Spot price critical as specialty minerals surge
There is no spot price to judge the performance of lithium and other specialty metals which is a problem for investors, say industry leaders.
Critical minerals companies have been the darlings of the market over the past two years, but the markets for the critical minerals they sell are still only emerging into the spotlight of investors.
There is an old joke in Perth that you can find more people on the street who can tell you the daily iron ore price than could tell you the Reserve Bank cash rate.
But despite the rise of West Australian lithium miners, there is no lithium spot price by which to judge their performance, as there is in iron ore, copper and other major commodities.
That is an issue the sector needs to address, according to Liontown Resources chief executive Tony Ottoviano, who told reporters at Kalgoorlie’s annual Diggers & Dealers conference that the occasional spot sales of product by Pilbara Minerals – almost alone in selling into a spot market – needed to evolve into a formal spot market.
“We can’t keep going with 5000-tonne increments. We’ve got to put some significant volume into the market to give it depth,” he said. “The second thing is we need a reliable platform. You need a mechanism to transact.
“ What I’ve seen in iron ore and LNG, once you get industry participation in there, then the index will thrive because you get the volume and then you get the accuracy and the transparency and the governance.”
The market for commodities such as copper and nickel are relatively easy to understand, as they have always been metals in high demand across a range of industries, trading through spot markets such as the London Metals Exchange that have deep pools of liquidity.
But speciality metals – such as lithium and rare earths – are not as easy to follow. While chemical price benchmarks exist, no spot market really exists for mezzanine products such as the spodumene concentrate exported by most Australian producers.
Like similar products, such as zircon and rutile mined as mineral sands, prices are generally set in negotiations between producers and buyers, with details of pricing mechanisms – including major factors influencing the eventual price, such as product specifications and discounts for impurities – kept confidential.
For shareholders, that often means their only real reference point for the health of a producer is the average selling price and volume figures included in quarterly reports, and revenue figures from financial reports.
Is Mineral Resources’ Wodgina mine a better bet than Pilbara Minerals’ nearby Pilgangoora assets? Or will Liontown’s Kathleen Valley mine, when it is built, deliver a better-quality product at a lower cost? That is a question that also faces shareholders in iron ore miners, copper producers and others. But each of those commodities has widely published spot prices as a point of reference. The price Fortescue receives for its lower-grade iron ore ore, compared to the average benchmark price of ore grading 62 per cent iron, is followed as a key company metric by most analysts.
While demand outstrips supply the opacity of the market is not likely to be an issue for investors in lithium, rare earths and other battery-making metals producers – a rising price floats all boats, and covers up many sins.
But it will be far more important when the market is in balance, or in the event of another economic shock that has a sudden impact on demand and again threatens the viability of more marginal producers.
In late 2019 the surging supply of lithium concentrate from hard rock mines in WA tipped the market into surplus, a situation exacerbated by the pandemic in 2020, which threw a long shadow over carmakers across the world.
The sharp downturn in the lithium market forced the closure of Mineral Resources’ newly commissioned Wodgina operations, and sent other players – including Altura Mining and Alita Resources – to the wall.
Now the boom times are back, as vehicle manufacturers get their transition to electric vehicles back on track, leading to predictions of major shortfalls in the market for battery-making materials – from lithium, to nickel, to rare earths, copper and graphite.
Most producers presenting at Diggers are forecasting a tight market for at least the next five years, and possibly until the end of the decade. Their major customers are acting as if that were the case, if Ford’s recent dealmaking spree is any guide.
Not all agree, however. Goldman Sachs analysts caused a minor run on lithium stocks in June after releasing a bearish note forecasting an oversupplied market over the next few years.
“We now expect the global supply-demand balance to ease from an 11 per cent deficit in 2021, to a balanced market in 2022, followed by 10-23 per cent oversupply in 2023 to 2025,” Goldman analysts said.
Goldman’s downbeat analysis was partly based on predictions that Chinese domestic sources of lithium, and output from Chinese-owned projects in Africa, would push Australian concentrate out of the market.
Mr Ottoviano said last week the rising expectations of major Western manufacturers – including the carmakers scrambling for supply, such as Ford, Tesla, Toyota and major European producers – would ensure Australian projects with strong environmental, social and governance standards would get a “ticket to ride” in the market.
A major marketing point for Lynas Rare Earths has been is status as the only major supplier of rate-earth oxides outside of China, and the company’s compliance with tough environmental standards in Malaysia and Australia is a part of that.
Lynas CEO Amanda Lacaze said last week there was no price premium in the market for “green” products, rather it was becoming a requirement to supply to Western customers.
“Anyone who is using these materials takes a huge brand risk, if they make an electric vehicle, and somebody else can say ‘but look at the environmental cost of making that electric vehicle’. So I don’t think it becomes a premium because I think that it is a ticket to play,” she said. But Lynas’s customers were increasingly willing to pay a premium to ensure their security of supply, she said.
“If you’re a vehicle company and you’re investing say hundreds of millions of dollars in a platform that you want to work for the next five to seven years, then you will be prepared to pay a premium,” she said.
“If you’re a wind turbine manufacturer who’s got a fixed contract a fixed price contract to deliver a wind farm in two years time, you will be prepared to pay a premium for a fixed price that allows you to be certain of what your margin is going to be.”