SP Angel Morning View -Today’s Market View, Friday 18th August 2023

US to scrutinise EV battery imports under laws on Chinese forced labour

MiFID II exempt information – see disclaimer below

Afarak Group Oyj (AFAGR EU) – Interim H1 report as production cut on weak price environment

Evolution Energy Minerals (EV1 AU) – Appointment of alternate director for Amanda van Dyke

US to scrutinise EV battery imports under laws on Chinese forced labour

• EV batteries and other car parts are the latest products under scrutiny as part of Washington’s effort to stamp out US links to forced labour in Chinese supply chains. (Reuters)
• Enforcement of the law that bans the import of goods made in Xinjiang, China, has focused mainly on solar panels, tomatoes and cotton apparel, but now, components that may include lithium-ion batteries, tires as well as raw materials aluminium and steel will be increasingly subject to detentions at the border.
• US believes Chinese authorities have established labour camps for Uyghurs and other Muslim minority groups – a claim that Beijing strongly denies.
• The Uyghur Forced Labor Prevention Act (UFLPA) has already slowed the development of solar energy projects in the US – installations of large solar energy facilities for utilities dropped 31% last year due to constrained panel supplies.

Chinese wave of Electric Vehicle exports facing challenges

• China is good news for consumers with a huge range of new Chinese EVs en-route to the West.
• Not only are these new vehicles said to be well made but they are also cheaper than their rivals.
• But that is terrible news for other manufacturers who transforming to EV production while competing with Chinese manufacturers which have been hugely encouraged and subsidised by the Chinese Communist Party.
• Worse still, China has near-total dominance on many EV and Li-ion critical raw materials meaning that China could easily strangle the development of Western EV manufacturing if it was so inclined.
• Complicating the matter is US action against China over Taiwan – notice how PRC rhetoric on Taiwan has died down, but anecdotal evidence suggests China may continue to build its military presence in the region. Lets hope the US can airlift everyone out who wants to leave if an invasion ever happens.
• News today that the US is looking at EV battery imports under laws on Chinese forced labour is protective and not of great surprise.
• The EU already requires substantial local content on vehicle imports from non-EU nations but we suspect China will negotiate its way around that, perhaps in the way Russia negotiated gas imports into Germany..
• Problem is, China needs to expand exports more than ever with a collapsing property market and missed payments on investment trusts.
• Fortunately for China, there are many other nations to sell its new range of EVs into, though we wonder about the demand for such vehicles across the rest of Asia, Africa and Latin America where the infrastructure for EV charging is less well advanced.
• The pressing need to drive Chinese EV export sales could easily raise political tensions as western manufacturers move to protect desperately look for new markets outside China.

Copper giant Codelco at risk of default as debt pile mounts

• Reuters reports that Chile’s Centre for Copper and Mining Studies suggests that Codelco is ‘at risk of insolvency.’
• Debt is expected to rise to $30bn by the end of the decade, currently standing at $18bn.
• Codelco has denied the suggestions, noting its ‘solid financial position.’
• Codelco’s CEO is stepping down this month as inhouse concerns mount.
• Its copper production currently sits at a 25-year low.
• Production is expected to continue falling until 2025.

Iron ore prices pick up as Chinese steel mill demand improves

• Iron ore prices rallied to $105/t on the Dalian exchange.
• The move comes as Hebei steel mills continue production despite expectations of production cuts.
• Coking coal and coke rose 2.8% and 1.5% respectively.
• The move also follows the US move to introduce anti-dumping duties on plated steel from China.

Gold bounces off five-month lows on US bond sell-off exhaustion

• Gold prices have bounced from lows of $1,888/oz to climb to $1,895/oz.
• The US dollar index has eased off recent 103.5 levels and US 10 year yields have eased from October highs over 4.3% to 4.23%.
• Both had been a primary headwind to gold prices over the past month.
• The SPDR gold ETF noted its biggest daily outflow since July 2022.

VOX Markets:  

11/08/2023: https://audioboom.com/posts/8348497-john-meyer-on-china-deflation-atlantic-lithium-aterian-celsius-resources-cla

31/07/2023: https://audioboom.com/posts/8341813-john-meyer-on-lab-grown-diamonds-bushveld-minerals-power-metals-res-wh-ireland

*SP Angel almost invariably acts as nomad or broker or nomad and broker to companies mentioned in the above videos and podcasts. We speak more about these companies as we have a good understanding of their business and can talk with a greater degree of confidence. As ever, however, it should be noted that our views do not take into account the circumstances and needs of any particular investor or investor type. So enjoy the talks, but please do your own research, including other companies not mentioned by us but operating in the same areas, and get professional advice where appropriate.

Economics

US – Weekly jobless claims pulled back last week suggesting the still tight labour market could see the Fed extending its monetary tightening cycle.

• Weekly Jobless Claims: 239k v 250k previous and 420k est.

China – Evergrande files for bankruptcy protection in US court as it seeks to restructure offshore debt

Evergrande debt included $31.7bn in outstanding bonds, collaterals and repurchase obligations.

• Since the debt crisis hit the sector in mid-2021 with Evergrande at the centre of the turmoil companies accounting for 40% of Chinese home sales have defaulted, most of which are private property developers, Reuters writes.

China Policies: are local municipalities able to help the party and advance Xi’s stated aims?

The PBoC has just admitted that its economy faces new challenges with fiscal pressure on the nation’s balance sheet

• PBoC intervention holds the USD / CNY rate at 7.29
• The PBoC is quoted as being targeted and using force with monetary policy along with making credit growth more sustainable
• The bank is also going to optimised property policies and help affordable housing along with support for unfinished housing.
• There is also an indication that inflation will rebound

President Xi policies:

• Helping to lift poor migrant workers into city home ownership
• Cracking down of corruption
• Helping errant property companies complete unfinished properties
• Boosting local consumption (Dual Circulation)
• Building infrastructure (Canals, hydropower, rail) – while there are fewer new project pronouncements the pace of this may not have slowed
• Trying to contain local authority / municipal debt
• Encouraging local entrepreneurs to reinvest in China – detailing Jack Ma and other entrepreneurs was a fundamentally bad idea. Some entrepreneurs sound fundamentally mistrusting of the government and communist party.

Problems for China, causes:

• China disrespected the US and took full advantage of open tariff-free trade though the era of globalisation.
• China offered unconditional support to Russia who promptly invaded Ukraine.
• China continues to support Russia through oil, gas and other commodity imports as well as technology exports.
• China continues to threaten Taiwan, though their sabre rattling has calmed down.
• China weaponised Gallium and Germanium against the US – possibly to hit the US military.
• Chinese spyware / malware into the US is a major concern.
• President Xi instructed young people to “eat bitterness” and find low-paying jobs – not the sort of advice young people appreciate.
• US unhappy with China which effectively abused globalisation to create factories and jobs at the expense of US manufacturing using subsidies and assurances of critical metals supply.
• Construction industry accounts for 6.9% of China GDP
• Infrastructure investment is also 6.7% of GDP.

Western sanctions:

• US sanctions on advanced AI chip exports into China is a setback.
• US investment into China has slowed / possibly reversed.
• EV investment in China was partly funded by Warren Buffet and other US funds (BYD)
• US reshoring appears to be working well.
• Covid showed the vulnerability of US manufacturing / assembly lines to Chinese logistics causing US manufacturers to demand production of a proportion of the components they use in the US.
• Germany is also seen as vulnerable to power outages caused by a lack of Russian gas with component manufacturing also moving to the US.

Effects:

• Deflation in China as manufacturers struggle to shift inventory
• Loss of consumer confidence as Chinese manufacturers cut back on hours worked and wages
• High national debt when off-balance sheet state municipal debt is included at >250% of GDP
• China’s national debt is forecast to rise to $23tn including hidden borrowings within thousands of financing companies.
• PBoC intervention to contain depreciation of the US Dollar / Yuan-Renminbi exchange rate

Solution:

• The solutions are numerous and varied. China wants respect from the West and to sell its products into western markets.
• The West wants the same but needs to re-shore manufacturing, regain control of critical materials production and ensure China drops its ambition to invade Taiwan along with its expansion in the South China Seas.
• It’s not looking like an easy road from here.

UK – Retail sales dropped more than expected in July on the back of unusually wet weather as well as strong inflation and high borrowing costs.

• Retail Sales (%mom): -1.2 v -0.6 June and -0.5 est.

Russia/Ukraine – A drone hit a non-residential building of Moscow’s Expo Center complex in the early hours of Friday.

• The Russian defence ministry and Moscow Mayor Sergei Sobyanin said there were not casualties after air defence hit down a drone.
• The Expo Center is a large spread of exhibition pavilions and multi-purpose halls, fewer than 5km away from the Kremlin, Reuters reports

Zimbabwe – Immigration officials instructed not to allow election observers, journalists and others into the country

• The Daily Maverick reports that Zimbabwean Authorities have prevented a director and three staff from Good Governance Africa from entering the country.
• “Some Zimbabwean immigration officials who requested not to be named said they received instructions from security officials not to allow Maroleng, a former broadcaster with the South African Broadcasting Corporation, and members of his delegation into the country.
  • “We are under strict instructions not to allow certain people into the country and we have a list of such people from various organisations that should not be let in until after the elections. We do not have any reasons but we are just following security orders,” said an immigration source.
• “Mnangagwa’s spokesperson recently warned that election observers who meddled in the country’s internal affairs would be deported from Zimbabwe.”
• several foreign media houses were reportedly denied clearance by Zimbabwean authorities to cover Wednesday’s general elections although no reasons were given. Some of the organisations include Voice of America, ARD of Germany and Daily Maverick.
• Jana Genth, the southern Africa correspondent of ARD, based in Johannesburg, also said her organisation had also been blocked. “

Currencies

US$1.0873/eur vs 1.0880/eur yesterday. Yen 145.24/$ vs 146.25/$. SAr 19.036/$ vs 19.163/$. $1.272/gbp vs $1.273/gbp. 0.647/aud vs 0.647/aud. CNY 7.286/$ vs 7.295/$. Dollar Index 103.45 vs 103.07 yesterday

Commodity News

Precious metals:

Gold US$1,892/oz vs US$1,897/oz yesterday

Gold ETFs 90.4moz vs US$90.4moz yesterday

Platinum US$899/oz vs US$892/oz yesterday

Palladium US$1,229/oz vs US$1,216/oz yesterday

Silver US$22.83/oz vs US$22.65/oz yesterday

Rhodium US$4,100/oz vs US$4,100/oz yesterday

Base metals:   

Copper US$ 8,234/t vs US$8,207/t yesterday

Aluminium US$ 2,150/t vs US$2,144/t yesterday

Nickel US$ 20,322/t vs US$20,100/t yesterday

Zinc US$ 2,288/t vs US$2,296/t yesterday

Lead US$ 2,134/t vs US$2,122/t yesterday

Tin US$ 25,066/t vs US$25,010/t yesterday

Energy:

Oil US$84.39/bbl vs US$83.9/bbl yesterday

• US natural gas prices were flat as the EIA storage report detailed a 35bcf build (vs 35bcf exp) to 3,065bcf last week, with storage levels decreasing to 21.8% above last year and 10.8% above the 5-year average.

Natural Gas US$2.590/mmbtu vs US$2.595/mmbtu yesterday

Uranium UXC US$56.75/lb vs US$56.75/lb yesterday

Bulk:   

Iron ore 62% Fe spot (cfr Tianjin) US$105.2/t vs US$101.3/t

Chinese steel rebar 25mm US$510.6/t vs US$510.8/t

Thermal coal (1st year forward cif ARA) US$123.0/t vs US$123.0/t

Thermal coal swap Australia FOB US$155.3/t vs US$154.0/t

Coking coal swap Australia FOB US$253.0/t vs US$254.0/t

Other:  

Cobalt LME 3m US$33,420/t vs US$33,420/t

NdPr Rare Earth Oxide (China) US$65,222/t vs US$65,323/t

Lithium carbonate 99% (China) US$30,455/t vs US$31,188/t

China Spodumene Li2O 6%min CIF US$3,260/t vsUS$3,360/t

Ferro-Manganese European Mn78% min US$1,039/t vs US$1,043/t

China Tungsten APT 88.5% FOB US$310/mtu vs US$310/mtu

China Graphite Flake -194 FOB US$672/t vs US$672/t

Europe Vanadium Pentoxide 98% 7.6/lb vs US$7.6/lb

Europe Ferro-Vanadium 80% 31.85/kg vs US$31.85/kg

China Ilmenite Concentrate TiO2 US$309/t vs US$309/t

Spot CO2 Emissions EUA Price US$94.7/t vs US$94.4/t

Brazil Potash CFR Granular Spot US$345.0/t vs US$345.0/t

Battery News

SK On announces USD$1.5bn investment to accelerate EV battery production

• SK On is investing in a large-scale expansion of its Seosan plant, in South Korea.
• The expansion is expected to be completed by 2025 and then gradually reach a production capacity of up to 14GWh by 2028.
• This will see SK On’s total capacity in South Korea reach 20GWh annually – enough for 280,000 EVs.

CATL achieve second zero-carbon battery facility

• CATL’s production site in Zhaoqing, Guangdong province, was awarded the PAS 2060 Carbon Neutrality certificate by international certification body SGS, marking the factory’s achievement of carbon neutrality in 2022 and officially becoming a zero-carbon factory.
• This is CATL’s first zero-carbon factory focused on energy storage batteries and its second zero-carbon battery factory after the Yibin factory in Sichuan.
• The plant reduces carbon through switching energy mix, distributed photovoltaic power generation, use of green energy, and carbon offsets.

Company News

Afarak Group Oyj (AFAGR EU) €0.6, Mkt Cap €116m – Interim H1 report as production cut on weak price environment

• Finnish ferro-chromium producer Afarak Group provides their Interim Report for 1H23.
• Revenue for the period stood at €95.3m vs €92.1m same period last year.
• Earnings per share for the period fell from €0.10 same period 2022 to €0.04 for the first half of this year.
• Earnings margin fell to 12.7% vs 24.6% same period last year.
• Afarak’s processed material sold falling 15.5% to 12,855t vs 15,205t same period 2022.
• The Company remains well capitalised with €19.9m in cash at 30^th June.
• South African operations are reportedly improving and were profitable in H1.
• Serbian operations are expected to resume development for the Magnochrome refractory project, in a bid to diversify revenue streams.
• Afarak comments that prices weaken into Q3 for ferro-chromium, and note that prices have ‘reduced substantially during 1H23.’
• Price weakness is directed to limited imports from China and India, encouraging Afarak to cut output, targeting limits on lower-grade material.
• Management expects to hold production lower given anticipation of weaker prices over the second half of the year.
• Low carbon ferro-chrome is sold to the aerospace, automotive and renewable sectors specifically.
• The company is working to lower costs and improve productivity.

Evolution Energy Minerals (EV1 AU) A$0.22, Mkt cap £33m – Appointment of alternate director for Amanda van Dyke

• Evolution Energy Minerals has appointed Cameron Dowling for Amanda van Dyke as a non-executive director.
• Ms van Dyke is a director nominated by the ARCH Sustainable Resources GPCo Limited which holds 24.7% of the company
• Mr Dowling holds a BEng (Civil), BEng (Mining) and a MCom (Applied Finance).
• Evolution Energy Minerals recently signed a strategic investment and binding offtake agreement and MoU with BTR New Materials Co. Ltd. a battery anode producer in an effort to create a vertically integrated producer of Li-ion battery anode materials.
• BTR recently took a 9.9% stake in Evolution through a $4.9m investment at A$0.22/s in Evolution along with participation rights in future capital raisings.
• The deal leaves ~90% of offtake from the Chilalo graphite project in Tanzania.
• A final investment decision is due on Chilalo before March 2024.
• DFS: shows a 32% IRR and $338m NPV with a 3.3 years payback on $120m capex and a $82m average EBITDA.

No.1 in Copper:  “The winner of the 2020 Fastmarkets Apex contest for copper was the team at SP Angel comprising John Meyer, Sergey Raevskiy and Simon Beardsmore, with an accuracy score of 93.8%”

No1. In Gold:  “SP Angel’s trio took the top spot for the gold price prediction throughout the year, with an accuracy score of 97.59%”

The SP Angel team also ranked 1st in Palladium, 3rd in Tin and 5th in Silver in the fourth quarter of 2020

Analysts

John Meyer – John.Meyer@spangel.co.uk – 0203 470 0490

Simon Beardsmore – Simon.Beardsmore@spangel.co.uk – 0203 470 0484

Sergey Raevskiy –Sergey.Raevskiy@spangel.co.uk – 0203 470 0474

Sales

Richard Parlons –Richard.Parlons@spangel.co.uk – 0203 470 0472

Abigail Wayne – Abigail.Wayne@spangel.co.uk – 0203 470 0534

Rob Rees – Rob.Rees@spangel.co.uk – 0203 470 0535

Grant Barker – Grant.Barker@spangel.co.uk – 0203 470 0471

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