SP Angel Morning View -Today’s Market View, Tuesday 31st December 2024

Lithium prices look set to rise as losses rise at major producers

MiFID II exempt information – see disclaimer below

Anglo American (AAL LN) 2,359p, Mkt Cap £31bn – BHP likely to take another run at Anglo in the new year

BHP (BHP LN) 1,955.5, Mkt cap £99bn

Lithium prices look set to rise as losses rise at major producers A new report by McKinsey sees global demand for BEV passenger vehicles rising to 28m from 4.5m by 2030

• The forecast for ongoing strong BEV growth indicates supply chains for lithium and other battery raw materials will struggle to keep pace with demand over the next 5-10 years.
• McKinsey’s analysis also sees shortages of supply and price volatility in the key battery materials and see lithium mining will need to increase substantially to meet 2030 demand.
• New chemistries should improve capacity but battery pack sizes continue to increase for range offsetting improvements in efficiency and Li-ion capacity.
• The lithium cost curve tells us that lithium prices should rise to beyond $18,000-20,000t simply to sustain current production rates.
•  The Salar de Atacama in Chile, the world’s largest lithium producer at~25% in 2023 (9.1mtpa grade @ 0.14%) appears to show costs of $16,000-22,000/t
• Nickel mining will also need to increase to meet demand for higher-capacity NCM batteries, particularly in western markets where range is more of an issue.
• The government of Indonesia is also likely to restrict supply as it seeks address pollution issues and to control nickel prices going forward.
• McKinsey see demand for cobalt rising by 7.5%pa to 2030, McKinsey though shortages seem unlikely due to byproduct supply from copper and nickel mining.
• For example, the European Union imports 68% of its cobalt from the DRC, 24% of its nickel from Canada, and 79% of its refined lithium from Chile.
• China continues to control refining capacity for critical Li-ion battery raw materials with

• • Graphite refined and synthetic >95%

• • • >77% natural graphite production
    • 74% of supply chain in graphite anodes (Benchmark 2023)

• • Lithium carbonate 40% (2024) capacity rose 83% yoy to 1.1mt
  • Lithium hydroxide capacity rose 94% yoy to 0.7mt
  • Nickel sulfate 74% in 2023
  • Cobalt 76% & 91% of cobalt chemical used in batteries.
  • High-purity manganese – 95%

• The dilemma for Western automotive manufacturers investing into the EV supply chain is on how to diversify and secure raw-material supply while maintaining a relatively low cost base.
• It matters not, wether you are investing in Li-ion gigafactories or EV component and automotive manufacturing it is all dependent on the steady and reliable supply of these raw materials.

Conclusion: Much uncertainty faces Western investors in EVs. Car companies will inevitably rely on China more than they should due to low Chinese prices but they should watch out for sub-spec supply and the potential for politically-driven disruption.

Economics

US – Fed to tread tight rope through 2025 as it balances relatively high interest rates with the need to suppress imported inflation

• Trump will need to treat carefully to avoid importing new inflation through increased tariffs.
• Any weakening of US interest rates will lead to a weaker US dollar resulting in a stronger CNY and importing inflation into the US.
• Higher imported inflation will simply cause the Fed to raise rates again.
• But US Tech equities look like they need lower interest rates to justify their valuations and with cash at an all-time-low and equities at 49% of allocations there is a risk of some selling of US equities if the dollar looks like it will weaken.
• Reshoring manufacturing and holding back cheap Chinese imports risk raising US inflation.

• • American companies tend to sell a minimum quantity of products at a maximum price – unlike Henry Ford!
  • Chinese companies produce a maximum quantity of product which they effectively sell for a minimum price to maximise their sales and boost local employment.
  • While these are broad overstatements, they highlight why the reshoring of manufacturing into the US will be substantially inflationary.
  • US workers do not accept the pay, conditions and rations of their Chinese counterparts and there is only so much robots can do.
  • Think, Harley Davidson, a low volume, high price motorbike manufacturer in a market where most others chase the economies of substantially higher volumes.

• Make America Great Again might work better if it translates into Make America Part of the Global Economy Again!

China – Exodus of manufacturing as companies move to offshore business to protect from political disruption

• Increasing numbers of Chinese companies are offshoring manufacturing over concerns of political interference and the impact of Tariffs on their production.
• Chinese companies invested a record ~1% of GDP or $177bn into overseas non-financial assets with >80% thought to have been invested into greenfield projects,
• Much of this new investment is into emerging Asian nations displacing previous investment into financial assets in the West.
• While Chinese manufacturers are careful to keep their offshore companies ‘all-Chinese’ often using >50% Chinese workers, their host countries are pushing for greater local content.
• China’s commerce ministry has told EV firms that their core technology is not to leave the country, lest it give others a competitive edge (SCMP).
• But Chinese manufacturers are killing off local businesses with ~2,000 producers reported to have shut factories in Thailand in the year to June 2024, with auto-parts manufacturers hit particularly hard.
• Malaysia is threatening to tax Chinese companies depending on their local staff numbers.
• The situation is adding to the political complexity of their overseas relations.
• President Xi has called for the self-determination and self-control of supply chains within China but many others would prefer to diversify away from the potential for political interference of the CCP

Switzerland – Swiss KOF falls to 99.5 in December from 102.9 in November

• The Economic Barometer is below the 101 forecast and highlights a slowdown in the Swiss economy due to slower manufacturing, tourism, services, foreign demand, and private consumption.
• We suspect much of this relates to the economic mess that surrounds Switzerland in Europe.

UK – Plans to cut red tape are ongoing with meaningful changes to MiFID II overdue.

• Current trends and regulation over investment and trading have cut fees across the board.
• Unfortunately, this appears to be accompanies by a loss of service and performance.
• Tax receipts from the ‘City’ are likely to fall further unless regulation enables new growth.
• Labour accepts that new regulation following the 2008 Sub Prime crisis has gone too far.

Ukraine – US to send US$6bn to Ukraine in military and budget assistance

• The Biden administration is racing to support Ukraine before Trump’s inauguration.
• $2.5bn in new military expenditure

• • $1.25bn om US weapons and munitions including hundreds of thousands of artillery rounds, thousands of rockets and hundreds of armoured vehicles.
  • $1.22bn in funds from the USAI the ‘Ukrainian Security Assistance Initiative’
• $3.4bn in direct budget support for Kyiv.
• Trump remains sceptical of Nato support from its alliance partner.
• Russian missile attacks recently cut water, heat and electricity to around half a million Ukrainian residents.
• Ukraine is now receiving its first shipments of US gas through Greek terminals ahead of the expiry of Russian gas transit agreements.

Currencies

US$1.041/eur vs 1.042/eur previous. Yen 156.94/$ vs 157.88/$. SAr 18.808/$ vs 18.734/$. $1.255/gbp vs $1.252/gbp. 0.623/aud vs 0.622/aud. CNY 7.312/$ vs 7.310/$.

Dollar Index 108.06 vs 108.04 previous

Precious Metals

Gold US$2,606/oz vs US$2,610/oz previous

Gold ETFs 82.6moz vs 82.6moz previous

Platinum US$920/oz vs US$937/oz previous

Palladium US$903/oz vs US$912/oz previous

Silver US$29.4/oz vs US$29.9/oz previous

Rhodium US$4,575/oz vs US$4,575/oz previous

Base metals:   

Copper US$8,941/t vs US$8,963/t previous

Aluminium US$2,554/t vs US$2,555/t previous

Nickel US$15,876/t vs US$15,876/t previous

Zinc US$3,021/t vs US$3,051/t previous

Lead US$1,947/t vs US$1,955/t previous

Tin US$28,810/t vs US$28,810/t previous

Energy:           

Oil US$74.1/bbl vs US$73.5/bbl

Natural Gas €47.6/MWh vs €48.2/MWh

Uranium Futures $72.8/lb vs $72.8/lb

Bulk:   

Iron Ore 62% Fe Spot (cfr Tianjin) US$103.9t vs US$104.1/t

Chinese steel rebar 25mm US$487.6/t vs US$487.2/t

HCC FOB Australia US$203.0/t vs US$204.0/t

Thermal coal swap Australia FOB US$127.0/t vs US$128.3/t

Other:  

Cobalt LME 3m US$24,300/t vs US$24,300/t

NdPr Rare Earth Oxide (China) US$53,776/t vs US$54,323/t

Lithium carbonate 99% (China) US$9,933/t vs US$9,933/t

China Spodumene Li2O 6%min CIF US$790/t vs US$790/t

Ferro-Manganese European Mn78% min US$985/t vs US$985/t

China Tungsten APT 88.5% FOB US$338/mtu vs US$338/mtu

China Graphite Flake -194 FOB US$435/t vs US$440/t

Europe Vanadium Pentoxide 98% US$5.0/lb vs US$5.0/lb

Europe Ferro-Vanadium 80% US$26.3/kg vs US$26.3/kg

China Ilmenite Concentrate TiO2 US$294/t vs US$294/t

China Rutile Concentrate 95% TiO2 US$1,089/t vs US$1,089/t

Spot CO2 Emissions EUA Price US$65.1/t vs US$65.1/t

Brazil Potash CFR Granular Spot US$295.0/t vs US$292.5/t

Germanium China 99.99% US$2,725.0/kg vs US$2,725.0/kg

China Gallium 99.99% US$415.0/kg vs US$420.0/kg

Company News

Anglo American (AAL LN) 2,359p, Mkt Cap £31bn – BHP likely to take another run at Anglo in the new year

BHP (BHP LN) 1,955.5, Mkt cap £99bn

• Speculation is increasing over the potential for BHP to launch a new takeover offer to acquire Anglo American in the new year.
• BHP have waited over six months as required under the UK Takeover Code with no third-party offers appearing in this time.
• Anglo management appear to have been busy tidying up the conglomerate to better suit BHP’s appetite.
• The team are busy divesting Coking coal and nickel assets while demerging the PGMs and considering the divestment or demerger of De Beers.
• This would meet some of the conditions for the original BHP offer.
• Regulatory conditions:

• • China might want Anglo or BHP to sell a copper mine to a Chinese mining company as with Glencore / Xstrata
  • US and EU regulators could also impose conditions
  • Canada: regulators have already blocked Chinese acquisition of mines outside Canada

• Anglo are busy confirming to shareholders they can create greater value as an independent entity

• Pathway for 1mt pa of copper production potential has been outlined to make the group 50% copper
• Three of the world top 10 copper mines

• • Collahuasi (44%) 252,000tpa
  • Quellaveco (60%) 319,000tpa
  • Los Bronces (50.1%) 215,000tpa

• Cost cutting potential $1.7bn

• • UK: Woodsmith polyhalite mine on hold and under review
  • Australia: metallurgical coal. Brazil: iron ore inc. port of Acu.

• Kumba Iron Ore market cap: £7.24bn x 70% = £5.1bn. Kumba shares have risen 14% since the offer
• Anglo Platinum market cap: £7.57bn x 79% = £5.97bn. AmPlats shares have fallen 3.2% since the first offer

• Capex: Anglo plan to cut capex spend by $1.8bn through 2025 and 2026
• Platinum (PGMs):  Platinum could have fared worse last year but operations will struggle to keep up with South African mine inflation
• Diamonds: Anglo have unsurprisingly failed to find a buyer for De Beers which appears stuck between an expensive agreement with the Botswana government and challenging conditions in the diamond market
• South Africa: Africa is not BHP’s natural operating territory and we would expect management to swiftly exit any South African assets either as a condition of the takeover or shortly after.
• Relative share performance:

• • BHP shares are now 1,995p vs 2364p the day before their last offer in on 29^th May
  • Anglo are now 2,359p vs 2205p the day before the offer and 2543p the day after the last Anglo offer on 29^th May

• The market does not appear to be overly welcoming of an offer for Anglo American and appears

Conclusion: The rationale for BHP to acquire Anglo’s copper mining business remains but BHP looks like it can afford to take time in considering its next offer though they should be wary of other suitors particularly once the group is restructured.

 LSE Group Starmine awards for Q3 commodity forecasting:

No.1 in Precious Metals: SP Angel mining team awarded No 1. ranking for Previous Metals forecasting in LSEG Quarterly Starmine Award for Reuters Polls Q3 2024

No.2 in Base Metals: SP Angel mining team awarded No 2. ranking for Base Metals forecasting in LSEG Quarterly Starmine Award for Reuters Polls Q3 2024

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

Arthur Parish – Arthur.Parish@spangel.co.uk – 0203 470 0476

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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