Welcome to Hot Commodities Edition 5: Hopped Up on Lithium
Lithium Market IPO
Used in the lithium ion batteries prevalent in just about every electronic device you own, demand for raw lithium is booming following strong demand in electric vehicles, whose batteries dwarf those in other applications. Growth for lithium will continue, with many analysts expecting demand to outpace marginal supply by significant amounts.
All eyes in the mining industry are on FMC Corp as they plan a spin-off and IPO of the lithium division -- the first all-lithium miner IPO -- to be named Livent Corp. While the commodity is hot, public lithium miners are somewhat diversified and have had rather volatile returns over the past few years. This IPO should be a good test of investor’s appetite for a pure lithium mining play.
Lithium is produced in two different ways, in two relatively disconnected markets: 1) from ores mined from the ground and 2) from salt flats, which use evaporation to concentrate the lithium metal (aerial view on the left). North Carolina-based Albemarle dominates hard rock production, primarily in Australia, while brine extraction is concentrated in South America, in Chile, Argentina, and Bolivia, and production is growing in China. SQM and FMC are two of the largest in the brine extraction market, while Tianqi and Ganfeng have projects for both hard rock and brine. Cumulatively, these five producers make up a lion’s share of the market, while many junior firms are having problems ramping up their own projects to be able to produce battery-grade lithium consistently, and produce near or below mine capacity.
Shortly after the announcement of the IPO, Reuters reported that Albemarle is considering buying the rival pure lithium spin-off should the float fail.
Will further concentration in the industry help with market development? While large concentration in production will allow for economies of scale, innovation is never at the forefront compared to markets with more players. Effective price discovery is difficult in concentrated markets as dominant players are reluctant to give real-time information about marketing prices.
Higher prices will certainly spur more investment in the mines, but how effective will those be at efficiently increasing production? It’s a big question for every automaker hopping on the EV train.
Physical Gas M&A
More M&A in the energy space. Pinnacle Asset Management, L.P., a $2.3 billion asset manager, announced further expansion into physical natural gas trading through an acquisition of Sierentz Global Merchants LLC. Sierentz, controlled by members of the Louis-Dreyfus family but operating independently, announced its exit from physical energy trading in July.
The appetite of financial asset managers for physical gas exposure follows with Goldman Sachs’ buying physical LNG cargoes, and this trend should continue in both pipeline and LNG as the LNG markets further commoditize.
Malt and Hops
Speaking of Corporate Development, it’s been hot in physical commodities the past few years. ABCDs have been divesting non-core assets and bolstering seemingly core ones.
Cargill is currently exploring options to spin off or divest their malting division, following the closing earlier this year of a North Dakota malting factory. This closure was blamed on the changing preferences of craft breweries responsible for most of the growth in the U.S. beer market, as well as the higher production of malt extract in two-row barley and the subsequent lowering of net costs.
Considering how quickly craft brewery tastes change, this could bolster prices for six-row if brewers suddenly get a craving for a throwback.
Beer input markets have been through some tough years. After a boom in hops demand from a switch in tastes towards ultra-hoppy flavors, prices followed with some varieties hitting $23/lb, up from low single digits.
Hop vines have a three year lead time from planting until brew-able harvest, with high upfront fixed costs for switching acres due to soil preparation, lattice work, and irrigation. When prices boomed, many farmers switched in expectation of high prices to stay, and breweries were eager to sign long term contracts to ensure supply. Shortly after these contracts were signed, brewers started switching away from high hops beers due to high prices. After planted acreage doubled over 5 years, heavy supply hit the market right as demand waned and craft brewery growth slowed. The result was a crash with prices with some varieties reaching sub $2/lb.
These term contract issues are all too familiar in frac sand markets.
Frac Sand Update
What’s happening in the frac sand market? A bit of mud apparently. Here’s an excerpt from our weekly update:
“West Texas was hammered by rain all last week. Accuweather reported 1.25 inches in Kermit and 2.2 inches in Monahans. Those who have lived in West Texas (guns up!) know that even 1/10th of an inch can cause flooding and render entire cities inoperable. On the supply side, mining operations have been slowed and even halted by flooding, while demand was also temporarily slowed due to logistical difficulties, causing a net neutral reaction in market pricing.”
We’ll be exploring potential effects of weather on the sand markets in our upcoming market wires, particularly when the upper Midwest and west Texas start freezing. Will sand mine freeze-offs combined with minimal storage hit right at a time when completion sheets are heating up?
A note from CEO Julie Lerner:
I am surprised by the strong and definitive reactions to my post in the previous edition of HC. It's clear that what I've been ranting about on social media is exactly what's missing from the blockchain conversation today. For example, our home state of Colorado is striving, like many, to become a global blockchain epicenter.There's a big, second annual conference coming up. But take a look at this roster of speakers. Can you tell what's missing? As with so many other conferences, the speaker lineup is full of highly intelligent and accomplished individuals. But there seem to be only a handful of speakers in the lineup who represent what they all need: the actual users of blockchain. Even after we navigate around the hype, we find that there is an (over)abundance of funding being thrown at this new technology and its potential. There are highly capable individuals running the software firms andr the generic alliance that discusses potential use cases, but they lack familiarity with the needs of the physical commodity industry.
There is tremendous potential for the technology, but it will not happen overnight. What we need is focused, industry-wide discussions between the actual suppliers, processors, traders, and end-buyers of the commodities that feed and fuel the world. Let's get on the same page with regard to what blockchain really is and what it can do for us. Establish our priorities in the near term. Only then will the industry leaders begin to shop around for technology and, as an industry, agree on the path forward.
I'm off to open our Singapore office but will be looking at ways to get this off the ground in Q4. In the meantime, please don't go dumping millions on a blockchain solution until it's clear you know what you want from it and the results are within reach.
Have we reached ‘Peak Blockchain Conference’ yet? Forbes fills you in: