Gold News

Critical, Not Trading Commodities

Investing in lithium, cobalt or graphite requires a long-term view...
 
SIMON MOORES is managing director of Benchmark Mineral Intelligence, an online publishing and consultancy business specializing in critical minerals and metals, disruptive technology and emerging markets.
 
With analyst Andrew Miller, he speaks here to The Gold Report about three critical metals – lithium, cobalt and graphite – discussing supply chain visibility and the impact of disruptive technologies on these markets.
 
The Gold Report: In a recent Benchmark Mineral Intelligence report, ' Mineral Supply Chain Visibility: Impact of Disruptive Technologies on Critical Raw Materials', you make the case that supply chain visibility will become increasingly important in the critical minerals space. Please briefly explain why.
 
Simon Moores: We've noticed that during the rare earth element bubble in 2010-2011, people didn't know what these niche minerals that go into everyday critical technologies were or where they were sourced. 
 
Awareness in these niche minerals of growing importance, such as graphite, lithium and cobalt, is now occurring throughout the supply chain and not just in the upstream portion with the mining or processing companies. The downstream companies are paying attention and they buy the raw materials to manufacture these disruptive technologies. Supply chain visibility is rising.
 
Andrew Miller: Supply chains are going to become increasingly important. As these new technologies rapidly develop, both traditional industrial end users and newer high-tech buyers of these raw materials need to know more about the global supply pattern – factors that can impact their business. It's basic risk management in today's world.
 
They can't just rely on their traders or distributors for intelligence. End users are now aware of the need for a more global, independent picture on supply, demand and prices.
 
TGR: Is that happening?
 
Simon Moores: We haven't seen companies completely change their raw materials buying patterns yet, but some are preparing for it. In the US, the Conflict Minerals Act was the first time specific political restrictions have been put in place for these minerals in the West for ethical reasons. Europe will introduce similar legislation early next year.
 
The industry will have to start thinking about buying from reputable suppliers that meet certain standards. That means that end users may no longer opt for the lowest-cost source of raw materials from places like China and Democratic Republic of the Congo (DRC) if producers in these regions don't fall in line with environmental or ethical rules. And that is key. It's not just about price anymore. It means people will start paying a premium for more ethically sourced raw materials.
 
TGR: In the same Benchmark report you suggest that disruptive technologies are the most important new market for critical minerals. What are disruptive technologies and what are two or three specific ways these technologies are changing the markets for critical minerals?
 
Andrew Miller: Disruptive technologies are completely new markets that are creating new value chains, products such as smartphones, electric vehicles and different types of energy storage. Growth in these new markets are affecting not only their own supply chains, but also those of existing industrial markets that rely on the same raw materials.
 
In the longer term there will be a real need for new critical mineral supply to come onto the market. In many cases that's also going to require suppliers to become more flexible. It's not just the production out of the ground that's going to have to increase; the refining and processing capabilities have to improve and expand too. The material required by traditional critical minerals markets is quite different and more tailored from the majority of product that is needed in these new high-tech spaces.
 
TGR: So companies developing these critical minerals projects not only have to get these elements out of the ground, but then they also have to process them in such a way to meet the specific requirements of these new end users, which can vary greatly.
 
Simon Moores: That's right. The grades that the critical minerals sector has traditionally served up and that have become industry standards over the past few decades are now changing, and that's why critical minerals like lithium, cobalt and graphite aren't really commodities. They can't be mined out of the ground in large volumes and directly used; they are tailored specifically for the end user.
 
With commodities it is more of a logistics game, with critical minerals is a processing game – this is where they are fundamentally different.
 
TGR: And that is often without any firm commitment from the end users. Is the traditional offtake deal dead in the critical minerals market, at least in specific cases?
 
Simon Moores: Offtake deals are familiar financing methods for resource companies, but it's difficult to apply that model to these minerals, which are specialist products. Critical minerals are not usually traded in the volumes that offtake contracts often serve, like, for example, iron ore. If these markets grow to reach huge volumes in the future, perhaps then they will be traded in the same way as large-scale commodities.
 
TGR: Cobalt is a component in lithium-ion cathode for batteries. Tell us about the cobalt market.
 
Andrew Miller: Cobalt is similar to the lithium market in the sense that you have one or two large producers that dominate supply. The DRC is where the majority of the raw material is produced. Outside of the DRC, cobalt is produced in a number of countries, but all of that production is limited and there's little capacity for short-term expansion. The key issue with cobalt is security of supply, particularly with the increased demand from the battery sector. Over the past five years or so, cobalt demand from the battery sector has increased threefold, and 2014 battery demand made up 45-50% of the total market.
 
TGR: Cobalt prices have slipped some over the summer. Is that the beginning of a downturn in cobalt prices or a summer dip?
 
Andrew Miller: It is more of a short-term trend than anything. When we look at the macro dynamics for the cobalt market, supply is tightening. In H2 2015 and certainly into next year we're going to see the market move into deficit, and that will obviously prompt rising prices.
 
TGR: Graphite is probably one of the most misunderstood markets that The Gold Report covers. Please dispel some of the common graphite market myths.
 
Simon Moores: First, it's not just about volume. Graphite is a niche market, so if a firm is trying to develop a graphite mine, it is going to have to examine the volumes end users use, the growth in those areas and whether it can tailor a specific grade for that customer. Saying that, if a company is going down the volume route and wants to produce in excess of 50,000 tonnes annually, then it needs a unique deposit. Not every graphite deposit can yield 100,000 per year that can be sold into multiple end-use markets.
 
TGR: Is grade overrated?
 
Simon Moores: High grade obviously helps project economics but grade isn't necessarily king. You can have high-quality graphite at a low grade. A lot of the deposits that are commercially active grade 3-7% graphite. But what we're seeing now in the graphite industry is the result of five years of intensive modern-day exploration that has uncovered some of the best graphite deposits the industry has ever seen. The industry can really choose which one to bring to market – it's a very strong position to be in.
 
TGR: Do you believe in graphene from natural graphite?
 
Simon Moores: Graphene is one micro layer of graphite and isolating that one layer from a flake source is proving too difficult at the moment. Three layers is the accepted standard for now and end users appear to be happy with this new form of nan-graphite. I believe that graphene has great long-term potential. The question is when. I think we're looking at in excess of 10 years.
 
TGR: Have batteries overtaken refractories as the major market for graphite?
 
Simon Moores: The significant demand growth in graphite is all about batteries. For an article in our Battery Special, the second issue of our magazine, Benchmark took production and export numbers from China since 2009, and the average growth rate in battery-grade graphite production has been 27% compounded for the last five years, which surprised us considering that for the majority of that time people have assumed that it's been a down market.
 
At Benchmark, we also like to crosscheck our data and analysis with other mineral industries used in batteries.
 
If you take cobalt's threefold demand increase in the last five years or the fact that lithium is now in shortage, it's clear that batteries are no longer a prospect but an immature industry that is here now and growing.
 
TGR: You're about to embark on the Benchmark Mineral Intelligence World Tour. Tell us about it.
 
Simon Moores: We will offer a series of free seminars that examine the battery supply chain and the raw materials that fuel it. We start our World Tour in London on Sept. 11 and continue in New York, Toronto, Vancouver, Hong Kong, Tokyo, Sydney and Melbourne. These are the world's mining investment hubs and places that have shown interest in the battery supply chain. People can find more information by visiting Benchmark Minerals.
 
TGR: Please share one tidbit for investors to keep in mind as they conduct their due diligence on critical minerals equities.
 
Simon Moores: Don't treat critical minerals like commodities. The basic process of analyzing commodities has relevance to specialist minerals but they're not entirely the same. Critical minerals are niche products at this stage that require a long-term outlook. It is no surprise that the people that invested in the critical minerals supply chain in the past – namely Japanese and Korean companies – are long-term thinkers. These companies now control the majority of these supply chains. A longer-term way of thinking is crucial.
 
TGR: Thank you for talking with us today, Simon and Andrew.

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