Drivers of Base Metals Price Volatility

Price volatility for minerals and metals required for the clean energy transition—including cobalt, nickel, and lithium—has become a significant deterrent to private sector mining investment. In March 2024, the S&P Global Market Intelligence’s Pipeline Activity Index—a single score that gauges the activity level in the commodity supply chain, factoring in drill results, initial resource announcements, financing, and positive project development milestones—dropped 30 percent, from 88 to 61—the lowest since the peak of the Covid-19 pandemic four years ago.

A critical question to ask is why prices are dropping given long-term global decarbonization goals that will require mineral-intensive clean energy technologies. At the beginning of 2021, JPMorgan analysts took a bullish view on minerals and metals, suggesting that the world has likely entered its fifth commodity supercycle since the early 1900s. A supercycle, by definition, spans at least 10 years. Yet today, cobalt, nickel, and lithium prices are currently at their lowest in over 2.5 years. There are three key reasons that can be attributed to this: macroeconomic headwinds, a sluggish Chinese economy, and Chinese market manipulation that has generated commodity surpluses.

Global Macroeconomic Headwinds

The Federal Reserve raised interest rates in 2022 and 2023 in an effort to rein in inflation. When interest rates are high, individuals are less inclined to purchase new cars, computers, household appliances, and other “luxury” items that require minerals and metals. As the graph below shows, commodity prices began collapsing as interest rates began rising. Eleven consecutive interest rate hikes had significant impact on the price of key base metals.

Relationship between Interest Rates and Base Metals Prices

Source: S&P Global Commodity Insights.

The impact of interest rate hikes on electric vehicles (EVs) has been particularly profound. Until March 2023, dealerships sold EVs faster than gasoline-powered vehicles. When the Federal Reserve increased interest rates another 25 basis points to 5 percent, a significant divergence emerged—gasoline-powered vehicles, which average $44,112, began selling significantly faster than EVs, which average $51,668. By the end of 2023, an EV took an average of nearly 70 days for a dealership to sell, compared to 42 days for a gasoline-powered vehicle. This is largely because higher interest rates mean that buying cars is more expensive—so consumers are more likely to go with the cheaper option.

There has been a direct knock-on effect on demand for most base metals. As the graph below shows, the vast majority of demand for critical minerals is expected to be from EVs. International Energy Agency modeling from 2020 showed that less than 2 million metric tons of critical minerals would be driven by EV demand that year; by 2030, this would increase to over 30 million tons (roughly 75 percent of minerals demand for clean tech); and by 2050, EV demand would drive over 130 million tons of critical minerals (roughly 90 percent of minerals demand for cleantech). The slowdown of EV sales, underpinned by high interest rates, has unexpectedly driven down demand for the metals required to manufacture them.

Sluggish Chinese Economy

China’s economic growth over the past two decades has been strong and the country has been a driver of global demand for mineral-intensive goods. It is the largest consumer of base metals, accounting for 50 percent of the global output. Between 2000 and 2019, gross domestic product growth rates ranged from 5.6 percent to 13.6 percent. While the Covid-19 pandemic slowed growth worldwide, the Chinese economy has been unable to rebound, owing to structural challenges including high youth unemployment, curtailed demand, and a collapsing real estate market. Since 2021, multiple Chinese property developers have defaulted, which has adversely affected market confidence. In 2022, China’s economy grew just 3 percent—the second lowest since 1991 (only behind the height of the Covid-19 pandemic in 2020).

In 2023—while much of the world was still raising interest rates to rein in inflation—China’s central bank, the People’s Bank of China, cut interest rates twice in a three-month period to encourage people to spend money. Data from January 2024 shows that China’s economy is actively suffering from deflation—consumer prices experienced the sharpest drop in over 14 years. And in April 2024, Fitch, a credit rating agency, downgraded its outlook on China from “neutral” to “negative.” China’s economy is no longer the world’s biggest engine of growth—instead, muted demand and deflation could spill over to the global economy and suppress demand for mineral-intensive goods.

Chinese Market Manipulation

Despite low demand, Chinese government-backed firms are ramping up production, which is putting downward pressure on commodities prices and forcing Western firms to close. For example, Indonesia’s nickel production has rapidly ramped up and is contributing to a global nickel surplus and a resulting decline in prices. Between 2021 and 2022, Indonesia’s nickel production increased by 48 percent, and between 2022 and 2023, it increased by an additional 29 percent. Indonesia’s low-cost production, driven by Chinese capital and poor environmental practices, has allowed the country to control upwards of half of the world’s nickel supply. However, this oversupply has adversely affected the profitability of major mining companies and created uncertainty about the future of the nickel market. This has forced closure of nickel mines in places such as Australia and New Caledonia.

Conclusion

Taken together, negative macroeconomic headwinds, a sluggish Chinese economy (the biggest in the world), and China’s market manipulation have created a storm of price volatility. There are three key implications to these dynamics.

·         The slowdown in private sector mining activity will undermine longer minerals security needs. Exploration is the oxygen of the mining sector—and the curtailment of exploration expenditures (with the exception of copper) means there will be significant delays in project development and production.

·         China will increase its dominance in critical minerals supply chains where the Western private sector is withdrawing—nickel is a prime example of this.

·         As China’s economy grapples with structural economic challenges, countries are increasingly turning to India given its mineral reserves but also given its potential to be a source of mineral demand as a result of its population size and rising incomes.