Car Crash - Real Vision
27 / October / 2017
Car Crash
THE START OF SOMETHING BIG?
Gold miners bull trends since 1942 Source: Incrementum; ‘In Gold We Trust Report’
• • • •
Gold mining shares entered a new bull market in January 2016 when gold turned. The bull move has seen a 180% rise from the trough in the Gold Bugs Index. Even the shortest bull trend lasted a year longer than the present one has, and the lowest return was over 200% from the trough. Could the trend unfold slowly as in 1960–1968, or end with a powerful parabolic move as in 1971–197
STOCKS KEEP WINNING! Says Sentimentrader
Source: Sentimentrader
• • • •
Not time to be a bear yet, if history is anything to go by! There has never been such a concentrated number of record closes. Stocks don’t normally crash from all-time highs – historical precedents suggest further gains in the short term. This view is echoed in Nautilus’s recent piece looking for gains on the S&P until H1 2018.
THE WAIT IS OVER A SPECIAL REPORT By Daniel Ruiz This week in The Hack we have a special Big Call report from Daniel Ruiz, an expert on the US auto industry. Some of you will have seen Daniel’s RV TV piece on the perfect storm brewing in the space. This week we give you an extended Hack special, featuring an in-depth piece of research from Daniel on where the US auto industry stands right now.
Blinders Off, LLC Before I get started, I’d like to share a few important things that will help bring perspective to my analysis. •
Eighty-six percent of consumers purchasing a new vehicle use financing. The frequency of replacement (trade cycles) by this group significantly impacts the velocity of new-vehicle sales.
Source: Experian
• •
Under normal conditions, vehicles financed for 60 or 72 months are traded at 36 or 42 months, respectively. Most leases have a 36-month duration and are held till maturity. Think of new-vehicle sales as potential used-vehicle supply. The moment the ownership paperwork is completed on a new vehicle, it becomes a used vehicle.
Why used vehicle values? Only jobs and credit are more important than used-vehicle values are to the health of the auto industry. Fully 86% of new-vehicle sales are financed, and under normal conditions the majority of those vehicles are traded within three years. Knowing that most car loans have a 60–72-month duration, we can assume that the majority of vehicles traded at the three-year mark are not paid off. The level of equity in these loans directly affects consumer behavior and in large part determines when the vehicle will be traded for another new vehicle. The frequency with which this very large group of consumers trades vehicles on which they still carry loans is one of the most important factors in new-vehicle sales velocity. I can make a strong argument that when used-vehicle values decline sufficiently, they can outweigh the positive effects of strong jobs and easy credit – we’ve seen this already this year.
2017 recap Here’s what we’ve witnessed to date after record-breaking new-vehicle sales in 2016. Used-vehicle values fell, slowing the velocity of new-vehicle sales as people chose used over new. Inventory piled up at retail dealers; and after dealers failed to stimulate sales of new vehicles through bigger discounts and incentives, manufacturers were forced to slow or halt production to manage day- supply levels. In June of this year, used-vehicle values began to stabilize because wholesale supply (inventory from rental vehicle companies) tightened and demand for used cars rose as new-vehicle sales fell (newvehicle sales provide trade-ins to be resold on the used-vehicle market). Another drop in used-vehicle values will trigger the same cycle again, although this time it will be much worse because used-vehicle value performance impacts residual value decisions for new leases. When residual values fall, monthly payments will rise, adding another layer of resistance to retail sales growth. Please read ‘The Perfect Storm 2 – Autonomics’ for a more detailed explanation on the importance of leasing.
Hurricanes to the rescue? After this year’s sales lagged last year’s for eight months in a row, September marked the first sales gain of 2017. This happened in large part because approximately 600,000 vehicles incurred flood damage during hurricanes Harvey and Irma and had to be replaced. However, I believe that the perceived benefits to vehicle sales of these hurricanes are wildly overstated. To date, approximately 400,000 insurance claims have been filed, but only those claimants with full coverage insurance will receive the replacement value of their vehicle. There were also 125,000 jobs lost due to Harvey alone. Employment is one of the most important requirements when would-be buyers attempt to secure an auto loan. That said, August and September sales volumes were affected by the storms. While September results were strong, it’s important to note that only 63,881 more vehicles were sold than in the same months of 2016. With so many vehicles destroyed and such a small number of additional vehicles sold, I can’t help but wonder how much September weakness these hurricanes masked. Some analysts are forecasting continued strength through Q1 of 2018 – I strongly disagree. It simply does not take that long to replace a lost vehicle once an insurance claim is filed. I believe the sales spike in September may have included the majority of the demand for replacement vehicles and that the coming months will see little residual benefit from these unexpected events. The hurricanes were also responsible for the largest spike in used-vehicle values this year. Retail dealers aggressively bought used vehicles at auction, based on speculative forward demand assumptions. I say speculative because normal, healthy demand starts with a sale. A dealer sells a vehicle then buys another to maintain proper inventory levels. This sales spike waved a huge red flag for two reasons. First, all of the vehicles lost will not be replaced, at least not in the short term. Second, with a high day supply of new vehicles and all-time high incentives, much of the replacement demand may be absorbed by newvehicle sales instead of used-vehicle sales. If retail dealers get stuck with this inventory after paying a strong premium, they will not return to auctions until those vehicles are sold. In early September I was concerned that a drop in demand from dealers occurring the same time that lease return volume picks up in the fourth quarter could cause a sharp drop in used-vehicle values. Where are we now? My concerns were well founded. I noticed a buildup of wholesale supply in mid-September that has now grown to the largest I’ve tracked all year. Without adequate demand to absorb the build in wholesale supply, used-vehicle prices have fallen significantly in October. How significantly? Enough to erase all of the gains in September as well as all of the gains going back as far as June, when used-vehicle values began to stabilize. For months, I’ve been preaching patience to investors with an interest in shorting auto-related equities. I expected a rebound in new-vehicle sales as retail dealers and manufacturers continued to offer larger and larger discounts in response to a day-supply problem that for some reached 2008 crisis levels. A combination of all-time-high incentive spending and replacement demand from the hurricanes satisfied this necessary piece of the puzzle in September. I also expected a bounce in used-vehicle values, which came to fruition as well.
In my professional opinion, the time to act is now. The events I’ve described should start the same vicious cycle that we witnessed earlier this year, although this time with more acute ramifications. Will used-vehicle values continue to fall? The simple answer is yes – mostly because of the performance of used-vehicle values versus residual values on active leases. When used-vehicle values underperform their respective residual values at maturity, the return rates for the captive banks rise. Higher return rates lead to more inventory at wholesale auctions, leading to lower used-vehicle values. Lease return volume will continue to grow steadily along with higher return rates, peaking sometime in late 2019. Here are a couple of examples of maturity curves going forward, using information found in recent auto lease ABS filings for Ford and Mercedes: Lease maturity profiles
Source: S&P
Another factor to consider is margin compression. As more used vehicles enter the retail market, consumers will have more options, and retail dealers will have to compete harder to earn their business. It’s important to understand the difference between new vehicles and used vehicles with regard to margin compression. Unlike new vehicles, which have a set cost for all retailers, used vehicles are subject to natural price discovery. A used vehicle is always awarded to the highest bidder at a wholesale auction. Consider for a moment how used-vehicle managers and buyers think: First, what will the vehicle sell for in my market? Second, what is my estimated reconditioning cost, auction fee, transportation expense, etc.? Third, how much profit do I want to make? What’s left over is the bid limit. As margins compress due to growing competition, the calculations are adjusted and bid limits keep falling.
What stops the vicious cycle of falling used-vehicle values? As I stated at the beginning of the article, think of new-vehicle sales as used-vehicle supply. The same thing that stopped the decline in used-vehicle values during the last recession will be needed this time around: years of declining new-vehicle sales. Total vehicle sales
Source: FRED
Falling new-vehicle sales volume will negatively impact a wide range of companies in the automotive industry, including manufacturers, suppliers, lenders, and retail dealers. Falling used-vehicle values will affect the same companies, but none more directly than rental car companies, whose largest expense is per-unit depreciation. About Blinders Off, LLC The most memorable question I have been asked by an investor to date is, What makes Blinders Off, LLC different? The answer: I measure the cause, not the effect. I focus on the WHY and the HOW to better predict the WHAT. Respectfully, I believe that most analysts measure the WHAT to predict the WHAT. This approach leaves analysts vulnerable to the limits of linear thinking, blinding them at critical inflection points. I actively track and interpret all of the data points discussed. I am confident that I can bring value to you or your team with my unique approach to auto analysis.
NICKEL THE EV LAGGARD Note that in order to convey the full story this week, we have only one ‘Are You On This Yet’ piece. While we are on the topic of autos, it seems fitting to revisit the natural resources challenges for EVs with a look at nickel. Nickel is a base metal that is used in variety of industrial applications. It is added to steel for corrosion resistance and is often used for its bright and lustrous appearance in coins, jewellery, etc. Nickel has also been used in batteries, such as NiCad batteries, which have recently been superseded by lithium ion designs. It is, however, still a vital component in battery manufacturing for EVs.
Nickel price Last week in The Hack we looked at the bullish fundamentals driving the cobalt price, as identified by The Bear Traps Report. The report focused in particular on cobalt’s limited supply dynamics, given the potential for explosive demand growth for EV batteries. Lithium and associated stocks like FMC, SQM, and the LIT ETF have also seen interstellar price performance, but the nickel price has remained fairly mundane:
Electric vehicle commodity race is in full swing
Source: The Bear Traps Report
Certainly, nickel has seen some upward price action since the 2016 commodities low, but returns have been muted. This metal still trades more like the broad-based metals complex – zinc, lead, and tin – than a hotly demanded, supply-constrained commodity. However, things seem to have been turning up broadly in the metals space since July 2017 – something Greg Weldon forewarned us of in his jam-packed commodity-focused slide series ‘Let’s get ready to rumble’!
Source: WeldonLive
Nickel supply Interestingly, much of the nickel mined on Earth, such as the deposits found in Sudbury, Canada, is thought to be derived from meteorites, which are composed of iron and nickel. Nickel deposits are few and far between but tend to be rich in the mineral. Global supply is around 2,000KT, and it has been falling due to high capital investment requirements to exploit new supply, coupled with low demand. All the major players have been reducing capacity due to underinvestment. Nickel demand Nickel demand looks set to grow, which could move the supply balance into a deficit. Norn Nickel are one of the world’s largest producers, and they see the market tightening substantially by 2018:
Source: Nornnickel
They expect a 75KT deficit to emerge in 2018 as demand picks up from Asian stainless-steel producers and the broader global economy starts to heat up. Now add to the mix in this tight market the projected increase from EV demand in 2020 of ~90KT, rising to as much as 2,400KT by 2040, per The Bear Traps Report, and you can see the future scale of investment required in nickel mining. The market for nickel is not as tight today as are those for lithium and cobalt, but it could get a lot tighter.
Changing the chemistry ‘There is no cure for high prices like high prices.’ With cobalt prices going through the roof, could substitution with nickel be the answer? Many Asian battery makers are switching to ‘NMC’ lithium-ion batteries that use more nickel: SEOUL, Aug 3 (Reuters) – Soaring cobalt prices are prompting Asia’s top battery makers to tweak the recipe for lithium-ion batteries used to power electric cars and mobile phones – reducing the amount of cobalt and adding more nickel. Popular nickel, manganese and cobalt (NMC) lithium-ion batteries typically employ a ratio of 60 percent nickel to 20 percent cobalt and 20 percent manganese, or 6:2:2, said South Korea’s SK Innovation, which aims to change the composition of these cathode materials to 80 percent nickel, 10 percent cobalt and 10 percent manganese. – Reuters Now, nickel supply is obviously more elastic than cobalt supply is, and global reserves are much higher. (In fact, cobalt supply tends to follow nickel supply, since cobalt is a by-product of copper and nickel mining). But that same supply is always under threat from environmental shutdowns that have hit mines in the Philippines and Russia. The medium-term supply deficit could create some interesting dynamics in the nickel industry if current industrial demand for use in steel pushes the market into a deficit, even before large-scale EV adoption occurs.
A nickel for your thoughts? The breakout in nickel since July looks bullish, as it has broken the resistance that Greg Weldon identified. The fundamentals and price movement stack up for a shift higher if the global inflation pickup we have been seeing continues.
The BOJ’s ETF mania, quantified This fascinating piece from VoxEU looks at the implications of the BOJ’s quiet but substantial purchases of domestic ETFs. The BOJ owned an estimated ¥20 trillion of equities at the end of July 2017, which was 3.2% of the total Japanese stock market! The BOJ could hold as much as 10% of the entire market by 2022 – but with their aggressive purchases of JGBs they seem to be running out of stuff to buy. How long before they own more equities than the Japanese government pension fund? Chinese environmentalism is real This article from Bloomberg shows the commitment to change at the 19th Communist Party Congress: China will prevent shuttered or illegal steel plants from resuming operations, according to an official at the nation’s top economic planning body. The world’s biggest steel producer has ordered illegal mills to close, both to reduce overcapacity and clean up the environment. China may be changing more deeply than many imagine. The excessive pollution of its recent development has left cities like Beijing oppressed with heavy smog; air and water quality have suffered greatly. Remember, the Chinese government has one imperative: Stay in power. It may not be a democracy, but it must still satisfy its citizens’ basic needs. We are now preparing to revamp and rebrand both Real Vision Publications and The Hack before the end of the year. Our mission is to raise our standards even higher and bring our content even closer to what is happening in the markets each week. Prepare yourselves! See you next time,
Milton
Disclaimer: You understand that no Content published, as part of the Services, constitutes a recommendation or a statement that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Neither the Site nor the Services are intended by Real Vision to provide, tax, legal or investment advice, and nothing on the Site or in the Services should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Real Visi on or any third party. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult with an attorney and tax professional regarding your specific legal and tax situation. You further understand that none of the creators or providers of our Content and Services, or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the Content published as part of the Services may be deemed to be investment advice, such information is impers onal and not tailored to the investment needs of any specific person but is for general, educational purposes.
Car Crash
THE START OF SOMETHING BIG?
Gold miners bull trends since 1942 Source: Incrementum; ‘In Gold We Trust Report’
• • • •
Gold mining shares entered a new bull market in January 2016 when gold turned. The bull move has seen a 180% rise from the trough in the Gold Bugs Index. Even the shortest bull trend lasted a year longer than the present one has, and the lowest return was over 200% from the trough. Could the trend unfold slowly as in 1960–1968, or end with a powerful parabolic move as in 1971–197
STOCKS KEEP WINNING! Says Sentimentrader
Source: Sentimentrader
• • • •
Not time to be a bear yet, if history is anything to go by! There has never been such a concentrated number of record closes. Stocks don’t normally crash from all-time highs – historical precedents suggest further gains in the short term. This view is echoed in Nautilus’s recent piece looking for gains on the S&P until H1 2018.
THE WAIT IS OVER A SPECIAL REPORT By Daniel Ruiz This week in The Hack we have a special Big Call report from Daniel Ruiz, an expert on the US auto industry. Some of you will have seen Daniel’s RV TV piece on the perfect storm brewing in the space. This week we give you an extended Hack special, featuring an in-depth piece of research from Daniel on where the US auto industry stands right now.
Blinders Off, LLC Before I get started, I’d like to share a few important things that will help bring perspective to my analysis. •
Eighty-six percent of consumers purchasing a new vehicle use financing. The frequency of replacement (trade cycles) by this group significantly impacts the velocity of new-vehicle sales.
Source: Experian
• •
Under normal conditions, vehicles financed for 60 or 72 months are traded at 36 or 42 months, respectively. Most leases have a 36-month duration and are held till maturity. Think of new-vehicle sales as potential used-vehicle supply. The moment the ownership paperwork is completed on a new vehicle, it becomes a used vehicle.
Why used vehicle values? Only jobs and credit are more important than used-vehicle values are to the health of the auto industry. Fully 86% of new-vehicle sales are financed, and under normal conditions the majority of those vehicles are traded within three years. Knowing that most car loans have a 60–72-month duration, we can assume that the majority of vehicles traded at the three-year mark are not paid off. The level of equity in these loans directly affects consumer behavior and in large part determines when the vehicle will be traded for another new vehicle. The frequency with which this very large group of consumers trades vehicles on which they still carry loans is one of the most important factors in new-vehicle sales velocity. I can make a strong argument that when used-vehicle values decline sufficiently, they can outweigh the positive effects of strong jobs and easy credit – we’ve seen this already this year.
2017 recap Here’s what we’ve witnessed to date after record-breaking new-vehicle sales in 2016. Used-vehicle values fell, slowing the velocity of new-vehicle sales as people chose used over new. Inventory piled up at retail dealers; and after dealers failed to stimulate sales of new vehicles through bigger discounts and incentives, manufacturers were forced to slow or halt production to manage day- supply levels. In June of this year, used-vehicle values began to stabilize because wholesale supply (inventory from rental vehicle companies) tightened and demand for used cars rose as new-vehicle sales fell (newvehicle sales provide trade-ins to be resold on the used-vehicle market). Another drop in used-vehicle values will trigger the same cycle again, although this time it will be much worse because used-vehicle value performance impacts residual value decisions for new leases. When residual values fall, monthly payments will rise, adding another layer of resistance to retail sales growth. Please read ‘The Perfect Storm 2 – Autonomics’ for a more detailed explanation on the importance of leasing.
Hurricanes to the rescue? After this year’s sales lagged last year’s for eight months in a row, September marked the first sales gain of 2017. This happened in large part because approximately 600,000 vehicles incurred flood damage during hurricanes Harvey and Irma and had to be replaced. However, I believe that the perceived benefits to vehicle sales of these hurricanes are wildly overstated. To date, approximately 400,000 insurance claims have been filed, but only those claimants with full coverage insurance will receive the replacement value of their vehicle. There were also 125,000 jobs lost due to Harvey alone. Employment is one of the most important requirements when would-be buyers attempt to secure an auto loan. That said, August and September sales volumes were affected by the storms. While September results were strong, it’s important to note that only 63,881 more vehicles were sold than in the same months of 2016. With so many vehicles destroyed and such a small number of additional vehicles sold, I can’t help but wonder how much September weakness these hurricanes masked. Some analysts are forecasting continued strength through Q1 of 2018 – I strongly disagree. It simply does not take that long to replace a lost vehicle once an insurance claim is filed. I believe the sales spike in September may have included the majority of the demand for replacement vehicles and that the coming months will see little residual benefit from these unexpected events. The hurricanes were also responsible for the largest spike in used-vehicle values this year. Retail dealers aggressively bought used vehicles at auction, based on speculative forward demand assumptions. I say speculative because normal, healthy demand starts with a sale. A dealer sells a vehicle then buys another to maintain proper inventory levels. This sales spike waved a huge red flag for two reasons. First, all of the vehicles lost will not be replaced, at least not in the short term. Second, with a high day supply of new vehicles and all-time high incentives, much of the replacement demand may be absorbed by newvehicle sales instead of used-vehicle sales. If retail dealers get stuck with this inventory after paying a strong premium, they will not return to auctions until those vehicles are sold. In early September I was concerned that a drop in demand from dealers occurring the same time that lease return volume picks up in the fourth quarter could cause a sharp drop in used-vehicle values. Where are we now? My concerns were well founded. I noticed a buildup of wholesale supply in mid-September that has now grown to the largest I’ve tracked all year. Without adequate demand to absorb the build in wholesale supply, used-vehicle prices have fallen significantly in October. How significantly? Enough to erase all of the gains in September as well as all of the gains going back as far as June, when used-vehicle values began to stabilize. For months, I’ve been preaching patience to investors with an interest in shorting auto-related equities. I expected a rebound in new-vehicle sales as retail dealers and manufacturers continued to offer larger and larger discounts in response to a day-supply problem that for some reached 2008 crisis levels. A combination of all-time-high incentive spending and replacement demand from the hurricanes satisfied this necessary piece of the puzzle in September. I also expected a bounce in used-vehicle values, which came to fruition as well.
In my professional opinion, the time to act is now. The events I’ve described should start the same vicious cycle that we witnessed earlier this year, although this time with more acute ramifications. Will used-vehicle values continue to fall? The simple answer is yes – mostly because of the performance of used-vehicle values versus residual values on active leases. When used-vehicle values underperform their respective residual values at maturity, the return rates for the captive banks rise. Higher return rates lead to more inventory at wholesale auctions, leading to lower used-vehicle values. Lease return volume will continue to grow steadily along with higher return rates, peaking sometime in late 2019. Here are a couple of examples of maturity curves going forward, using information found in recent auto lease ABS filings for Ford and Mercedes: Lease maturity profiles
Source: S&P
Another factor to consider is margin compression. As more used vehicles enter the retail market, consumers will have more options, and retail dealers will have to compete harder to earn their business. It’s important to understand the difference between new vehicles and used vehicles with regard to margin compression. Unlike new vehicles, which have a set cost for all retailers, used vehicles are subject to natural price discovery. A used vehicle is always awarded to the highest bidder at a wholesale auction. Consider for a moment how used-vehicle managers and buyers think: First, what will the vehicle sell for in my market? Second, what is my estimated reconditioning cost, auction fee, transportation expense, etc.? Third, how much profit do I want to make? What’s left over is the bid limit. As margins compress due to growing competition, the calculations are adjusted and bid limits keep falling.
What stops the vicious cycle of falling used-vehicle values? As I stated at the beginning of the article, think of new-vehicle sales as used-vehicle supply. The same thing that stopped the decline in used-vehicle values during the last recession will be needed this time around: years of declining new-vehicle sales. Total vehicle sales
Source: FRED
Falling new-vehicle sales volume will negatively impact a wide range of companies in the automotive industry, including manufacturers, suppliers, lenders, and retail dealers. Falling used-vehicle values will affect the same companies, but none more directly than rental car companies, whose largest expense is per-unit depreciation. About Blinders Off, LLC The most memorable question I have been asked by an investor to date is, What makes Blinders Off, LLC different? The answer: I measure the cause, not the effect. I focus on the WHY and the HOW to better predict the WHAT. Respectfully, I believe that most analysts measure the WHAT to predict the WHAT. This approach leaves analysts vulnerable to the limits of linear thinking, blinding them at critical inflection points. I actively track and interpret all of the data points discussed. I am confident that I can bring value to you or your team with my unique approach to auto analysis.
NICKEL THE EV LAGGARD Note that in order to convey the full story this week, we have only one ‘Are You On This Yet’ piece. While we are on the topic of autos, it seems fitting to revisit the natural resources challenges for EVs with a look at nickel. Nickel is a base metal that is used in variety of industrial applications. It is added to steel for corrosion resistance and is often used for its bright and lustrous appearance in coins, jewellery, etc. Nickel has also been used in batteries, such as NiCad batteries, which have recently been superseded by lithium ion designs. It is, however, still a vital component in battery manufacturing for EVs.
Nickel price Last week in The Hack we looked at the bullish fundamentals driving the cobalt price, as identified by The Bear Traps Report. The report focused in particular on cobalt’s limited supply dynamics, given the potential for explosive demand growth for EV batteries. Lithium and associated stocks like FMC, SQM, and the LIT ETF have also seen interstellar price performance, but the nickel price has remained fairly mundane:
Electric vehicle commodity race is in full swing
Source: The Bear Traps Report
Certainly, nickel has seen some upward price action since the 2016 commodities low, but returns have been muted. This metal still trades more like the broad-based metals complex – zinc, lead, and tin – than a hotly demanded, supply-constrained commodity. However, things seem to have been turning up broadly in the metals space since July 2017 – something Greg Weldon forewarned us of in his jam-packed commodity-focused slide series ‘Let’s get ready to rumble’!
Source: WeldonLive
Nickel supply Interestingly, much of the nickel mined on Earth, such as the deposits found in Sudbury, Canada, is thought to be derived from meteorites, which are composed of iron and nickel. Nickel deposits are few and far between but tend to be rich in the mineral. Global supply is around 2,000KT, and it has been falling due to high capital investment requirements to exploit new supply, coupled with low demand. All the major players have been reducing capacity due to underinvestment. Nickel demand Nickel demand looks set to grow, which could move the supply balance into a deficit. Norn Nickel are one of the world’s largest producers, and they see the market tightening substantially by 2018:
Source: Nornnickel
They expect a 75KT deficit to emerge in 2018 as demand picks up from Asian stainless-steel producers and the broader global economy starts to heat up. Now add to the mix in this tight market the projected increase from EV demand in 2020 of ~90KT, rising to as much as 2,400KT by 2040, per The Bear Traps Report, and you can see the future scale of investment required in nickel mining. The market for nickel is not as tight today as are those for lithium and cobalt, but it could get a lot tighter.
Changing the chemistry ‘There is no cure for high prices like high prices.’ With cobalt prices going through the roof, could substitution with nickel be the answer? Many Asian battery makers are switching to ‘NMC’ lithium-ion batteries that use more nickel: SEOUL, Aug 3 (Reuters) – Soaring cobalt prices are prompting Asia’s top battery makers to tweak the recipe for lithium-ion batteries used to power electric cars and mobile phones – reducing the amount of cobalt and adding more nickel. Popular nickel, manganese and cobalt (NMC) lithium-ion batteries typically employ a ratio of 60 percent nickel to 20 percent cobalt and 20 percent manganese, or 6:2:2, said South Korea’s SK Innovation, which aims to change the composition of these cathode materials to 80 percent nickel, 10 percent cobalt and 10 percent manganese. – Reuters Now, nickel supply is obviously more elastic than cobalt supply is, and global reserves are much higher. (In fact, cobalt supply tends to follow nickel supply, since cobalt is a by-product of copper and nickel mining). But that same supply is always under threat from environmental shutdowns that have hit mines in the Philippines and Russia. The medium-term supply deficit could create some interesting dynamics in the nickel industry if current industrial demand for use in steel pushes the market into a deficit, even before large-scale EV adoption occurs.
A nickel for your thoughts? The breakout in nickel since July looks bullish, as it has broken the resistance that Greg Weldon identified. The fundamentals and price movement stack up for a shift higher if the global inflation pickup we have been seeing continues.
The BOJ’s ETF mania, quantified This fascinating piece from VoxEU looks at the implications of the BOJ’s quiet but substantial purchases of domestic ETFs. The BOJ owned an estimated ¥20 trillion of equities at the end of July 2017, which was 3.2% of the total Japanese stock market! The BOJ could hold as much as 10% of the entire market by 2022 – but with their aggressive purchases of JGBs they seem to be running out of stuff to buy. How long before they own more equities than the Japanese government pension fund? Chinese environmentalism is real This article from Bloomberg shows the commitment to change at the 19th Communist Party Congress: China will prevent shuttered or illegal steel plants from resuming operations, according to an official at the nation’s top economic planning body. The world’s biggest steel producer has ordered illegal mills to close, both to reduce overcapacity and clean up the environment. China may be changing more deeply than many imagine. The excessive pollution of its recent development has left cities like Beijing oppressed with heavy smog; air and water quality have suffered greatly. Remember, the Chinese government has one imperative: Stay in power. It may not be a democracy, but it must still satisfy its citizens’ basic needs. We are now preparing to revamp and rebrand both Real Vision Publications and The Hack before the end of the year. Our mission is to raise our standards even higher and bring our content even closer to what is happening in the markets each week. Prepare yourselves! See you next time,
Milton
Disclaimer: You understand that no Content published, as part of the Services, constitutes a recommendation or a statement that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Neither the Site nor the Services are intended by Real Vision to provide, tax, legal or investment advice, and nothing on the Site or in the Services should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Real Visi on or any third party. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult with an attorney and tax professional regarding your specific legal and tax situation. You further understand that none of the creators or providers of our Content and Services, or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the Content published as part of the Services may be deemed to be investment advice, such information is impers onal and not tailored to the investment needs of any specific person but is for general, educational purposes.
