Chinese Market Gyrations, EU Slaps Tariffs on China’s EVs, & Cobalt Market Blues
MARKETS UPDATE
This is getting ridiculous. Lithium prices are flat, but earlier this week in China, Zhejiang Huayou, Ganfeng Lithium, and Tianqi Lithium, were all up 10%.
No kidding.
Meanwhile, in Australia on the same day the ASX peers were all down: Mineral Resources (down 3.96%), Pilbara (down 3.23%), Ioneer (down 4.55%), and IGO (down 5.51%). Two things are happening. One is the government-steered buying in the PRC (the $71bn injection). The other is the siphoning of FOMO capital from other markets – including Australia and Japan into China. It’s a battle between markets and governments. And right now, the mining western capital markets are losing. However, no real reform in the PRC is possible anymore (as we will discuss below), so this is a wonderful bubble to prick... time to short the REMX. (1)
GEOPOLITICAL INSIGHTS
Shortly after Joe Biden’s election as America’s 46th President, the European Commission, under strong pressure from the German Chancellor, finalized a seven-year-long negotiation with the PRC to sign the Comprehensive Agreement on Investment (CAI). In the final months of 2020, through Xi Jinping’s personal intervention, Beijing offered concessions to Brussels in a scheme to drive a wedge between Europe and a potentially more cooperative US administration.
Fast forward nearly four years and just weeks before the next US elections, the relations between Europe and China are unrecognizable. The CAI died a quick death after the European Parliament suspended ratification of the deal following China’s sanctions on several policymakers and advisors in the EU. As the relations continued to deteriorate, the issue of critical minerals and the EV value chain came to the fore. Last Friday, the EU overcame pro-Chinese opposition marshaled by Berlin and slapped new tariffs on China’s electric vehicles.
To the last minute, Germany tried to consolidate resistance to the move, but the list of its allies remained short – Viktor Orban’s Hungary, Robert Fico’s Slovakia, Slovenia, whose citizens received a Chinese visa waiver a week before, and Malta, a country accused by the EU Commission for selling “golden passports” to non-citizens.
Brussels’ decision will have far-reaching effects on the structure of the electrification value chains, potentially affecting critical minerals sourcing. Interestingly, one of the strongest statements came from the key country that voted against the measure. Germany’s economy minister, Robert Habeck, stated: “Together Europe is strong, divided it becomes a pawn of others. And if Europe does not react as one, China’s aggressive industrial war will continue in other sectors too.” Habeck is a member of the Green Party, whose strongly anti-Moscow stance has now affected the group’s attitude to Beijing, especially given the recent revelations regarding China’s support for Russia’s military effort in Ukraine.
The application of the tariffs will vary depending on the carmaker. Products made by China’s SAIC will attract a 45.3% duty, which is less than half of the levy imposed by Washington and Ottawa. Geely’s cars will be saddled with a 28.8% import tax, BYD’s with 27%, while “other cooperating companies” with 30.7%. This would mean that Geely and BYD, both of which have ambitious plans for the European market, were more forthcoming “cooperating” with the EU’s probe. SAIC, which is fully state-owned, must have treated the probe as illegitimate or worse, but this is not surprising given Beijing’s paranoia about data sharing.
Among the countries voting in favor of the measure were five Western European nations, led by France, Italy, the Netherlands, Denmark, and Ireland. Despite the Spanish Prime Minister’s recent pro-Beijing statements, his country abstained from the vote. Among Eastern European members, Poland, Bulgaria, and the three Baltic countries voted in favor of the anti-Beijing move. The participation of the Eastern European members illustrates the fiasco of China’s attempts to splinter these countries from a broader EU agenda through an initiative named “17+1”. Lithuania’s earlier move to upgrade the country’s relations with Taiwan infuriated Beijing.
The tariffs will hurt, given that the European market represents a third of China’s EV exports. For now, Beijing's anticipated retaliation has affected French spirits, and China is investigating European pork products. The PRC might find it more challenging to stem the inflow of Danish hormones, Dutch lithography, or chicken feet from Poland. A current account surplus economy is, by definition, at a disadvantage when it comes to trade wars.
Yet this is unlikely to mark the end of the saga. The two sides will apparently be exploring whether an agreement can be reached on a complicated mechanism to control prices and volumes of exports in place of the import duties. EU’s Chamber of Commerce in China favors such a negotiated solution. On the other hand, the director of the European Council of Foreign Relations stated that successfully implementing the tariffs would strengthen the EU, giving it “momentum to continue addressing market distortions, critical dependencies, and emerging security challenges across various industries”.
In the immediate future, this could be good news for the countries pre-positioned as a backdoor manufacturing hub for Europe, including Turkey and Morocco. The latter country, in particular, may benefit from investment inflows due to its proximity to Europe and its free trade agreement with the US. Morocco is the fastest-growing car manufacturing nation and a leading car exporter to the EU, ahead of Japan and the PRC.
China’s Gotion High-tech has already signed a deal with Rabat to invest USD $1.3bn in the country’s first gigafactory. Since then, other Chinese groups, including Shinzoon, Hailiang, and BTR New Material Group, announced plans to set up affordable facilities to manufacture LFP batteries. At 50bn tonnes, Morocco is home to 70% of the world’s reserves of phosphate rock and could become a natural source of feedstock for the production of LFPs. China, whose reserves stand at a mere 2bn tonnes, mines 70m tonnes, which is twice as much as Morocco. The redirection of the trade flows from the European continent to the northwestern African country could have long-term repercussions for this commodity, but closer relations between Beijing and Rabat will be undermined by China’s historically close embrace of neighboring Algeria. Algeria’s pro-Moscow stance stands in stark contrast to Morocco’s pro-Western position. Tensions between the two North African nations may complicate Beijing’s overtures to Rabat.
SUPPLY CHAIN OBSERVATIONS
Cobalt has lost USD $4,835/t or 16.60% since the beginning of 2024. The picture for cobalt chemicals, however, is less damaging. Chinese prices of cobalt oxide and cobalt sulfide have fallen 5% and 3%, respectively, since the beginning of the year, already following a year of precipitous drops. Historically, cobalt reached an all-time high of USD $95,250/t in March of 2018.
Cobalt is obtained as a byproduct from the mining of nickel, copper, platinum group of metals and arsenic production. The metal is heavily oversupplied at the moment, with huge inventories in the Democratic Republic of Congo, South Africa (through shipment), and in China. China has clearly decided to corner this market.
Annual output in the global cobalt market has now reached about 230,000 metric tonnes, almost doubling courtesy of Hong Kong-listed CMOC (formerly China Moly), which has expanded its production to more than 100,000 tonnes this year from about 15,000 tonnes five years ago. CMOC has rapidly expanded its massive Tenke Fungurume and Kisanfu mines in the southern Democratic Republic of Congo, way above what the market could possibly stomach.
Hydroxide is the most stable compound to be stored, and when it is converted into metal, it ends up warehoused in long-term inventories. It may take several years to balance out the inventory. The low prices may actually incentivize the return of cobalt in battery chemistries, at least for those customers who do not mind the supply from China.
MINING & EXPLORATION NEWS
Rio Tinto and Arcadium agreed for Rio Tinto to acquire Arcadium in an all-cash transaction for US$5.85 per share, valuing Arcadium at ~USD $6.7 billion. This represented a premium of 90% to Arcadium’s closing price of $3.08 per share on 4 October 2024, and a premium of 39% to Arcadium’s VWAP since Arcadium was created on 4 January 2024. Rio Tinto currently has two lithium projects in Serbia and Argentina, while Arcadium is a leading global lithium chemicals producer with diversified product offering and portfolio of upstream and downstream assets in spodumene, carbonate, hydroxide and lithium chemicals, across Argentina, Australia, Canada, China, Japan, the United Kingdom and the United States. This corporate move is another countercyclical move in lithium from a major in growing lithium production. Rio Tinto’s CEO Jakob Stausholm, spoke mid-September: “We would like to strengthen our lithium business, and we also have opportunities to grow our copper business. I couldn’t care less about what the lithium price is in the next 12 months, I’m more thinking about how will the market and demand be over the next decade or two, and lithium is necessary in almost any construct of a battery.”
Ares Strategic Mining, the Canadian listed owned of the Lost Sheep Fluorspar mine in Utah, USA has completed the fabrication of its flotation plant which is being shipped to the US. Lost Sheep is the only permitted fluorspar mine in the USA and Ares plans to soon be the only domestic supplier of acid grade fluorspar in the USA. Acid grade fluorspar, or acidspar, is a highly sought-after industrial product, primarily used in the production of Hydrofluoric Acid (HF), which is the principal source of fluorine for various critical industrial applications such as aluminum and LiPF6, a key electrolyte in Lithium-Ion batteries. Fluorine is also used in the manufacture of uranium hexafluoride (UF6) which allows the isotopic enrichment of natural uranium. Interestingly, the US imports its enriched uranium from Russia…go figure! These applications include the production of LiPF6, a key electrolyte in Lithium-Ion batteries, aluminum production, refrigerants, fluoropolymers and fluoro-plastics, petroleum cracking, and other specialized uses.
One of the Amvest Terraden team members met with the management of Q2 Metals in New York recently, which is a Canadian-listed lithium exploration company. Despite being listed in Canada, majority of the shareholders are Australian. Q2 is exploring at its Cisco lithium project in James Bay, Quebec, Canada. Despite not conducting any geophysics, the recent drill program designed off outcropping, mapping and sampling alone has delivered exception drill results including: 215.6m at 1.69% Li2O, 181.1m @ 1.67% Li2O and 115.9 m at 1.48% Li2O.
WA1 Resources, the niobium darling of Western Australia, announced the results of the second stage of its metallurgical test work program, showing Luni concentrate is able to be refined through a conventional calcine and hydrochloric acid (HCl) leach stage. The testwork indicated a clean concentrate of 66.9% Nb2O5 at 99.9% recovery.
Li-FT Power released its maiden mineral resource estimate for its Yellowknife Lithium Project (YLP) in Canada’s Northwest Territories. The resource, in the inferred category, 50.4Mt at 1.00% Li2O, containing 1.25Mt of LCE. The YLP deposit is now the third largest maiden resource estimate for a hard rock project in Canada, behind Patriot’s Shaakichiuwaanan and Winsome’s Adina. It also ranks among the top 10 largest lithium spodumene projects in the Americas, based on only 10 months of drilling totaling ~48,578m completed between June 2023 and April 2024.
SOURCES: (1) Market Data from Bloomberg as of 7:00 PM ET, October 11, 2024, in the local currency. (2) Additional data courtesy of Arcadium Lithium plc (ALTM US, LTM AU), Ares Strategic Mining Inc (ARES CN), CMOC (HK 3993), Ganfeng Lithium Group Co Ltd (SHE 002460), IGO Ltd (IGO AU), Ioneer Limited (INR AU), Li-FT Power Ltd (LIFT CN), Mineral Resources Ltd (MIN AU), Patriot Battery Metals Inc (PMET CN), Pilbara Minerals Ltd (PLS AU), Q2 Metals Corp (QTWO CN), Rio Tinto Limited (AU/LN/US RIO), Tianqi Lithium Corp (SHE 002466), WA1 Resources Limited (WA1 AU), Winsome Resources Limited (WR1 AU), and Zhejiang Huayou Cobalt Co Ltd (SHA 603799).
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