The steel market really drives the vanadium story ”
Based in New York, Chris has been an independent analyst since 2009 with a focus on Energy Metals including lithium, cobalt, graphite, vanadium, and rare earths. His research provides strategic insights to institutional clients and has a specific focus on how disruptive trends in energy, strategic metals, and technology create opportunities. Before shifting focus to analysis of these trends, Chris gained twelve years of capital markets experience on both the buy side and sell side.
Mines and Money caught up with him ahead of his appearance at Mines and Money New York on 1 and 2 May.
Chris Berry, Founder, House Mountain Partners
Mines and Money: Vanadium was the best performing commodity of 2018. Why?
CB: Firstly, there were a number of mine closures amongst existing producers owing to low vanadium pricing. Secondly, China’s talk about imposing higher standards on steel rebar is finally becoming a reality after what seemed like years of talk. China is under increasing environmental pressure to do this, and this, coupled with the mine closures and de-stocking, led to the supply shock that happened last year.
Mines and Money: What’s in store for vanadium 2019?
CB: In 2019 we have seen a mean reversion in the vanadium pricing which was entirely predictable, in my opinion. Market participants are looking for a new base price of perhaps US$15 to US$17 per pound for vanadium Pentoxide which is much higher than a few years ago. This “new normal” pricing parallels what I think we’ll see in other energy metals like lithium and cobalt over time.
Mines and Money: Are vanadium redox batteries (VRB’s) contributing to the demand?
CB: Not really and I’m skeptical that they will anytime soon. VRBs are arguably a better energy storage medium versus lithium ion based on cyclability and life of the electrolyte. The challenge now is that lithium ion wins on cost and scale. It’s not that lithium ion is better than the VRB technology, but it’s “good enough”. Vanadium electrolyte in a VRB constitutes 30 to 40% of the total cost of the battery, so finding a way to hedge the price risk or volatility to crucial.
The steel market really drives the vanadium story.
Mines and Money: What about your outlook for the rest of the battery metal space?
CB: For battery metals no-one disputes the demand side. There might be differences of opinion as to whether lithium demand will increase to 800,000 or 900,000 or 1,000,000 tonnes in 10 years or less, but everyone agrees that we are talking about 10 to 20% growth per year for now. Although the demand story seems reliable, the supply side of the equation is not as certain and this is the main reason for the dramatic price increases we saw in 2015-2017 for select raw materials like lithium and cobalt. This parabolic price rise was followed in 2018 by a mean reversion of sorts in pricing which hurt just about all equities and has sent investors to the sidelines. Longer term, I’m very optimistic that more supply of these metals will be needed beyond just what the major producers are capable of handling which means there is a window for development-stage companies with strong balance sheets, scalable assets, and sound management teams who can skilled at capital allocation in opaque markets.
By around 2022 to 2023 the cost of an unsubsidised EV should match or beat that of a comparable Internal Combustion Engine (ICE) car. If that is the true tipping point for EV demand, the upstream investments need to be happening today.
Mines and Money: The most common figure for predicted EV take up is 30% by 2030. What do you think?
CB: The 30% by 2030 figure has been bandied around by the likes of the International Energy Agency and various banks. I personally don’t like to look so far into the future, but I tend to broadly agree with the idea. If we see EV penetration of 10 to 12% by 2025, the 30% by 2030 is realistic in my opinion. This all depends on the supply chain solidifying from top to bottom and since nobody has ever seen this much stress along the lithium ion supply chain in particular, I think a five to sever year forecast is more prudent than anything beyond that. Battery economics continue to improve whilst subsidies are still in place and these are lynchpins of the overall thesis for now.
Mines and Money: Out of all the battery metals (lithium, cobalt, graphite, copper, nickel) which commodity are you most keen on as an investment opportunity and why?
Mines and Money: I like copper, which often gets overlooked in the EV story. Whilst it we are not going to see an increase in demand for copper of 20% per year as we are currently for lithium, people overlook that most of EV infrastructure will need copper and much more of that infrastructure needs to be built out.
It is interesting to me to see how oil super majors such as Shell or BP are mitigating risk against the rise of EVs. They aren’t looking to buy a lithium or cobalt miner – they are making investments in battery charging networks to hedge against the destruction of their main business. This is a hugely shrewd asymmetric bet on their part.
Mines and Money: Any battery metals you are less sure of?
CB: This really depends on your time frame, but my overall ranking of EV commodities is copper; lithium; graphite; cobalt and then nickel. It’s not that I am bearish on nickel, it’s just the commodity I’m the least comfortable with in terms of EV demand really moving the needle here. .
Nickel projects can be highly capital intensive. As it is produced in such huge quantities the EV story doesn’t really move the nickel demand needle.
Mines and Money: So, is investing in battery metals miners the best way to play the battery metals investment thesis?
CB: The miners certainly have the best operating margins, but are really exposed to the volatility of underlying commodity price swings. It’s really a risk-reward trade off. That said, an understanding of the economics of each part of the lithium ion supply chain is essential to hedge away various risks. Cathode, battery cell manufacturing, or battery recycling are just a few examples. Recycling actually has potential to become a much bigger business as a veritable tsunami of battery supply comes on-stream over the next ten plus years. Lithium ion batteries can’t simply be disposed of, so I’d expect to see lithium ion supply chain participants look much more closely at integrating recycling technology into their existing business models.
Mines and Money: Therefore, should investors look at investing in lithium recycling as opposed to lithium mining companies?
CB: Not necessarily. Regarding the miners, I am agnostic as to brine vs rock vs clay-based lithium sources. The most important factors are companies with a proven management team in the lithium space, deep experience with capital allocation, and also the requisite technical experience in lithium project building. . Companies that build a mining operation and combine it with a conversion/recycling facility through a phased in approach would be the most attractive opportunities. It’s all about risk management throughout the life cycle of the company. .
Mines and Money: Outside of battery metals, what other commodities do you like?
CB: I am surprised that gold isn’t higher given the political uncertainties but it’s really not my area of expertise.