Renewable Energy and The Rise of the New Commodities

It’s no news to anyone that the commodities market has been a graveyard for investors in the last couple of years, with low prices and little sign of any positive catalysts. The global economic slowdown has affected goods such as steel, aluminium, copper and other commodities.

The 15-year commodity super cycle peaked circa 2008 and has experienced a trend of falling prices and stagnant/falling demand since. With lower market fundamentals and in China, commodities took another hit as demand fell off a cliff, with the expectation being that many commodities won’t recover for years as the world adjusts to a new structure, without heavy reliance on Chinese demand.

Demand for commodities is declining in part due to the deployment of renewable energies (RE). However, not all commodities are in a rut, some are actually benefiting from the rollout of RE as there are a few rising stars, that are making the world a *slightly greener* place.

The gold medal goes to:

Silver

solar-k8YG--621x414@LiveMint

Silver is an extremely important mental for industrial fabrication, as it accounts for about 56% of world silver demand relative to gold, which only accounts for 8%. This is largely because silver is a crucial component of cell phones, monitors and tablets, plasma TVs, cables, precision instruments, and many other tech products.

Silver has become one of the best-performing commodities this year, fuelled by an increase in interest from hedge funds and Chinese traders after it fell to an uncommonly large discount to gold.

This is partly due to a significant increase in installations and investment in solar panels, which uses silver for its electrical conductivity. According to the Silver Institute, 70 million ounces of silver are projected for use in solar panels by 2016.  A very thin “paste” made from silver is applied to the front and back end of crystalline-silicon solar cells using highly efficient ink-jet technology (like the one in your printer), spraying silver nanometric conductive inks on solar cells, cutting solar cell energy costs even further.

Moreover, with the solar industry just accounting for 6% of overall physical silver demand, global solar capacity is growing at an average rate of 53% a year in the last decade, underscoring future growth potential, according to London-based Capital Economics’s Simona Gambarini. 

In any case, it is important to bear in mind that the price of gold and silver will continue to be impacted by changes to monetary policy. Since they have quite stable supply and demand, these commodities are more of a “pure play” on inflation than traditional industrial metals, energy, or agricultural commodities. They may also be influenced by technical factors and the economics of exchange-traded fund (ETF) buying and selling, which could introduce volatility to these markets in the future. 

Secondly:

Lithium a.k.a “White Gold” or “the new Gasoline”

Lithium is a soft, highly reactive metal which is quickly becoming an interesting alternative commodity investment. With uses ranging from heat-resistant glass and ceramics, alloys used in aircraft, and lubricating greases. Lithium is the key ingredient in many rechargeable batteries, plug-in cars and electric vehicles like the Nissan Leaf, Tesla, and hybrids. About 30% of lithium supplies are used in these rechargeable batteries.

Analysts say demand will increase in the next 5 to 10 years as battery costs fall and electric vehicles and storage for grid power gain popularity. Today, the main lithium-ion battery makers are Samsung and LG of South Korea, Panasonic and Sony of Japan, and ATL of Hong Kong and BYD of China, whose government is scaling up the promotion of lithium-ion batteries and electric vehicles, with the biggest emphasis on city buses. Sales of “new energy” vehicles in China almost tripled in the first ten months of 2015 compared with the same period in 2014, to 171,000 (still it’s less than 1% of total vehicle sales).

Global Lithium Market Outlook @ Goldman Sachs HCID Conference, 3/16
Global Lithium Market Outlook @ Goldman Sachs HCID Conference, 3/16

Prices for lithium in China have risen 60% from about $7,000 a ton to over $20,000 recently, according to research by consultants CRU, while industry website Asian Metal says lithium carbonate, the compound used in batteries, has jumped by 76% in the past 12 months.

Still, it is not a relatively big business: lithium accounts for only about 5% of the materials in some car batteries, and for less than 10% of their cost. Worldwide sales of lithium salts are only about $1 billion a year. But it is a vital component of batteries that power everything from cars to smartphones, laptops and power tools. With demand for such high-density energy storage set to surge as vehicles become greener and electricity becomes cleaner.

Tesla, US electric car maker, will need to capture much of this growth as it will need 24,000 tonnes annually of lithium hydroxide, according to Benchmark Mineral Intelligence, out of a market last year of 50,000 tonnes. Moreover,  this year Tesla will begin production at its “Gigafactory” in Nevada, which it hopes will supply lithium-ion batteries for 500,000 cars a year within five years. J.B. Straubel, Tesla’s chief technical officer, says the firm wants to secure supplies of many battery materials, not just lithium.

Either way, larger automakers also have a growing demand for lithium. In a recent shift, Toyota has begun offering lithium-ion batteries in lieu of heavier less efficient nickel-metal hydride ones in its Prius hybrid.

Limited supply is another appealing factor that makes this metal a lucrative investment. 80% of the world’s lithium that is in Argentina, Chile and Bolivia (in the USA, Nevada is the only state that produces lithium), where the lithium is extracted from brine pools and refined.

Lithium is, for now, a tiny component of batteries, but  has the potential to shape the future of energy.

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