Illuminating the Markets Metals Covid-19 to Change the Structure Of

June 2020

Argus White Paper: Covid-19 to change the structure of base and minor metals markets

Base metals markets are key for economic growth and correlations with industrial products are significant. Copper continues to be the most efficient way to transfer electricity by diameter and nickel and cobalt are experiencing rapid increases in demand as the world demands batteries and increased electrification. Argus metals assesses prices for key battery components and prices for base metals which have experienced much volatility since the start of the covid-19 crisis. Argus also assesses daily spot cobalt hydroxide, nickel sulphate, lithium carbonate and hydroxide prices across a variety of geographies and incoterms. We work closely with global exchanges to provide price assessments and insights that illuminate markets that are typically opaque. Scrutiny is mounting, both on the liquidity of the battery materials’ spot markets and on the industry’s gradual evolution away from tradition- al metal-based pricing structures, toward a pricing structure more focused on hydroxides and sulphates.

Much has been written about the cyclical factors of Covid-19 Nickel – now at $12,881/t on an LME 3-month basis – is still but its longer-term implications are still unclear. We recognise demanded in increasing quantities by battery makers the three key trends that look set to alter future markets for base world over. The supply of cobalt – now at $29,500/t on LME and minor metals: sharp volatility in traders’ positions; lower 3-month basis – remains centralised around operations in the purchasing power among Chinese market participants due Democratic Republic of the Congo and prone to rapid price to currency depreciations; and reduced investment in metals volatility. Argus-assessed regional premiums follow a similar supply. These three factors are expected to leave demand pattern and prices for cobalt hydroxide CIF China have fallen and supply for base and minor metals much changed over the 11pc to $10/lb since early October 2019, whilst CIF China short-term. lithium carbonate prices of $7.75/kg are the lowest since early June 2018. First 362 deaths corresponded to $561/t off copper Firstly, the speed and the extent of the fall in base metals These rapid and significant price changes have led to a quick prices caused sharp swings to committed traders’ positions switch from net-short positions to net-long positions as some on the London Metals Exchange, or LME – these will require traders anticipated the dive in prices. For example, LME cop- time to be rebuilt and a more structural change to stock-own- per positions moved from a net short of approximately 3,560 ership is more likely. lots on 3 January to a net long position of approximately 2,118 lots by 7 February. Despite rising aggregate deaths linked to For example, prices for copper, nickel and cobalt are now Covid-19, copper prices are regaining ground though well off down by 20pc, 16pc and 64pc respectively off recent highs the highs of 2018. seen in 2018. LME 3-month copper prices are now at $5,801/t which is risen from the depths of the recent crisis of $4,618/t on March 19 but are still low compared with prices of $7,223/t seen on 11 June 2018.

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Copper prices lost $561/t over the initial surge of 362 deaths

$/t $/t 6,500 6,450 1 Jan 2020 12 Jun 2020 First: 11 Jan, 2020 6,300

6,000 6,150

6,000 5,500 5,850

5,700 5,000 5,550 Last: 3 Feb, 2020 4,500 5,400 0 100 200 300 400 0 10 20 30 40 50 60 p p p Global daily deaths p Global accumulated deaths, '000 people — LME, Argus

USD vs CNY: China crowded out of some metals Lower prices for base metals discouraging markets investment in all the Argus Metals International More importantly, the crisis has meant a flight to safe-haven metals assets and particularly strength in the US dollar versus its key With lower demand; lower prices; an uncertain environment trading partners. The RMB:USD exchange has climbed 2.4pc for industry; and ongoing deaths from the virus, investment in year over year as the yuan has depreciated against the dollar. industry and in metals has paused. Barrick Gold has however The US remains the world’s reserve currency and international indicated that it seeks M&A opportunities in the copper sec- money markets clearly prefer USD to CNY; a cost to be borne tor, but capex is broadly on hold. Some data has suggested by aspiring buyers of metals in China. that cross-border deals in the mining sector have fallen by over 10pc since the crisis first gained momentum. Since the first recorded Covid-19 death on 11 January, the yuan has slid 2.5pc versus the dollar which shows that Covid-19 is a This is negative for future supply as base metals provide the key driver in altering that value shift. This is likely to linger and world with these larger mined-products which also help to produce structural geographic change in where demand for finance the production of minor metals. With lower investment some metals is satisfied. in base metals, supply has been reduced by more than the average 5pc disruption allowance – particularly within copper markets – and stocks of base metals are to be wound down. Weak demand will need to recover in order to improve the investment cases for large-scale miners.

CNY depreciated 4.4pc against the USD crowding out base-metals demand in China

7.25 $/t Chinese RMB per 1 USD 6,500

7.15 6,100

5,700 7.05 5,300

6.95 4,900

4,500 6.85 6.90 6.95 7.00 7.05 7.10 7.15 Jan Feb Mar Apr May Jun USD/CNY 2020 — LME, Argus

This will have unintended consequences across several metals required for high-tech applications. Argus assesses that Introducing the the prices of rare earths have fallen by approximately 9pc on a trade-volume weighted average since the beginning of Janu- Argus Automotive hub page ary, whilst some rare earths – such as cerium oxide – have fallen by 12.4pc to approximately $1.45/kg ExW China over the same period. Argus-assessed molybdenum oxide prices have fallen 17pc to $8.03/lb du Rotterdam over the same period.

Without improved investment in these disrupted segments, these minor metals will face tighter market conditions as demand gradually re-emerges. Furthermore, as the world exits Covid-19 lockdown, countries other than China might find a greater portion of the world’s metals trade more affordable Featuring news, in-depth market analyses now that China’s yuan has depreciated against the dollar. and the wide range of commodity price Volatility is certain within this new structure and traders will assessments crucial to the industry be tested to pre-empt shorter cycles and to be nimbler. Click here to learn more and register for Argus Automotive Weekly

Base metals prices hard hit by covid-19 – investment in mines to take time to recover

120 Dec. 31, 2019 = 100 110

100

70 Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 EU HRC Nickel Zinc Copper Gold Iron Ore Cobalt — LME, Argus

For more details please contact: Maximilian Court, Manager Business Development – Metals International, (44) 203 890 5019, [email protected] Ellie Saklatvala, Editor – Metals International, (44) 207 780 4308, [email protected]