About this Episode
Dave Ernsberger of S&P Global Commodity Insights joins the Essential Podcast to talk about the short, medium, and long term effects of the war in Ukraine on energy markets.
The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets—macroeconomic trends, the credit cycle, climate risk, ESG, global trade, and more—in interviews with subject matter experts from around the world.
- Dave Ernsberger previously joined the Essential Podcast to explain what went wrong on April 20th with the U.S. oil market and how a new benchmark for U.S. crude can integrate effectively with the global market. Listen here.
The Essential Podcast is edited and produced by Kurt Burger.
Transcript provided by Kensho.
Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. On this podcast, we are returning once again to the elements of the energy transition. Today, our focus is gadolinium, lucky #64 on the periodic table of elements. With gadolinium, we return once again to the lanthanides, 15 metallic elements that are known as rare earth elements.
My guest for this series, once again, is Terence Kooyker, Founder and CEO of Valent Asset Management, a fund that specializes in energy, commodities and metals. As usual, I will note that Terence is my brother-in-law and a bit of the chemistry nerd. So consider yourself warned. Terence, welcome back to the podcast.
Terence Kooyker: Thank you very much, Nathan. Great to be here again.
Nathan Hunt: Terence, it feels appropriate, given world events, to start with the elephant in the room. At the time of this recording, Russian troops are laying siege to a variety of Ukrainian cities, and Western governments are applying steadily escalating sanctions against the Russian state. How does all of this affect not just gadolinium, but all of the elements of the energy transition?
Terence Kooyker: Yes. So obviously, this will have a profound impact on the metals markets, and in this conversation, we're setting aside all the other implications of Russia's actions and focusing purely on the metals markets. And the initial impact is seen in those metals for which Russia is a significant supplier. And so we can look at what happened in the nickel market recently. Russia accounts for 7% of global nickel supply, 10% of tellurium supply, 5% of cobalt, 33% or so of palladium, 17% of vanadium.
And while the sanctions haven't specifically targeted metals exports out of Russia yet, certainly, the sanctions surrounding the SWIFT payment process had an impact on just being able to purchase from any Russian entities. In that regard, there's an extra hurdle to exporting metals from Russia. But like I said, there's been no sanctions specifically targeting those exports. However, what you're seeing now in the marketplace is that consumers want to avoid Russian-sourced material. The risk is simply too high that there will be sanctions specifically targeting these materials down the road. And of course, you raised a lot of questions about the long-term supply that might come out of Russian producers.
Now many will also argue that this is simply going to become a change in logistics in that if you don't have the entire globe potentially sanctioning exports of metals from Russia, what's the difference? They could just export it from China. China then exports it to the rest of the world either in fabricated or semi-fabricated fashion or even in finished goods that are produced there anyway. Interestingly, this time around, you see Chinese consumers also backing off of Russian purchases.
Also, what's largely forgotten a lot of the time when people make that assumption is that you're adding just a massive amount of additional logistical work. First, there's -- on many of these metals, there's an export VAT out of China. For instance, in palladium, there's a 17% VAT. So even if the palladium from Russia went through China, it would still, first, have to travel a longer distance, there would be an export tax imposed and it would be a much longer delivery route. It's not like the globe was having a seamless time with shipping and logistics anyway.
I think it's still in the early stages of seeing the reaction for some of these metals and minerals. Certainly, there's this initial impact in the markets. But you have to ask a question with virtually every Western nation imposing sanctions of some kind, and with already the prospect of the green energy build-out requiring much higher levels of supplies for something like nickel, that really had producers focusing on CapEx and expansion. And now Norilsk Nickel is going to have to finance that somehow. But it's not like many are jumping at the bid to enter back into the Russian corporate bond market either. So I do think that the -- there is this initial supply shock, but it will be long lasting as well.
Nathan Hunt: Do you believe this -- and by this, I mean the Russian invasion and the sanctions that have resulted, do you believe this is likely to increase the pace of change on the energy transition or reduce it?
Terence Kooyker: It will increase the intended pace of change. And by that, I mean, we already see many of the EU nations increasing the funding committed towards renewable energy. Germany brought forward its goal of achieving 100% renewable energy by more than a decade and committed EUR 200 billion. It's now both a matter of addressing climate change, but also addressing the obvious way and influence that Russia has over the European continent by supplying it the amount of natural gas that it does.
But then as we were speaking before about the metals that are actually sourced from Russia, you need a significant amount of nickel for EVs. You need a significant amount of cobalt for EVs. You need a significant amount of vanadium for vanadium flow redox batteries (sic) [ vanadium redox flow batteries ]. You need tellurium to build your solar panels. So in some ways, we're trading them supplying us natural gas for other inputs into the renewable energy sector.
The difference is, and we've spoken about this on other podcasts, is that once you've built out this infrastructure, you can largely enter a closed-loop system -- or hopefully a closed-loop system as metals can be recycled from these applications. And once you're burning hydrocarbons, you're harnessing the energy from those chemical bonds, those molecular bonds, and really that's the end of that energy source. Whereas, at least with metals, there will be a recycling industry around it. But in the initial stages, we're going to need more supply of these metals, and much of them are sourced from Russia.
Nathan Hunt: Turning away from current events and back to gadolinium. Last time we talked, you suggested we tackle this rare earth element as our next topic. So why does gadolinium matter for the energy transition?
Terence Kooyker: Gadolinium plays a role in the energy transition in a few different ways, and one of the reasons I suggested it is because of how the demand side for gadolinium has evolved in relatively recent history. So it largely was one of the more stable rare earth elements and consumed mainly in high-end or niche applications: so for MRIs, to enhance MRI imaging; the nuclear industry, gadolinium is mixed with uranium for nuclear power plants, and that serves as a neutron absorber and has a very high cross section of 2 distinct isotopes from it.
But now, and this will also remind you of previous conversations we had because I think I've said the word magnet to you over 100,000 times in the last 2 months, gadolinium is highly magnetic. And what we see now is it's become a substitute for neodymium in neodymium-iron-boron magnets. And the reason these are so important are for any time you need to change energy into motion or motion to energy, it's generally going to hold some sort of permanent magnet unless it's a pure induction motor. So you could find gadolinium now in the permanent magnets of EVs, and also another demand side that's high intensity of use is going to be wind power generation.
Nathan Hunt: What's the market for gadolinium? Who's buying, who's selling and in what kind of quantities?
Terence Kooyker: Like the rest of the rare earths, it's -- mostly production is in China, highly concentrated in China. And that's also where the initial demand for the raw materials are. So most of the refiners of rare earths or even the magnetic centering plants are also in China, and then the rest of the world has access to it by exports of the [ magnets ] themselves.
These purchases can be done either on long-term offtake agreements where a consumer has a deal with a producer that they will buy that material as it comes out of the ground, and that's usually based on some premium or discount to spot prices at the time. Then there's also the aspect of the market that will function on spot terms, so when producers have excess to sell, they'll go to the spot market. And this happens with any natural resource. You have varying degrees of what's committed to long-term agreements under fixed prices, what's committed to spot transactions.
And there's a long there's a long chain for some highly specialized applications for gadolinium. So in any applications where you need to have very high purity, you'll first send it from mine to a specialist refiner to a fabricator. So it could change hands many times. Sometimes it goes through multiple dealers. It's a very dispersed marketplace.
Nathan Hunt: Is gadolinium production one of those things that is a byproduct of the production of other rare earth elements? Or is this something we need to seek out specifically?
Terence Kooyker: Yes, it is, as we've also spoken about the unfortunate geology and chemistry of rare earths, is that the ones that are in the highest demand are the ones in the lowest concentrations when you're mining a basket for rare earths. And gadolinium is no different. Although, because it's an even atomic number, we know that it's going to be more abundant than its 2 neighboring elements of europium and terbium, but I wouldn't go as far to say abundant. So even if you take into account all the rare earth elements mined in a year, gadolinium constitutes about 1.4% of the entire volume. You'll still have it be dictated as production be dictated by the basket price of rare earths.
Nathan Hunt: I hesitate to ask this, given my earlier comment about you being a chemistry nerd, but what are the chemical properties of gadolinium that make it so useful?
Terence Kooyker: So we can start with the chemical properties that make it so useful in nuclear energy. And that property is that it has a very high cross section, basically where it can interact with -- as a neutron absorber. So there's 2 common isotopes, gadolinium-155 and gadolinium-157. And like I said, they have incredibly high cross sections. And for this reason, it's used as a burnable absorber in nuclear power plants.
Just to give you a sense of the size, one of the metrics for gadolinium-157 is that it has 250,000 barns. And that's not going to be a metric that many people are going to know about, but the story behind how that metric came about is actually very interesting. It's -- so 1 barn is the size of a cross section of the nucleus of a uranium atom. What a barn is supposed to do is it's a measure of the probability of interaction between small particles.
During the Manhattan Project, American physicists at the time obviously didn't want to give up any secrets about what was going on there. And so they decided that to use a code term for cross sectional area presented by a typical nucleus, they were going to call that a barn. The etymology is that they said, "Well, that's so big, it's like hitting the side of a barn." Because in nuclear terms, hitting an entire nucleus would actually be a rather large target. And the term just stuck. Now we're in a place where we say gadolinium has 0.25 million barns, and that means something to the nuclear industry.
The other property of gadolinium that makes it so valuable is its ability to hold a magnetic force. That's due to the fact that you'll notice it lies directly in the middle of that line on the periodic table, where it sits. And that means it can organize its 7 4f electrons in a half-filled shell and with all electrons spins in parallel. So that actually makes it so that it has the largest possible total electron spin and magnetic movement. And you find it to varying degrees within all the rare earths, but because of that property of its 4f electrons, it makes it a particularly strong permanent magnet.
Nathan Hunt: Fun fact, gadolinium is named for the Finnish chemist, Johan Gadolin, whose laboratory in Finland was destroyed in the infamous Great Fire of Turku. I don't really have a question here, Terence. I just wanted to send some of our listeners down a wiki rabbit hole.
Terence Kooyker: Yes, that is quite a large rabbit hole, too.
Nathan Hunt: How closely do gadolinium prices track the prices for other rare earth elements?
Terence Kooyker: Well, for -- if we look back all the way to like 7 years ago or so, in 2015, it's actually been gadolinium that has slowly been leading rare earth prices higher. But from the beginning of 2015 to date, gadolinium is up maybe 900% versus the basket price being up about 200%. Now many of those gains have come in the last year. But you can find a large divergence between these, as we've also mentioned before, because since your mining has a basket, you are targeting certain of the elements and there will be an oversupply of some of the other ones, some of the more abundant ones like cerium, lanthanum, europium.
Nathan Hunt: You have noted that the price of gadolinium has increased since you mentioned it on our last podcast together, I think, proving the immense influence this podcast has on the lanthanide market. But how would someone invest in gadolinium?
Terence Kooyker: Yes, I think we did our last podcast in January. And since then, it's up -- gadolinium is up 50%. And since January 2021, gadolinium is up about 275%. Something that's important to note here is that the demand stays constant because even gains of that magnitude don't particularly impact the total cost with the end product for which it's going to be employed in. To actually invest in gadolinium, it's another one of those markets -- and I hate to keep frustrating people, where you have to take delivery of it in a warehouse, store it appropriately. And there are no derivative contracts around it. It really is a purely physical market.
Nathan Hunt: Is that the same for what you were talking about before, locking in at the long-term price and for spot markets?
Terence Kooyker: Yes. Yes, largely. For the long-term contracts, sometimes that is going right into a production process. So the mine provides it and it gets centered into magnets and shipped out to EV producers. Sometimes it goes to dealers who will take the metal out a long-term agreement, which is effectively financing the mine. And those dealers will sit on the metal in warehouse for a while if they want to take a speculative position on it.
Nathan Hunt: So Terence, I am required by law every time we talk about rare earth elements to make the standard disclaimer that rare earth elements aren't all that rare in terms of, and a phrase you haven't used yet in this podcast but I always enjoy, crustal abundance. But what countries besides China are currently refining gadolinium, this rare/not rare earth element?
Terence Kooyker: So there is some production in the U.S., Brazil, Australia, Greenland and I believe Tanzania, too. However, it's fractional compared to the dominance of China in this area. We're now seeing nations try to address that. And I think if the situation in Russia can shed any light on how dangerous it is to have that concentration of a type of raw material come from one country, if people can make that connection, they will accelerate their investments in domestic production sources.
And to an extent, that already is the case. There's a decent amount of funding for developing U.S. projects. It's something that the Department of Defense is particularly interested into since each F-35 takes about 400 kilograms of rare earths. So it's something that will develop the primary production in other areas. But once we get to a critical mass of electric vehicles and once they've been on the road a long enough time, you'll start getting recycling supply coming in as well.
Nathan Hunt: Final question as we reach the end of this podcast. What should we tackle next in our elements of the energy transition?
Terence Kooyker: I am thinking gallium.
Nathan Hunt: Gallium. Okay. Any particular reason?
Terence Kooyker: Well, there's many. But we'll have to wait for the next one. But it's liquid at room temperature, and watch what happens if you pour it on lead. There's a lot of YouTube videos on that.
Nathan Hunt: Excellent. Something to send us down another rabbit hole. Well, Terence, thank you for joining me on the podcast once again.
Terence Kooyker: Thank you.
Nathan Hunt: The Essential Podcast is produced by Kurt Berger with assistance from Kyle May and Camille McManus. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments and individuals to make decisions with conviction. From the majestic heights of 55 Water Street in Manhattan, I am Nathan Hunt. Thank you for listening.