The new Cold War is already here based on commodity supply strategies of major economies, says Liberum
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(Kitco News) Looking at the latest commodity supply strategies of major economic powers, a new Cold War has already begun, according to the investment bank Liberum.
And the U.S., EU, and Japan have identified ‘critical’ commodities required to guarantee stable economic growth, Liberum analysts said in their latest commodity report.
“Now, they’re moving to secure the supply chains of these inputs, mainly by activating old trade alliances,” the bank’s analysts Tom Price, Ben Davis and Yuen Low wrote Tuesday.
There are also a lot of new U.S.-led deals happening in the critical metals space. At the May G7 meeting in Japan, U.S. President Joe Biden and Australian Prime Minister Anthony Albanese signed the Australia-US Climate, Critical Minerals, and Clean Energy Transformation Compact.
The deal secures supply growth of Australia’s critical minerals and materials used in clean energy and defense technologies. Also, the U.S. signed up to finance Australian miners to produce selected minerals, the analysts described.
Earlier this spring, the U.S. and Japan signed a critical minerals agreement to strengthen and diversify supply chains.
“Even for the cursory market observer out there, it must be clear what’s going on here — the U.S. is moving to secure supply chains of what it regards as critical inputs for its economy,” the report noted.
The focus is on securing supply chains for lithium and cobalt, which are used in rechargeable batteries and EVs.
What’s driving this move?
China’s dominance of global commodity supply chains is not enough to explain some of the latest changes.
“For us, 2018’s US-China tariff war [is the] primary catalyst. Why? That’s when industry players with which we’re connected (miners, traders, investors) first recognized new risks in the commodity world, and commodity prices responded to shifts in this new geopolitical theme and sources of project capital changed (i.e., more from the U.S., not all from China),” the report said.
Since then, the U.S. had to deal with COVID-related supply chain issues, Russia’s war in Ukraine, and increased tensions with China.
“We’re probably at the start of a competitive push by major economies to secure raw materials’ supply chains – involving identification/development of mineral reserves, creating/reactivating strategic political alliances, and proactive/co-ordinated stockpiling,” Liberum said.
The world has not witnessed mineral resource management of this scale since the last Cold War, the analysts pointed out.
A ‘critical mineral’ is defined by the United States Geological Survey as those with essential uses and no viable substitutes, with potential disruption in supply.
“What a country regards as ‘critical’ must somehow reflect a collection of factors unique to that country, including domestic mineral resources (commercial or otherwise) + where they are in their own long-term economic growth cycle + strategic alliances (or conflicts) which that country has with other countries, etc.,” the report explained.
During the first Cold War, ‘critical’ minerals included beryllium, cobalt, tungsten, and titanium. They were all used for military-related reasons. That is still the case today, but now the list also includes gallium, germanium, niobium, and lithium, Liberum pointed out.
“It has been over 50 years since national policies by major economies were implemented to impose control over selected mineral resources and/or build strategic commodity stockpiles,” the analysts noted.
After the 40-year Cold War ended in the 1990s, most U.S.-related controls over remote resources were eased, and stockpiles sold off.
“If we really have entered a new Cold War, any activity involving securing supply inputs should initially be bullish for supply,” the report added. “That is, as more of the existing supply of a given commodity is set aside in strategic stockpiles, its market will tighten (assumes demand growth unchanged), lifting price (impact akin to ETF builds). Eventually, though, supply growth will lift.”
Focusing on lithium and cobalt, Liberum projects upside risk to the demand and price forecasts.
“Key prices for lithium carbonate/hydroxide products bounced off a ~$25/tfloor in late April, after falling >70% vs. Nov-22’s peaks of >US$80k/t; battery feedstock’s sell-off has reported to spodumene prices too, down 15-20% to U.S. $4,000/t-level by mid-May,” the report said. “Cobalt’s price has halved to below $25k/t-$12/lb (LME), and now tests the industry’s marginal cost of production. Price supports are emerging.”
Longer-term bullish drivers for lithium include an emerging geopolitical push to secure strategic lithium reserves, project delays, and a push by some countries like Chile to nationalize supply.