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Lithium market recharges as electric vehicle sales rise

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Surging sales in electric cars have encouraged investors to bet on a rebound in the lithium market, setting off a dizzying rally in equities linked to the raw material.

Lithium-related stocks have been on a turbocharged run in recent weeks, encouraged by a growing number of cars rolling on to the roads of Europe and China. Shares in Albemarle, the world’s largest producer of the battery raw material, have soared more than two-thirds since their September low. Over the same period, Australia’s Pilbara Minerals has doubled in value.

The sector’s momentum has been encouraged by its association with the green agenda, an increasing focus of investors and governments, as well as one of the hottest market stories of 2020 — the almost 600 per cent share price rise of carmaker Tesla, which uses the material in its batteries.

The recent move reflects growing optimism about the mass market penetration of electric cars that use lithium in their batteries, say fund managers. Sales of electric vehicles and plug-in hybrids are expected to rise 28 per cent this year to 2.78m vehicles, according to consultancy Rho Motion. European sales are expected to creep past those of China, helped by subsidies in Germany and France.

“The stock market is always a forecasting animal . . . but it has a high-powered set of binoculars on at the moment,” said Will Smith, co-founder of Westbeck Capital Management in London. “Clearly, EV demand has surprised everyone to the upside this year and that is going to continue given the shift by governments to greener forms of transport as a way of stimulating economies.” 

Bar chart of million units sold since 2018 showing that sales of electric vehicle are on the rise

The shift in sentiment follows a three-year downturn in lithium prices caused by an oversupply of the raw material from new mines. Now, lithium prices may have bottomed, especially in Australia, the world’s largest producer. From a peak of more than $900 a tonne in 2018, prices for Australia’s lithium-containing spodumene rock have fallen to $375 a tonne — below the level where most mines can make money.

But prices were flat in October, according to Benchmark Mineral Intelligence, a consultancy. At the same time, domestic Chinese prices for lithium carbonate, a processed form of the raw material that is used in batteries, rose almost 1 per cent.

Wang Xiaosheng, chief executive of China-based lithium producer Ganfeng Lithium, said the price rise was driven by growing EV sales as well as growth in consumer electronics such as laptops as more people work from home due to Covid-19. Tesla last year opened a factory in Shanghai that produces its Model 3 vehicle, some shorter-range versions of which use lithium carbonate.

Line chart of lithium carbonate, global weighted average, $ per metric tonne, showing that lithium prices have slumped in recent years

Tesla’s chief executive Elon Musk said last month that the carmaker’s new factory in Berlin would expand to produce as much 250 gigawatt-hours of batteries a year — equivalent to about half of this year’s global production capacity.

Tesla’s stunning share price rally this year has lifted its market value to more than $500bn. Investors who had backed the company, and other high-flying EV stocks such as China’s electric carmaker Nio, were paying more attention to materials producers, said Westbeck’s Mr Smith.

To reach Tesla’s goals would require an expansion in the lithium sector, he added, but building a new mine could take up to five years — meaning a potential shortfall in supply if demand kept growing. “You’ve got a hugely well-capitalised demand sector and the supply sector is still coming out of the trenches with a few plasters on,” Mr Smith said.

Still, Ganfeng’s Mr Wang cautioned that faster growth of EVs in China was constrained by lack of charging facilities in the biggest cities. “It’s a big question for the market — a 10 to 20 per cent [EV] penetration rate is still fine but beyond that there needs to be a way to address the charging.”

Lithium supply could still expand rapidly in Australia, as it did when prices hit a record high in 2017, he added. That presents a longer-term threat to the market rebound.

But such a snapback in production might not come quickly. In October, Australian lithium miner Altura went into administration after it failed to raise enough funds to pay off its debts.

This week, Pilbara agreed to acquire Altura’s lithium project for $175m, in a deal backed by Australia’s largest pension fund, AustralianSuper. But Pilbara chief executive Ken Brinsden said there was “no incentive” to restart the project at present. “The industry is not going to expand at today’s prices,” he added. “Inevitably, there has to be a price increase if the industry wants to satisfy the growing demand.”

Meanwhile, US producer Livent — which last month said it had extended its supply agreement with Tesla through 2021 — has agreed to invest in Canadian miner Nemaska Lithium, a company that went bankrupt last year.

Howard Klein, founder of RK Equity, which invests in the sector, said equity markets “are pricing in a lithium price rise and they’re going to get a price rise — inventories are depleting and there will be consolidation and more discipline”.



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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