WHAT'S ALL THE FUSS ABOUT?

During LME week, over the end of October and beginning of November, the buzz around EV’s (Electric Vehicles) was palpable. As was it with two of its major base metal components, Copper and Nickel.

The two metals receiving plaudits from all quarters on potential future price movements after having both produced stellar returns this year. Copper up 23.55% to end of October and Nickel 22.70%.

However, are these particular base metals worthy of such praise when compared to the broader base complex. Have they been unfairly crowned in a beauty contest driven more by the seemingly unflappable noise around the Electric Vehicles than fundamentals? Have they actually outperformed?    

Figures as of 31/10/2017

What we have, in fact, witnessed, is a broad-based rally in base metals.

For example, Zinc has returned 26.75% year to date to end of October. Lead 19.71% and Aluminium 27.58%.

The rise of Electric Vehicles no doubt holds some sway in terms of demand over the longer term. It’s worth noting though that currently the market makes up only 1% of all vehicles sold. 

Even with a very large ramp up in production and with manufacturers and governments around the world moving towards the technology (See Arion article “Electric Vehicles – The Metals & The Means to Invest In Them”, October 2017) it’s still likely to be a good few years before a serious and sustained increase in demand from the technology takes effect.

It’s not that it won’t happen. More that it is perhaps overdone in terms of EV related metals versus the more broad-based rally that we are currently witnessing. At least in terms of coverage.

An exampleof this is the ramping up of Copper and Nickel during LME week around the EV buzz…and subsequent selloff. Yes, Copper will likely be a very big winner from the EV revolution. But its true effect in terms of fundamentals will likely start in 2019, where many analysts see a massive undersupply all the way to 2023, when new mines presently under development are due to start producing.

Also, on the Copper front, the main positive outcome driven by EV’s may not be the amount used in the batteries that power them, but the huge amount of copper that would need to be laid to upgrade power grids required to supply the power when we are recharging the cars at home and in (what we used to call) petrol stations. Particularly in developed economies where our grids are old, outdated and could not handle the capacity requirements.

On the Nickel front, a wave of new supply coming in from Indonesia and the Philippines should dent any short term EV upticks. Two thirds of the metal supplied is used in stainless steel verses a whole 3% of battery demand this year (Nickel Study Group) and we’re more likely to see the Chinese stainless-steel market cool after a two-year boom.

Base Market Moves over LME week;

Fundamental drivers, it could be argued (and at least in the near term), are more likely to come from the need for base metals in both renewables and the Chinese belt and road initiative.   

“There was a buzz around EV related base metals over LME week, especially in Nickel, which pushed prices higher. The subsequent sell-off would suggest this was more about sentiment than fundamentals” – Darius Tabatabai, Portfolio Manager at Arion Investment Management   

It’s obvious that the combination of geopolitical motives and new technology mean that EV’s are not going away. It might, however, be worth taking note of the other base metals also enjoying a stellar year and reassessing whether the hype around the EV technology is just that. Hype.

At least for now.

Figures as of 31/10/2017

Author; James Purdie, Head of Investor Relations

Disclaimer: Although this document has been issued by Arion Investment Management, it is important to note that the views of the author(s) may or may not represent that of the company. The document has been derived from sources believed to be current and accurate as at the date of release. The comments made are general in nature and do not take into account anyone’s personal needs, financial situation or requirements and past performance is not an indicator of future returns. Before acting upon anything associated with this document we would recommend seeking advice from your financial advisor.  

About the company; Arion Investment Management Limited is a commodity focused investment management company, based in London. The company is authorised and regulated by the Financial Conduct Authority (registered no. 742037).