

Yes, good. Let me think of how to break that down. I guess the problem is that I think everything's being disrupted at a certain point, so it's almost not always helpful to think of mature versus new, but there are differences. So steel is not going to be radically disrupted, but the price at which you procure it might go up a bit, but it's also supplied. Aluminum is a bit more complicated using the example of the potential for Canadian tariffs that would have a more material impact in the US for example. But when we're talking about more recently critical minerals, minerals whose demand has grown relatively quickly, even though the volumes are small, maybe in physical terms you're really thinking about stuff like lithium, the more rare elements like indium and tellurium that were included in the export ban that from China's response to the initial tariffs placed on them.

And when it comes to building out that value chain, it takes several years at minimum. So you can't do it overnight. There's a lot of potential in the US specifically. I think this is really much more of a US problem than it is anyone else because the US is typically importing the input. Obviously Europe is going to have to find its critical minerals somewhere because it's hard to build mines in Europe and there's not a ton of them in Europe necessarily, but they don't have the same political constraints necessarily in terms of how they approach procuring them.

With that said, I think that the real issues are going to be policy related. So in other words, if you think about a rare earth element that might be used in a military weapon, a weapon system or its ITech application, the physical market for those goods is tiny. So the only way to build the mine in the first place before you even get the processing is to have guaranteed off take. That's kind of a baseline and DOD actually started doing this for the US for specific procurements of critical minerals or rare earth elements, probably the last 18 months, 24 months. But you need to have that guaranteed.

And so that's going to really be policy driven in terms of not just making it easier to build the mine in the first place or the refining facility, but also to make sure that you can guarantee that it gets procured and paid. For the US specifically, I think there's going to be a lot of more interest in trying to get these rare earth elements out of old lignite coal deposits in places like North Dakota, which happens to be something that Secretary Burgum actually has some exposure to because he didn't necessarily give the money out, but he was governor when a pilot project was launched to do that.

But when you say you're starting from scratch, you're right. I think it's tough because also in many cases these elements haven't really been searched for at scale until relatively recently, so we're still in the process of exploring. And the real issue when it comes to who you're putting tariffs on, geology also still bites you at some point. And in the US you don't really have large nickel deposits and obviously most of the global supply expansion that's happened in the last six years, seven years has been from Indonesia. And that's not all, but virtually all are led by Chinese investment either into the mine specifically or into the refining process to take lower quality ore and make it a product you can ship abroad. And of all markets in the world the last 10 years, 15 years, Canada has actually gotten the most exploration spending for non-ferrous metals nickel.

So if you want to make sure you have access to nickel that's not exposed to some kind of Chinese value chain, if you're a US manufacturer, you want to be able to access the Canadian market because they physically have the geologic reserves you need in a way that you don't necessarily have in the United States. So for a lot of these inputs, it's going to be down to policy intervention to ensure demand, the permanent reforms that are ostensibly going to happen. We'll obviously see what that looks like, but it's also going to be, I think businesses lobbying to explain that there are some things that you cannot overcome by force of like a tariff or like a market intervention. You just physically have to get some metals from some places.

Sam Humphreys:

So let's maybe think about some of those cases. So you talking about Indonesia then. Obviously we've got, what, the US on one side, one side in one place, and then China. It's very different demands, different tariffs, regulation coming in. But then as you say, there are certain places that produce these metals, that's where they are. Assuming that tariffs are introduced in the US, where does it leave those countries with those sort of rare earth minerals? What is their options for selling on the market? Where do they go instead if they're not going to the US for example?

Nick Trickett:

Yeah, so they're kind of stuck between a rock and a hard place because the-

Sam Humphreys:

Geology pun.

Nick Trickett:

The options are China or dominantly Europe. Obviously there's some other countries that you can export to, but China also just being the manufacturing powerhouse for most of these technologies, China's by far the most important destination. And what that suggests is actually that you would have a kind of policy induces glut for longer because if that supply can't make it into the US market for whatever reason or it's not competitive to do so, the rest of the global economy is relatively well supplied for that metal. And China's obviously done a really good job collectively with this industry maintaining vertically integrated value chains for most of these metals and making sure that they kind of keep pace with their expected demand. And that gets doubly hard because the net effect of what China's doing is it typically brings demand forward for a metal because of how rapidly they expand their capacity to produce, manufacture, or install whatever the clean tech is in question. But then it kind of weakens it everywhere else because no one else can manufacture at scale as competitively.

So I think that the logical result would just be actually that Chinese mining companies probably are in a much better position to consolidate their control over various value chains. I mean, European companies will also obviously go out and try to procure whatever they can. I think that one of the interesting political flash points for the US and the EU is going to be the degree to which European companies are effectively allowed to work with Chinese companies and projects depending on what the US wants. But I think that the answer is just that you end up ceding the field to incumbent Chinese players that already have a much, much stronger market position.

Hill Vaden:

Scale is often or not perhaps always talked about as being a major advantage in global energy. And that's been something that we've all talked about for several years now. Would you rather be the incumbent or the innovator in a world where the existing supply chains are getting affected in the way they are? Who has the advantage in this situation? Somebody who has, the reason I ask it's cheaper to build a new house than it is to rehab an old house. Are we talking about something similar here where it's going to be easier for an innovator to build something wholly new than an incumbent to try to rework their existing system?

Nick Trickett:

It's a really good question. So as with always to use the kind of D.C. wisdom where you stand depends on where you sit.

I think if you're an innovator in a developed country and you have a policy protection in place helping you to kind of be more competitive against imports, let's say, you're actually in a really good position to be able to reap not super profits but a better profit margin and then maybe scale your business if you have the right idea. But the problem you have is you're probably going to be stuck, not trapped, but kind of stuck primarily serving your home market and then maybe a couple of other markets before you reach a point where you have the kind of scale we're talking about for a competitor or trying to, and the odds of you reaching that are relatively low at least quickly.

So if you are an incumbent in China, it's ideal for you because you don't face any of the same constraints and you're willing to, you have the capacity to forego the US market especially if American administrations successively are willing to forego your exports. You have to go elsewhere and you face some pressures because obviously the biggest problem Chinese companies have right now in the space is that exports are a growing share of their profit margins. And so the more they become dependent on these exports because prices have keep getting cut domestically, the more leverage actually the importers that they're pivoting to away from the US in particular have to try to demand concessions and those concessions will probably look like making sure they localize more production.

But if you're like the innovator in the energy space and you are trying to meet future demand in markets that have a hard time getting energy, you actually are in a pretty good position and in a better position than an incumbent in the kind of fossil fuel space. I would argue primarily because you have the benefit of falling costs driven by China for imports. You also can partner with them in a way that you would be constrained from doing so if you were in the US.

You also have frankly different understandings or assumptions about what you need to be viable. So if the average person's getting no electricity in a day or a couple hours of electricity in a day, just having a solar PV at all, if it's eight to 12 hours is enough to have a meaningful improvement in their life. So it's a very, very different kind of framework than a developed market where people are a bit snobby about making sure we always have hot water and always have the lights on.

And I guess the last bit of it is that because of what China's done with the cost on the metal side, they've made it viable for more people to install these things at scale. So I would say that structurally you're probably in a better position if you're an innovator, not an incumbent in a kind of clean tech space in these markets that are less developed or have had less investment historically. But that said, the incumbents and the more established players in the more traditional molecule economy for energy are going to have better margins. And so it depends on what you see your kind of focus is. If you're on returning value to shareholders via dividends, molecules are definitely the better way to go. If you want to have a growth life strategy where that's really the play, then you want to be in clean tech.

Sam Humphreys:

One thing that we've mentioned with the new administration in the US is Donald Trump's focus on drilling for oil, going back to that molecule-based fuel. Does that mean in your opinion that the investment then in the clean technology, particularly with potential tariffs coming in within the US will diminish or will it sort of continue because like you say, that it's still a viable source of energy, particularly in areas, we've talked about transmission issues particularly within the US as they try and cope with added demand for all sorts data centers and so on. And if that is the case, if it is, say if it is diminishing, is that opening opportunities elsewhere for those markets to capitalize on that and take the benefit of the US not taking the metals?

Nick Trickett:

It's hard to say take the benefit only because it depends on if the capital from the US goes abroad. We don't want to know what that looks like yet because if you're a US company and you're facing also political pressure to focus at home, that's its own thing. But to your larger question about whether or not that investment continues, I think it does. I don't think that there's a fundamental rupture in clean tech investment. It might slow depending on what happens with tax credits or subsidies that have already been given by Congressional authority. And obviously Congress can claw that back in a budget bill or something, so that can change, but they're economically viable and the companies still have an investment in doing it.

I mean the good example also is you have these kind of different supply chain choke points or pinch points that compete with each other. So if you want to build a nat gas plant to power a data center because it's guaranteed, the issue then of course becomes that the manufacturers for the turbines, their order books are full for the next three years. So if you have not already booked that capacity, book that turbine, you're waiting for longer to get it. And then the longer that delay happens, the faster it might be to actually just try to do a battery and different approach to how you power the actual data center. But the basic problem that drill, baby drill mantra I think has is the US is not the global market and trends elsewhere are simply different than in the United States. The US also has a very different energy consumption profile because it's energy rich, so people have kind of been used to cheap energy and that's changed their expectations somewhat. But I think the bigger issue is just that trends in China are foreseeing what's happening everywhere else.

And the best example I can think of off the top of my head is with light vehicles and the fact that Mobility iQ, our own data forecast, that by next year a majority of light vehicle manufacturing production will actually not be pure combustion engine vehicles. So we can talk about the slowdown for EV sales or plug in sales and hybrid sale, pivot to hybrids maybe in the US and that's fine, but globally that's happened.

And if you want a number on it in terms of the top line between 2018 and last year, the number of pure combustion engine vehicles that were manufactured based off our data fell by about 30 million units a year. And so it's just it's force of gravity at a certain point. And obviously it looks a bit different for wind, but solar PVs obviously have exploded and batteries will follow them realistically. But I think by and large, the main issue is not so much while other people benefit, it's more like the US might actually be a aberration in some respects in terms of these market trends. So it's useful to think of it as being its own thing.

Hill Vaden:

So just watching the time and maybe to move us into a final comments, there's a lot happening quickly in the tariff and trade discussion. That there's a lot of noise, there's a lot of news. As it relates to metals and specifically metals used in the energy complex, can you give us some tips on what we should pay attention to as being news versus noise and some of the things that really matter in the conversation in the headlines?

Nick Trickett:

Yeah, so I think first off, the most important variable for any price or supply is going to first be what's happening for Chinese consumers. So obviously in the commodities complex in the world of molecules, we're typically used to US policy rates, the dollar, whatever it is, being kind of the key driver in some respects of how we think about what the costs are for other people. In metals, it's really China since China's half the consumption and refining for any given metal or more.

So yeah, I think the first thing is that we would talk about shortages or kind of squeezes on metals, usually it's a politically induced story. For example, last year when the copper squeezes happened twice, that had a lot more to do with the fact that just the new supply that was being mined in the DRC was not deliverable to COMEX because it wasn't a brand included in COMEX. COMEX is kind of registry of onto its warehouses. So that's one thing.

The second is that the pinch points for these tariffs, these tariffs play on, they're really significant, but they can be overcome within a couple of years with capital. I mean obviously the lead times will vary a bit. I think that we spend a little bit too much time obsessing over how long it takes to build a mine in the US Not that it doesn't take forever, but there is supply elsewhere in the world and people will find ways of getting stuff to market.

The last thing is that when you see mining companies or manufacturers, governments talk about massive looming shortages of supply for copper, whatever it is, look at their spending, not what they're saying. And if they're not committing the capital to building the new mines, then either they're not being totally honest with you or there's actually more capacity to squeeze supply at brownfields than they're letting on, etc. Or maybe recycle more.

It's in some respects, it's kind of similar to what we used to get maybe ten-ish years ago, a little less than that from the kind of oil majors in the US when they were talking about the lack of investment into conventional oil supply because of shale. Obviously shale eventually matured and then they bought it, but it's not a one-for-one analogy, but you definitely see some of the same dynamics happening in the mining sector where companies will tell you, "Well, we don't have enough copper." Instead, well then build more mines because you're returning billions of dollars in dividends every year and the cost of increased exploration is like a hundred million, 150 million.

So those are the three most important things, I think takeaways that China is always the most important variable. So you want to focus on domestic stories in China for the supply-demand stuff. Most of the shortages we talk about are typically linked to a political issue, even though there are potential pinch points for critical minerals or for clean tech value chains. And then third, that mining companies that want to obviously focus on their returns and on their equities, evaluations, etc, they're going to talk about shortages, but if they don't commit the capital themselves, then either they don't have full confidence in what they're saying or, and this is probably more fair, other people with capital that'll take more risks will fill that gap and we're already seeing that happen with tech and tech VCs getting into the mining space.

Sam Humphreys:

All right, so just one quick question from me. As Hill said, we're recording this on 4th of February. We're anticipating lots more changes to happen in the next few weeks because stuff happens continuously and it's been an exciting start to the year. So if you're looking six months ahead, what is the one thing that you think we should be paying most attention to? Is there a particular metal that you think is going to change or particular policy that we're waiting on? What's your one thing?

Nick Trickett:

Less a policy. I would definitely just focus on where the copper price is because it's historically the best metal for the macroeconomic picture of just how things are doing because used in so many things, but also its importance as a leading macroeconomic indicator are going to keep increasing the more we electrify. So in six months time, I would say if copper hasn't really moved up a lot from where it is now, then global growth is probably weakening, demand is probably not quite where we expected it to be or the price upside is not as high as we thought because supply is actually stronger than we expected. But that's kind of the way that I would think about it.

Sam Humphreys:

All right, well thank you very much. Hill, any final comments?

Hill Vaden:

No, that was very helpful. So thank you Nick.