Underinvestment, volatility and surging demand to bring metal bull cycle

Underinvestment in new commodity (and specifically metal) projects could combine with supply disruptions and demand surges to create a supply-demand imbalance and push prices up in coming years, Gijsels – “maybe the biggest commodity bull in Belgium,” in his words – told Fastmarkets in December.

Demand for critical raw materials from the energy transition and for those technology metals that will underpin increased productivity is widely expected to increase rapidly in coming years. But recently, bearish conditions in several of those markets, as well as price volatility in more niche markets, such as gallium and germanium, have detracted from the appeal of investing in the assets.

Several battery raw material markets experienced flurries of investment in 2022-2023 — graphite and lithium among them – and the capacity ramp-up overshot the relatively more modest growth in demand, data from Fastmarkets’ research team showed. But some currently oversupplied markets are expected to tighten in the medium term.

The global supply deficit of graphite for electric vehicle batteries in 2021-2022 switched to a surplus in 2023, according to Fastmarkets’ research team. That surplus is expected to have dropped in 2024 and to fall further in 2025. Meanwhile, lithium’s significant surplus in 2023 is estimated to have decreased in 2024 and to become even tighter in 2025.

“If you look at investments in the commodities space, that has been horrible recently,” the economist said. “There is no interest, which is logical in a way, because the markets have been so bearish for so many years.”

Companies “have not made a lot of money,” and a lot of miners “have destroyed value,” he added.

The iShares Lithium Miners and Producers exchange-traded fund (ETF), which tracks US and non-US lithium producers’ equities, was down by 61.5% on Friday January 3 from its inception in June 2023.

In terms of metal prices, 2024 was also a down year, with declines in critical battery and new energy markets.

Fastmarkets’ daily price assessment for cobalt standard grade, in-whs Rotterdam was $10.00-11.90 per lb on December 31, its final session of 2024, down by 18.9% from $12.80-14.18 per lb in the first session of the year.

And Fastmarkets assessed the lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price cif China, Japan & Korea at $8-11 per kg on December 31, down by 38.7% from $14.50-16.50 per kg on January 2, 2024.

Gijsels warned that some investors do not believe in a new bullish cycle, meaning they are consuming and depleting their reserves, generating cash flows and paying dividends or buying back shares instead of investing in new resources.

But Gijsels, like some other prominent market participants in the commodities sector, observed that the best “remedy” for low prices is low prices themselves, “because then capacity starts to shut down and prices go up,” he said.

This is a view echoed by Rio Tinto chief executive officer Jakob Stausholm. Explaining Rio Tinto’s milestone acquisition of Arcadium Lithium to shareholders in October, he theorized, “The lower [the lithium price] goes in the next short period of time, the higher it will have to go later on.”

Eventually, sustained price increases could help promote investment, according to Gijsels.

“If you know it takes 10 years and a couple billion dollars of investment to build a big mine, if prices go up and up for a while, maybe people will say the price movement is not a spike and make the investment,” Gijsels said.

Higher prices could lead to some consolidation in the commodities space, according to Gijsels, as major market participants could buy up medium ones then move further down the food chain.

Regulatory hurdles

Rising geopolitical tensions also pose challenges for investors. For example, in 2022, Canada moved to restrict foreign investment in its mining sector, widely regarded as targeting China’s influence there.

This presents a significant obstacle for companies operating in the jurisdiction, as Canada-based junior miners in energy minerals such as uranium and lithium said in December.

“They’ve effectively banned Chinese investment but haven’t offered anything to replace it,” a Canada-based junior lithium producer told Fastmarkets on the sidelines of the Resourcing Tomorrow 2024 conference held December 3-5 in London.

The junior miners warned that the punitiveness and lack of clarity around Canada’s rules were undermining the jurisdiction’s appeal.

For example, in 2024, Falcon Energy Materials, a graphite producer with an asset in Guinea, announced it had redomiciled from Canada to the United Arab Emirates after a proposed investment from a Chinese-owned entity fell through.

Gijsels acknowledged “the governments’ rational desire” to try to intervene in a “tug of war between geopolitical blocs,” but he said that “if you say these projects are strategic enough to defend, you should support them as strategic too.”

The overall value of some of the junior miners on the Toronto Stock Exchange also poses problems for private investment, according to Gijsels.

“Many of these companies are too small cap for us to really invest in – and there isn’t much financial liquidity there anyway,” he said.

Geopolitics

Rising geopolitical tensions may offer increased impetus for investment in metal projects, but progress will be incremental, Gijsels told Fastmarkets.

He referred to a fourth turning, a concept also addressed in his 2024 book “The New World Economy in 5 Trends,” co-authored with BNP Paribas Fortis chief economist Koen De Leus. The concept is borrowed from a 1997 book by Neil Howe and William Strauss.

It posits generational cycles (turnings) in history, with the fourth turning being one of internal and international instability and transition. Gijsels expects that it will bring a realigning of global alliances and a multi-globalization (not deglobalization) of international trade.

Tariffs and export controls have fostered a renewed drive to shorten and secure supply chains. China has introduced export controls on gallium, germanium, antimony and graphite, while the US has increased Section 301 tariffs on a variety of imports from China, including raw materials such as indium, chromium and graphite, and finalized products such as solar panels and lithium-ion batteries for electric vehicles.

China’s dominance in the production of such a wide array of critical materials will force the US and other Western countries to reintroduce their own production, Gijsels predicted.

“In the fourth turning, we should see the US work to rebuild their resource industry, especially under the [Donald] Trump administration,” he said.

In the meantime, the US and other US-aligned Western countries will be reliant on other countries — often China — for their supply of critical raw materials. This could lead to abrupt supply shocks, Gijsels predicted, as was the case when China introduced export controls on the aforementioned critical metals in 2023 and 2024.

“China, from time to time, will close the tap… so prices for some commodities will increase very quickly,” he said, also expecting a greater volume of new projects to come online, including in relatively small markets such as gallium and germanium.

Indeed, China, which produces the vast majority of the world’s supply of both metals, did not directly export a single kilogram of gallium or germanium to the US – widely believed to be the target of the export control – since the policy was introduced in August 2023.

Niche markets

Despite the supply vulnerability exposed by China’s export control on those metals, there has been little in the way of new primary production in the West announced since the controls came into effect. Market participants have particularly pointed to price volatility in those markets as undermining investment interest.

While Gijsels did predict that investment would eventually be made in projects to produce those niche metals, owing to the amount to be lost without supply, he questioned whether a commercially motivated company could justify that investment.

“It would probably need to be subsidized,” he said.

The fourth turning will be hugely volatile, owing not only to geopolitical uncertainty and domestic political strife within major economies but also due to inflation and interest-rate fluctuations, Gijsels said.

Emerging market currency fluctuations have also become more pronounced, and he expects this to bleed into commodity markets, helping to “create a strong bull market in commodities for many years to come,” he predicted.

International commodity transactions generally take place in US dollars, making producers and consumers particularly vulnerable to exchange rate hikes. A stronger US dollar generally makes exports from a country where the dollar is not the local currency more competitive, but it can also make imported inputs more expensive.

Though his investments in commodities mean he stands to benefit if commodity prices rise – as they might if a shortage emerges – Gijsels ended the interview by saying that it is in the wider interests of the world that a solution is found before then.

“I am long on commodities, so I would like their prices to go up, but maybe the world would look better if we find solutions that avoid that,” he said.