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Surging prices, falling inventories confirm early stages of commodities boom

10th February 2022
Tim Treadgold
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If you have ever wondered what the early stages of a commodities boom looks like, consider three comments made this week:

• “We’re out of everything.” - Jeff Currie, head of commodities research at Goldman Sachs.
• “No stopping the commodities freight train.” - U.S. investment bank, Jefferies.
• “Supply chains strung like piano wire.” - Paul House, chief executive of mining technology provider, Imdex.

Those observations capped a remarkable week in the mining and oil industries with prices for almost everything rising as the post-Covid recovery gathered pace while supply struggled to keep up.
The flipside of the higher prices for basic raw materials such as oil, iron ore and copper, is that they are playing into the inflation fears of the world’s central banks, which are already poised to ratchet up official interest rates.
Oil at $US90 a barrel is a major cost factor in most sectors of the broader economy while copper, which has moved back above $US10,000 a tonne to be close to an all-time high, is piling pressure on the electronics, construction, and transport industries.
Iron ore has moved back to be within sight of $US150/t, sparking a Chinese Government warning of market intervention, and lithium has exploded to reach a truly spectacular $US60,000/t in its carbonate form in China where some battery makers, having failed to secure long-term supplies, have been forced into the spot market.
To put that Chinese spot-market lithium price into perspective, carbonate was selling for $US5000/t two years ago, $US10,000/t last year and $US25,000/t three months ago.
Morgan Stanley, an investment bank, said the Chinese lithium carbonate price was unrelated to the contract price “reflecting very limited volumes in the spot market” and while the bank’s comment is undoubtedly correct, it is also the nature of markets that short-term trades tend to eventually effect contract pricing.
Citi, another investment bank, boosted its long-term lithium price this week, adding that “extreme pricing is likely to be required to defer or destroy demand”, a trend which might be developing in markets other than electric vehicles (EVs), as well as for lower-range EVs.
On the Australian stock market, lithium stocks moved up, but not nearly as rapidly as the underlying spot-market price of the metal. Pilbara Minerals added 9c to $3.39 and Allkem rose by 42c to $9.74.
Mineral Resources, which is working on a plan to grow its lithium business, fell by $4.30 to $54.41 but that was largely related to a poor half-year profit caused by a drop in iron ore prices early in the reporting period and heavy discounting of the low-grade ore that the company produces.
Chris Ellison, the managing director of Mineral Resources, said he was confident that there would not be a lithium “crash landing” of the sort seen in previous booms because demand was too strong for that to happen.
But it’s also likely that battery and EV makers will be forced to reconsider their lithium strategies if prices stay as high as they are today.
The Wall Street Journal newspaper reported mid-week that “surging prices for the metals that make up EV batteries (lithium, copper and nickel) have ended a decade-long decline that brought the cost of an EV to within spitting distance of gasoline powered vehicles”.
Incentives for consumers to make the switch to an EV remain strong but price is a major factor in all big-ticket purchases and if metal prices keep rising, there is a risk of some EVs being priced out of the market.
Lithium producers are slowly reacting to the market with the owners of the big Greenbushes mine in WA announcing a firm commitment to a previously announced $1.4 billion expansion of the project.