Critical materials markets 2021 outlook

For 20 years, analyst Jon Hykawy has been looking at the global critical materials markets and providing advice to companies about the sector. The president of Toronto-based Stormcrow Capital spoke to The Northern Miner about what he thinks the new year will hold for this part of the mining industry.

The Northern Miner: What do you think the critical materials markets are generally going to be like in 2021?

Jon Hykawy: Well, I hope they will be improved. There’s an old adage that the best cure for high prices is high prices, and the best cure for low prices is low prices.

On the battery materials side we obviously had a weak period here with Covid striking demand in China, first, and then everywhere else thereafter. Lithium has been at a low ebb for a period of time. Contrary to what some have said, there really isn’t any more room for lithium prices to decline and, in fact, currently prices are moving up in China. And a number of the suppliers are actually withholding sales at this point, waiting for higher prices.

As far as cobalt and nickel go, we’re fairly confident demand is going to increase, and that’s going to drive up the price, because we don’t have a massive supply response in behind either one of those materials.

On the side of things like rare earths, we’re seeing a lot of noise in that space with prices moving up really dramatically over the last little while. Almost for certain, driven by speculative buying gambling on the willingness of the Chinese to cut off supply and drive up the price of rare earths. I’d be willing to stick my neck out and say the Chinese are not going to intervene in the actual rare earth market. But they may well put some controls in place on other critical materials depending on what the new U.S. administration does, starting in January.

TNM: How do you expect the lithium market to be like in the new year?

JH: I said earlier that lithium has been at a low [ebb] in price. The rationale behind lithium having to go higher is just that if the prices go much lower, no one is going to be able to supply spodumene to the conversion industry. So, lithium prices don’t really have a choice but to go up, provided we actually want more lithium.

We’ve been pretty carefully monitoring spodumene prices for a couple of months now, because we’ve seen car sales, new energy vehicle sales and battery consumption in China expanding dramatically since the end of the Covid shutdown there. So, the stockpile of spodumene in China is finally being worked through. And we are now seeing the beginning of price increases in spodumene, and we are seeing significant price increases in lithium carbonate. I expect to see 2021 as a year of increasing prices on the lithium side.

TNM: What are your thoughts about cobalt and nickel?

JH: On the cobalt side, as goes the automotive industry, as goes battery demand, so goes cobalt pricing. The dream of zero cobalt batteries? We’re still way away from that. There are enough batteries out there, in terms of demand, that require high energy density, that we still can’t make do without cobalt.

Just to be clear, cobalt is not the backbone for the energy density factor in modern lithium batteries. That’s nickel, predominantly. But cobalt provides operational stability. And we’re not crying for cobalt, so the prices have not gone berserk.

On the nickel side, there’s not really any shortage of nickel. That isn’t the issue. The issue is pure enough nickel at a low enough price. We expect to see those prices do reasonably well in 2021. We don’t see any reason for a retrenchment back to lows in nickel. There is enough demand out there, and supply will come back online.

TNM: What are your expectations for rare earths?

JH: I’ll say that I had higher prices forecasted for 2020 than occurred, because of the slowdown caused by the pandemic. But we’ve seen a speculative frenzy in the last few months that’s done a fair bit to drag those prices back up to our projected 2020 average. What I don’t see is that trend continuing.

Chinese authorities and the rare earths companies in China learned a bit of a lesson in 2010. The story we always hear is that rare earths are absolutely essential, we can’t live without them or civilization would collapse. That didn’t play out [in 2010]. What we saw back then was a crisis, an engineered rare earth crisis. And what happened to the Chinese industry was not pleasant. Because the prices skyrocketed, for a period of time the Chinese producers were making ridiculous money.  But they ended up with demand dropping away and prices collapsing. I don’t think they’re going to make the same mistake they made in 2010, regarding the rare earths themselves.

We expect rare earth prices to climb in value, we expect to see a relatively stable market and the only thing that’s going to cause a disruption would be some sort of breakdown in relations between China and the U.S. or the rest of the world.

TNM: Are there other critical materials that are overlooked and which we should keep an eye on in 2021?

JH: Well, tin’s long been a favourite of mine. You know, we’ve hit peak recycling levels, the secondary supplies of tin. The best supplies of tin are showing signs of depleting, and that’s worrisome. We’ve also gotten pretty close to optimizing the amount of solder that’s used per electrical connection in the electronics industry. And look, we’re in no danger of people buying less electronics. So, the demand for tin continues to rise, while the supply is somewhat constrained.

I’ve said for a while that tin is going to be one of the critical materials that we’re going to wake up one day and suddenly realize we’re in trouble. As long as we want to avoid the use of lead in electronics, we don’t have a choice. Tin is the direction we have to go in, so I’m bullish on tin.

TNM: What are the most important factors that will influence the critical materials market in the new year?

JH: I would say the tenor that is taken between the new U.S. administration and China.

You know, there are a number of really significant flashpoints that the Trump administration put in place. There were movements made months and months ago to limit the ability of companies to sell advanced semiconductors to certain Chinese entities. When you put in place regulations that limit the ability of China to build, for example, a 5G telephony network in China, using their selected providers of equipment, you are going to cause some repercussions.

However much we want to become independent of a Chinese supply chain for critical materials in the future, we are pretty heavily dependent on that supply chain at present. So, if you choose to pick a fight in a particular area, along the lines of what the Trump administration has done with semiconductors, then you run the risk of the Chinese stepping in and taking some very focused actions, perhaps limiting the exports of antimony to the U.S. Or you run the risk of the Chinese taking a broader approach, which could, for example, be to limit exports of gallium. Both of those materials are vital to certain industries, they are critical materials in their own right.

The idea of fighting a trade war is to cause asymmetric damage. And from my point of view, what the United States has been doing is they’ve been doing high profile things that are frankly going to cause almost as damage to U.S. and international companies as in China. Whereas the Chinese responses potentially could cause a lot more damage in the U.S. than they do economically in China.

I’m hoping cooler heads will prevail and we’re going to start seeing some thought put into the decisions that are made. It would be nice to see this new administration take a more thoughtful tack when it comes to trade.

TNM: What do you think those who are looking at the critical materials sector need to know about as 2021 begins?

JH: The sector has matured. The companies – and the people involved – have grown up. It’s not like it used to be a decade ago. And its global importance needs to be recognized.

I often say that we went through the bronze age, the iron age, and we’ve gone through the steel age and, arguably, we are probably in what we should term the critical materials age. I mean, you couldn’t really have a modern cell phone without that little bit of lithium in a battery. It’s those little bits of material – critical materials – that make all the difference today.

This interview has been edited and condensed.