Battery Metals

It is still premature for gold traders to start buying. That’s the judgment of many contrarian analysts, who note that gold market sentiment is not yet favorable.

This is the same opinion they had six weeks ago, the last time I focused a column on gold market sentiment. Gold GCG9, -0.21% today, of course, is trading slightly lower than where it stood then.

Consider the average recommended gold market exposure level among a group of several dozen short-term gold timers monitored by my Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at 10.4% — indicating that the average gold timer currently is allocating just 10% of his gold-trading portfolio to gold.

Though this HGNSI reading of 10.4% is a lot lower than the greater-than-60% readings registered in late October, it nevertheless is not so low as to indicate the excessive bearishness that typically accompanies a tradable low. My research into gold sentiment over the last three decades suggests that contrarians should begin to sit up and take notice only when the HGNSI drops below the minus-30% level.

There is a silver lining, however, to today’s gold sentiment picture: Sentiment’s trend over the last few trading sessions has been in the right direction. If that trend continues, a buy signal could well be forthcoming in the foreseeable future.

For example, the HGNSI currently is more than 50 percentage points lower than where it stood a month ago, even though gold bullion’s price today is barely different than where it stood then. So the net effect of the gold market’s churning over the last month has been to wring a lot of the bullishness out of the gold timing community.

But there is no need to jump the gun. Contrarians advise letting market sentiment itself tell the story. If and when enough of the gold timers throw in the towel and become aggressively bearish, the time for a short-term trade on the long side will finally be at hand.

Note that contrarian analysis, to the extent it works, is only a short-term timing tool. Sentiment tells us nothing about where gold might be in six months’ or a year’s time, for example. So it might well be that gold is headed much higher, as many gold bugs currently argue. But if contrarian analysis is right, gold’s path to those higher prices will first take it lower than where it stands today.

The United States might have a new North American trade deal in place, but the Trump administration’s tariffs on steel and aluminum continue to be a headache for businesses, lawmakers and America’s neighbors.

Despite expectations to the contrary, the 25 percent tariffs on steel and 10 percent duties on aluminum are staying put for now. They remain such a big point of contention that Canadian Prime Minister Justin Trudeau took aim at the tariffs Friday during a signing ceremony for the United States-Mexico-Canada Agreement.

Trudeau tied the tariffs to the layoff plans at General Motors announced earlier this week to the chagrin of leaders and workers in the U.S. and Canada. “Donald, it’s all the more reason why we need to keep working to remove the tariffs on steel and aluminum between our countries,” the Canadian prime minister told U.S. President Donald Trump, who was standing directly to his right.

The tariffs were first put into place on March 23 under the Commerce Department’s rarely used national security authority, known as Section 232 of the Trade Expansion Act of 1962. Mexico and Canada were initially exempt pending the outcome of the renegotiation of the North American Free Trade Agreement. The exemption was removed June 1, however.

Several lawmakers expressed their dismay that the tariffs on our key allies have not been lifted. Sen. Rob Portman, R-Ohio, and Rep. Jackie Walorski, R-Ind., separately said they were “disappointed” there is still no resolution. Sen. Pat Toomey, R-Pa., said the tariffs are “doing more harm than good.” He added that Commerce Secretary Wilbur Ross said over the summer that the tariffs would be lifted as part of the larger trade negotiation.

“Our objective is to have a revitalized NAFTA, a NAFTA that helps America and as part of that the 232s would logically go away both as it relates to Canada and to Mexico,” Ross told the Senate Finance Committee in testimony on June 20.

Speaking to reporters in Buenos Aires, Argentina, U.S. Trade Representative Robert Lighthizer said the tariffs are working, but that negotiations were continuing.

“We want an agreement that is fair to Mexico and fair to Canada but maintains the integrity of the president’s steel and aluminum programs which have been very successful for the U.S.,” he said.

Some policy watchers predict that the tariffs will be lifted soon.

“USTR Lighthizer today carefully acknowledged that the three countries will negotiate on the tariffs. Once they agree that there are demonstrably changed circumstances on metals issues, the metals tariffs on Canada and Mexico likely cease, our instinct is early in the New Year,” Terry Haines, an analyst at ISI Evercore, wrote in a note to clients.

But businesses and farmers are growing impatient. An agricultural coalition group formed to oppose tariffs said that U.S. exports targeted with retaliation, including beef, pork and apples have faced more than $1.1 billion in new tariffs, leading to a 21 percent drop in exports.

“While USMCA offers exciting opportunities for market access into America’s largest and closest ag export markets, any gains will continue to be offset by the losses farmers are experiencing from retaliatory tariffs as long as they are in place,” Brian Kuehl, executive director of Farmers for Free Trade, wrote in a statement.

The influential Business Roundtable also called for a “prompt resolution” of the tariff issue and said it would review the USMCA against the objective of increasing the competitiveness of U.S. companies.

Copper prices steadied on Friday ahead of a meeting of global leaders at the G20 summit, where a long-standing trade dispute between China and the United States is expected to take centre stage.

Tit-for-tat trade tariffs have rattled global markets and sapped demand for base metals, in some cases overriding supportive factors such as falling stocks.

“The market is, to a great extent, discounting the chance of a breakthrough in talks between the U.S. and China over the weekend,” said Commerzbank’s head of commodities research Eugen Weinberg, adding that Chinese data added to the general lacklustre performance of metals on Friday.

China’s official Purchasing Managers’ Index (PMI) fell to a 2016 low of 50 in November, missing market expectations and down from 50.2 in October.

Three-month copper on the London Metal Exchange (LME) closed 0.2 percent down at $6,198 a tonne, ending barely changed on the week.

Aluminium finished 0.9 percent up at $1,958.

TRADE DEAL: U.S. President Donald Trump, Canadian Prime Minister Justin Trudeau and Mexico President Enrique Pena Nieto signed a new trade agreement on Friday known as the United States-Mexico-Canada Agreement (USMCA).

CHALCO SUPPLY CUTS: Aluminum Corp of China (Chalco) is cutting 470,000 tonnes of annual output, it said on Friday as Chinese aluminium prices sank to a two-year low.

ALUMINIUM: Norwegian metals company Norsk Hydro expects global primary aluminium demand growth to slow next year and says it is being hit hard by a production slowdown at a key alumina plant in Brazil.

ZINC SPREADS: Falling stocks pushed the premium for cash zinc over the three month price to $101 a tonne, its highest since 1998. CMZN0-3

STOCKS: Inventories of zinc in LME-monitored warehouses are close to a 10-year low of 88,600 tonnes. In warehouses monitored by ShFE, zinc stocks fell 25 percent from last Friday to 26,779 tonnes. MZNSTX-TOTAL

CODELCO: Chile’s Codelco, the world’s largest copper producer, said mine output fell 3 percent in the first nine months of the year as ore grades fell sharply.

STEEL: The United States is moving to moderate its steel trade tariffs but countries in Europe and beyond are wary of reducing protection for their steelmakers while U.S.-China trade tensions prevail.

OTHER METALS: Zinc ended at a one-week high of $2,542 a tonne, up 2.9 percent, while lead finished 2.1 percent up at $1,970. Tin fell 0.7 percent to $18,400 and nickel gained 1.3 percent to $11,200.

Excelsior Mining has closed a $75 million project financing package with Triple Flag Mining Finance Bermuda for $65 million copper metal stream and $10 million private placement of common shares of Excelsior.

With the financing, Excelsior will start construction activities at the Arizona Gunnison copper project before the end of the year, the company announced in a press release today.

“With the two crucial milestones of permitting and construction financing now behind us, we look forward to unlocking the remarkable economics of this project as we advance towards first copper production from the wellfield in 2019,” Stephen Twyerould, Excelsior President and CEO said in the statement.

The piece highlights a slide from an Orocobre deck showing just how large the gap is between expectations of new supply and the reality of bringing lithium projects into production.

It could not have been Orocobre’s intention, but the Brisbane-based company’s Argentina venture became the poster child for the challenges faced by new brine projects. Salar de Olaroz eventually took seven years to hit its stride.

The delays, run-ins with courts and regulators, not to mention mutual accusations of licence violations, Chile giants SQM and Albemarle are dealing with in the Atacama only reinforce this point.

After a dramatic retreat since the first quarter, lithium carbonate and hydroxide prices have now at least stabilized.
That’s mostly because the shake-out among Chinese converters and processors (responsible for over 80% of the global industry) seem to have run its course, but also because the South America brine problems diminished fears about a flood of new supply.

It’s a hard rock life

But brine production is only half the story. Or more accurately, less than half the story with the vast majority of new lithium capacity coming from hard rock mines.

Altura Mining’s first concentrate shipment to China marked the third new Australian spodumene operation to enter the market this year. Altura’s Pilgangoora mine took just 18 months to construct and follows new supply from Pilbara Minerals and Tawana Resources.

Galaxy’s Mt Cattlin is ramping up as is Mineral Resources’ Mt Marion. Another sign of the shift in the industry is Albemarle’s investment in Mineral Resources’ Wodgina project for $1.1B which follows SQM’s own Australian diversification with the acquisition Kidman Resources’ feasibility stage project.

If the message wasn’t clear enough, Albemarle announced last month it won’t expand in Chile at all beyond 2021. In stead the Charlotte, North Carolina firm will pour resources into the grand-dad of hard rock lithium mining in Australia, Greenbushes, where capacity is doubling and a $1B hydroxide plant was greenlighted this month.

By 2025 Australia could account for 51% of global output. Currently China holds that position while Chile and Argentina together account for 43% of world production. Outside Australia Canada’s Nemaska Lithium and Brazil’s AMG also entered production this year.

Sought after spodumene

While generally higher on the cost curve than brine operations (with Greenbushes a notable exception) spodumene concentrate is converted into battery-grade lithium hydroxide.

Pumping and evaporating brine solution produces lithium carbonate which requires further refining or conversion to feed into the battery supply chain.

UK-based consultants Roskill predicts annual growth of nearly 39% through 2031 for hydroxide compared to 13% CAGR for lithium carbonate.
Total consumption of hydroxide is expected to rise four-fold versus carbonate, with demand climbing to 1,605,500 tonnes and 460,100 tonnes respectively by 2031.

According to Benchmark Minerals data lithium hydroxide inside China goes for around $18,875 a tonne, while the midpoint price of battery grade lithium carbonate has fallen to $11,500 a tonne.

In March carbonate ex-works in China was sold for $24,750 compared to $22,000 for hydroxide which was even cheaper than non-battery grade carbonate.

Spodumene (6% concentrate free on board Australia) has been either side of $900 a tonne throughout 2018. And clearly that price has been more than enough incentive to build new mines.