Categories: General Market Commentary
Topics: General Market Commentary

China's enviro policies, EV growth two megatrends to boost most commodities

Chinese actions in recent years to embrace temporary production cuts and enforce stricter environmental regulations are probably here to stay for the long term and have already disrupted a range of commodities, including coal, aluminium, lithium and cobalt production chains.

Commodity research and consulting firm CRU Group analyst Paul Robinson recently told an audience attending the Prospectors and Developers Association of Canada's 2018 convention that China is tackling its pollution problem and that it is starting to gain traction.

"Lots of steel production cuts and seasonal restrictions are pushing prices up. Chinese people in these industrial production centres are breathing clean air for the first time in years. This is the beginning of something that will continue as long as they can afford this. Some additional curtailments during summer times are also rumoured," he noted.

According to Robinson, the need for cleaner, healthier societies has become a commodity megatrend to look out for, as it has the power to create sudden, structural deficits. "What if the Chinese environmental production curtailments are the start of a new normal?" he asked.

The impacts are wide-reaching and could encourage industrial metals to remain, or reach deficit territory. Increased environmental needs could stimulate copper demand as investment shifts to the distribution grid to accommodate renewable energy, while it could also stimulate a structural increase in clean copper scrap premiums.

Zinc will also be particularly impacted, as Chinese consolidation would only allow the same output from fewer mines. China is looking to leverage economies of scale to reduce pollution levels. The threat of Chinese winter heating production cuts also threaten aluminium and particularly steel output, as it disrupts Chinese mine supply, while stimulating raw material consumption.

EV MEGATREND

Robinson explained that the electric vehicle (EV) megatrend also has the potential to create a persistent market deficit for a basket of energy and automotive metals, much like the market underestimated the surging Chinese commodity demand growth in the 2000s.

For instance, he foresees lithium demand, expressed as a percentage of the total market demand, rising from 35% to 47% between 2016 and 2021, respectively. For cobalt, demand will rise from 8% to 23% over the same time frame, with that for nickel being 2% growing to 6% respectively.

However, automotive metal demand growth as a percentage of total demand growth between 2016 and 2021 is pegged at 77% for lithium, 63% for cobalt, 32% for aluminium, 29% for nickel and 14% for copper.

On the back of rising cobalt prices, the EV industry is actively looking to replace cobalt in battery chemistries, which could push the nickel market closer to deficit territory. For lithium, the faster-than-expected uptake and growth of the EV market and deficits owing to the slow ramp-up of battery-grade material production, could push prices higher yet. For cobalt, looming deficits, supply disruptions in the Democratic Republic of Congo and depressed copper and nickel prices could constrain cobalt by-product output.

Working in favour of copper is the fact that EVs also require significant amounts of wiring, motor and transformer demand. Aluminium is also set to benefit from the EV growth megatrend as automakers seek to lightweight their products and its use to encase batteries as a safety measure.

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