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The energy transition electrified commodity markets in 2021, especially those of key metals critical to the world meeting its climate goals – aluminium, copper, lithium, cobalt, nickel, and, increasingly, graphite. The energy transition – combined with the disruptive effects of Covid-19, a bump in the road for the commodity supercycle and, in the second half of the year, the signs of a coming period of stagflation – made for an interesting year, with record-breaking levels of volatility and record-high prices.
In 2022, the energy transition is even higher up the agenda for governments, investors and corporates alike. Copper, aluminium and battery raw materials will be needed in ever greater quantities to build the electric vehicles (EV), batteries and power grids of the future. Despite growing demand from EVs in particular, we expect 2022 to be a smoother year, as the global economy continues to put distance between itself and the most acute period of the Covid-19 pandemic.
Read on for a snapshot of our 2022 outlooks for key energy transition metals: aluminium, copper, lithium, cobalt, nickel, graphite.
Aluminium prices continued their correction in the fourth quarter of 2021 on the back of falling coal prices in China, plans by Russia to remove its export tax next year, and news of more smelting capacity restarts outside China (triggered by higher prices).
While we are cautious on near-term price sentiment, we believe most of the selling has been done, which should allow prices to move into consolidation mode. We are still bullish overall.
There is plenty to keep prices elevated, including low stocks, strong demand, uncertainty over European energy supplies, reduced aluminium output from China due to power rationing, geopolitical risks around developments near the Russia-Ukraine border and inflation concerns.
With on-warrant LME stocks at their lowest since 2005 and a large global deficit ahead in 2022, prices should gradually recover in the months ahead once a base has been made.
After an extended period of correction and consolidation between May and September 2021, copper prices have rebounded markedly since the start of October. We expect copper prices to perform well in the months ahead because we think that we are in a stagflationary environment (owing to supply chain bottlenecks) and believe that the deficit in the global refined copper market is set to prevail in 2022.
Total world copper mine production growth could surge to 7% in 2022 from just 2% in 2021. Such strong growth will bring the global concentrate market back to balance in 2022 after two deep deficit years. However, we expect a higher rate of supply disruptions next year given so much new and expanded capacity due to come online or ramp up.
We expect a bigger deficit of refined copper of 571,000 tonnes for 2021 as a whole, assuming 2.2% growth in refined output and 2.5% growth in refined usage. We also expect the refined market to remain in a deficit in 2022.
Even though the Omicron variant constitutes a potential bearish risk to our overall copper outlook, we continue to think that the bull market is not over yet. The consolidation from May was necessary after prices rose too fast and too hard. Sentiment is now in check and positioning is clean.
Consequently, we have a bullish price outlook for the rest of 2021 and going into 2022.
We expect the lithium market to remain tight for the rest of 2021, because of price performance, stronger-than-expected demand growth and the slow return of idle production capacity. We expect additional supply to relieve the present tightness as 2022 unfolds.
For now, it appears as though the tightness will last well into the new year – the level of destocking by downstream processors, convertors, consumers and hoarders will determine whether prices hold at these levels, drift lower or push higher still.
Apparent demand is expected to be stronger than actual demand – the supply chain will likely want to restock after this expected period of destocking and expanding downstream capacity will need to carry ever larger amounts of working stock.
After a brief consolidation, the fact prices are on the rise again suggests consumers have decided they cannot afford to destock too much, with some prepared to chase prices higher in order to keep inventories topped up. However, given the already massive price gains in 2021, we expect consumers to be increasingly reluctant to chase prices higher and higher.
The question is how long it will take new material from expansions and restarts to be commercially available to the market. We should expect ramp-up issues and material will need to be qualified – a process that normally takes between 6-18 months depending on each company’s policy.
Cobalt prices rallied strongly in 2021 with the Fastmarkets standard grade metal price up by 99.3% compared with the end of 2020, but the market is now being buffeted by both headwinds and tailwinds.
Benchmark cobalt prices continue to rise and that is lifting other cobalt prices in China, even though demand in China from NCM batteries is not as strong as it would have been had LFP batteries not seen a surge in demand. But, with so much of the world’s processing being done in China and the strained shipping conditions, it means supply from China to the international market is not as fluid as it would normally be.
With greater interest in LFP battery chemistries and with EV sales still potentially likely to suffer from the semiconductor shortage, we would not be surprised if the current rise in cobalt prices is limited and if prices fall back again as the fourth quarter of 2021 progresses.
We think prices are near their peak as we expect production increases in 2022, combined with weaker than expected demand from consumer electrics, due to semiconductor shortages, plus the surge in LFP demand, to weigh on prices.
Generally, for nickel and many other metals exposed to the energy transition, we see recent price weakness as a healthy correction within an ongoing bull market. Nickel’s performance in the past month supports that thesis.
While China’s economy may put the brakes on somewhat in the face of macro headwinds, history shows that the government is quick to resolve problems and preserve growth. Meanwhile, the rest of the world still looks structurally bullish – demand is robust, infrastructure projects are under way, electrification is accelerating, shipping congestion and supply disruptions are affecting availability, stock levels are low, and central banks seem to be in no hurry to raise interest rates. This picture gives us confidence to maintain a bullish bias in our price forecasts and gives traders the confidence to continue their buy-the-dip strategy.
After exhibiting relatively stable price performance for much of the year, graphite prices have posted impressive increases in recent weeks, spurred higher by a combination of rising costs and tighter supply in China, shipping issues and higher freight rates, and stronger than expected demand from the EV battery sector this year.
We maintain the view that both flake and spherical graphite prices will trend stable to higher in the near term. The only potential reprieve we see for graphite prices would be if the power constraints diminish EV lithium-ion battery production, and in turn reduce demand for graphite anodes sufficiently to stem the upward pressure on graphite prices.
Numerous challenges are ahead for the graphite industry as it develops to meet the needs of the rapidly growing EV sector. While debate persists around cathode chemistries, with LFP cathodes gaining ground in China in recent months at the expense of NCM cathodes, these various lithium-ion battery chemistries are all utilizing graphite anodes. In the coming years, exponential growth from the EV sector will propel the industry’s graphite requirement far above demand from traditional consuming sectors.