Industrial metals are in the grips of a bear market, various outlets report, and one of the main narratives sounds like a case of the market having its cake and eating it too.
The FT reports that the oil price, as referenced by the Brent crude quotation, has topped $60 a barrel for the first time in two years.
The article quotes various sources suggesting that while demand is strong, the rise in prices is driven more by supply constraints than by a sudden surge in demand (which caused the China-inspired super-cycle in the last decade). This time, a combination of reduced investment in new capacity (resulting from low prices in recent years) and the OPEC-led production constraints initiated in November 2016 are gradually tightening the market. Trader Trafigura is quoted as predicting demand will outstrip supply by as much as 4 million barrels a day by the end of the decade as supply becomes under better control and the U.S. shale industry fails to make up the delta between supply and gradually rising demand.
That’s where the have the cake and eat it too part comes in.
At the same time, industrial metals are rising strongly. Copper passed $7,000 per ton last month and aluminum is knocking on the door of $2,200 per ton. The cobalt price has doubled in the last 18 months and nickel, long in the doldrums due to over-supply and poor demand from the stainless sector, has also been on the rise due to projected battery demand from electric vehicles and charging infrastructure.
On the face of it, this appears like investors are picking and choosing their good news. If electric vehicles are such a strong bet that metals demand is set to soar, then surely oil demand is set to collapse. That prospect should undermine the oil price, you may reasonably suggest.
If only it were that simple.
Even a doubling of battery production would suggest an extra 750,000 vehicles based on 2016 global electric vehicle and hybrid production of 773,600 units, according to EV-volumes.
There was modest, by global light vehicle sales, of 90 million units in 2016, just 0.86%. Yet for cobalt, it’s still significant when you consider the battery industry currently uses 42% of global cobalt production, so an ongoing rise of 42% increase in lithium ion battery demand (2016 over 2015) would be highly disruptive to cobalt demand.
Plug-in vehicle sales grew 20 times faster than the overall market, justifiably causing concern that cobalt supply could be strained by this one market application.
Worryingly for cobalt, the fastest-growing market is also the largest.
Driven by government subsidies, the Chinese market, at some 351,000 units last year, also grew at 84% over 2015. The switch to EV and PHEV cars is part of Beijing’s drive against pollution, so incentives are not likely to be relaxed anytime soon. Growth of this magnitude dwarfs the 13% and 36% growth rates in Europe and the U.S., respectively.
No wonder cobalt prices have doubled and yet oil prices have virtually ignored the message the rise in EV sales is telling us. One is major disruption to a small, constrained and geographically, supply market, while the other is a long-term trend to a still growing vast supply and demand market that will take years to impact consumption figures.