There is potential for price explosions in future facing commodities as competition for limited supplies mounts.BHP (ASX: BHP) has started a fire in the base metals sector with its takeover bid for OZ Minerals (ASX: OZL) – a move which highlights the shortage of commodities essential for energy transition.
The combination of supply suppression through bans on new oil, gas and coal projects, and energy-demand growth even as the global economy slows, effectively guarantees higher future prices for copper, nickel, lithium and other commodities essential in batteries and renewable energy.
While there is nothing new in BHP’s growing exposure to what it calls future facing commodities, there are early signs of a crisis brewing and the potential for price explosions as competition for energy metals boils over.
For investors with a preference for small cap stocks there is a powerful lesson in BHP’s activities, because with the higher prices will come a rush for companies of all sizes either because they could become miners in their own right or takeover targets for asset consolidators.’
Base metal rush
A look back over the past month shows that the base metal rush actually started before BHP lobbed its $25 a share bid for OZ earlier this month.
The roots of the rush can be found in a report from an energy industry lobby group, which highlighted the mega-trend in battery and critical metals predicted to last for decades.
The Paris-based International Energy Agency (IEA) sparked a surge of interest in energy metals with a report which warned that in order to meet government pledges the world needs, over the next seven years, 60 new nickel mines, 50 new lithium mines and 17 new cobalt mines.
The IEA did not put a number on how many copper mines will be required, but industry estimates point to the need for at least 10 major new mines.
“Additional investment is needed in the short-term, particularly in mining, where lead times are much longer than for other part of the supply chain,” the IEA said.
In some cases, it takes more than a decade from initial feasibility studies to production and then several more years to reach nominal production capacity.
The problem, which is slowly becoming clearer, is that there are not enough projects in the pipeline to meet demand and even if they could be identified development approvals can take years.
So, by the time BHP dropped its $25 per share bid on OZ the stock was already on the move courtesy of the IEA report, with the combination behind a 54% rise in the target’s share price, not the 31% increase immediately after the takeover offer was made.
Battery mineral stock prices on the rise
A similar picture can be seen in the price movements over the past month in other copper stocks.
Sandfire Resources (ASX: SFR) and 29Metals (ASX: 29M), two well-placed copper producers, are up 29% and 57% respectively, while Coda (ASX: COD), a grass roots explorer is 50% higher – up almost 23% in the past week alone.
Nickel stocks have done just as well.
Mincor (ASX: MCR) is up 22%, Centaurus (ASX: CTM) has risen by 16%, while IGO (ASX: IGO), which has one foot in nickel and the other in lithium is up 26%.
Nickel market fundamentals
BHP and the IEA are particularly bullish about nickel, a metal with a track record of explosive price moves that go back to Australia’s original nickel boom of 1969.
“By 2030, nickel is facing the largest absolute demand increase as high-nickel chemistries are the current dominate cathode for electric vehicles (EVs), and are expected to remain so,” the IEA said.
“High nickel lithium-ion batteries require far more nickel than even lithium.”
“For example, the BMC811 battery requires seven-times more nickel than lithium by weight.”
BHP said this week that the nickel market was experiencing tight fundamentals due to a combination of strong demand from conventional users (stainless steel) and rapid growth in the EV value chain.
“These forces culminated in a dramatic spike in London Metal Exchange prices in March,” BHP noted.
“Prices have since fallen back to levels before the Russian invasion of Ukraine due to recession fears, alongside other exchange-traded commodities.”
“Longer-term, we believe nickel will be a core beneficiary of the electrification megatrend and that nickel sulphides will be particularly attractive,” the miner added.
Copper fundamentals
Copper will also rise with the electrification transition, but unlike nickel it does face the challenge of a busy market in scrap metal which, along with a number of new mines just starting production, could weigh on the price.
The need for more scrap to help balance the copper market, or plug a shortfall in supply, was highlighted in a report this week by the Bloomberg New Energy research service which said there was a need for new recycling technologies to prevent a copper shortage.
Annual copper demand, according to Bloomberg, will grow by 53% by 2040 driven by electrification while mine supply is expected to rise by just 16% leaving a shortfall of 14 million tonnes of copper by 2040.
Even in a best-case scenario Bloomberg’s analysis sees a shortage of more than five million tonnes of copper.
Other rising base metals
Other, less obvious metals are also being affected by the changing nature of the energy supply with zinc being driven up by cuts in electricity production, particularly in Europe.
Zinc this week hit a two-month high of US$3,639 a tonne following the suspension of production at Nyrstar’s Budel refinery in the Netherlands, a cut which follows the closure of three other energy-intensive zinc refineries.
The common theme across the base metal sector identified by BHP and the IEA is that the world is already experiencing shortages of metals needed in energy transition and that the deficit is only going to get worse – which is excellent news for commodity prices and the share prices of base metal exposed miners of all sizes.
