Commodities Outlook

Uranium and its uses

Uranium is an element that is associated with radioactivity, due to its unstable nucleus. This instability causes the element to be in a constant state of decay, in search for a more stable arrangement, resulting in radioactive properties. Nevertheless, its rate of decay is very slow meaning its radioactivity levels are quite low in comparison to other elements such as polonium.

What makes uranium unique, and more widely used, is its isotope uranium-235, the only naturally occurring isotope capable of a nuclear fission reaction, giving uranium explosive properties. As such, uranium can be used to make anywhere from nuclear weapons, to bullets and can be used for heat generation in nuclear power plants. Uranium is mined in over twenty countries, however Australia accounts for over 31% of global reserves. Additionally, Canada, Australia and Kazakhstan accounted for 68% of world uranium production in 2019.

How is it Transacted?

For several years, supply of uranium had outpaced demand. Such an environment eventually led to major suppliers halting production. However, despite the decrease in supply, demand for uranium has consistently increased, particularly in Asian markets such as China. As such, uranium has seen an increasingly bullish stance from investors.

Additionally, like most commodities, uranium markets are highly cyclical – when prices are high, supply is perceived as being very scarce and when prices are falling there is no perceived threat to supply, leading to falling investments. In 2020, data from the US Energy Information Administration showed that utility inventories were declining to levels were there was a potential threat to the overall supply of uranium. As such, it is expected that the market has a large demand gap to fill.

Investors have several ways of speculating on uranium including ETFs, futures or shares of uranium companies. However, investors should consider that uranium companies are not solely exposed to the price of uranium but to several other external influences such as political and social forces as well as internal management factors that may affect the price of shares.

Uranium Market Outlook

Supply of uranium is tightly controlled by the International Atomic Energy Association, which publishes its information to the public. In April 2021 Daniel Major, the CEO of GoviEx Uranium, argued that the supply of uranium cannot currently keep up with the growing demand especially considering the depletion of stock of major producers due to mining closures. As such, the outlook for uranium prices is bullish and stands on the back of continuously increasing demand by emerging markets as their economies continue to grow. Additionally, populations in fast-growing economies will also continue to increase such that the demand for energy will increase further, especially the demand for clean energy.

Rising concerns regarding climate change and the need for immediate action make clean energy sources such as hydro, solar and nuclear ever more important to societies. In the past, clean energy from nuclear plants was overall feared by the general population and even politicians. As such, nuclear plants became a less popular way of reducing carbon emissions.

However, with recent research indicating that solar and wind may not be the best options for economies, it is possible that nuclear energy, in the future, becomes the preferred source of clean energy due its relatively low cost compared to the amount of CO2 emissions reduced. For example, already in 2014 Charles Frank, a non-resident senior fellow in Global Economy and Development at the Brookings Institution, showed that when comparing nuclear energy to wind and solar, only nuclear energy presented positive net benefits of adoption.

On the other hand, the influence of consumer sentiment regarding the safety and ethical standards of the use of uranium is also significant in dictating market prices For example, prior to the Fukushima disaster in Japan, uranium prices were hovering at around $136 per pound. Following the disaster, general consumer sentiment turned and demand fell sharply leading to prices as low as $18 per pound in 2017.

Now, recovering from a bear market, prices have slowly risen to $28 per pound. As such, accidents and other major occurrences will always have an immense impact on the price of the element and on the perception of safety and that can last for a large amount of time.

Additionally, recent economic downturns, such as the COVID-19 pandemic, will have a long-lasting effect on emerging market economies and the global growth outlook. Consequently, the demand for uranium may fall as economies search for cheaper energy alternatives.

Lithium and its uses

Lithium is a metal, and of the known metals it is the lightest and the softest – so soft that it is possible to cut it with a knife and so low in density that it floats. It has numerous uses such as making special glasses and ceramics.

Due to its lightness, is used to make strong and light metal alloys for aircraft. Is also used in space industry, in the treatment of bipolarity and the most well-known use is in lithium-ion batteries and batteries for electric cars.

How is it Transacted?

There is no direct way to invest in the commodity because there are no futures traded in any exchange. However, there are alternative ways to invest in lithium, such as through the derivatives market, using derivatives like options contracts in lithium indices and companies, CFDs in lithium indices, futures contracts in lithium indices. Another way is by buying shares of the BITA American Lithium and Battery Metals Giants Index or BALITG. On the other hand, investors can buy shares of companies that engage in mining or lithium processing.

Lithium Market Outlook

The growth of lithium demand is raising the price of this metal. The growing optimism in the industry derived from the increase in the price of lithium is a positive change from the previous year, where the financing of mines and production plants dried up with the pandemic.

Albemarle Corp, Livent Corp and other producers are attempting to increase production. Since January 2021, General Motors Co, Ford MotorCo, LG Energy Solution and SK Innovation Co, along with other car manufacturers and battery component manufacturers have fostered the idea that they will spend billions of dollars on EV plants. Even governments themselves have plans to boost EV sales and infrastructure through expense or incentives. These plans have led the lithium price index to increase 59% since April 2020, according to data from Benchmark Mineral Intelligence, a commodity price provider.

Paul Grave, chief executive of Livent Corp., a component supplier for Tesla, looks kindly on this growth in demand and considers it a turning point important for the industry. At the same time, however, he warns that it will be a challenge for the lithium industry to produce quality materials, in the short and medium term, enough to meet the growing needs.

Albemarle, the world’s largest lithium producer, plans to double its production capacity to 175,000 tons by the end of 2021, when two projects under construction are completed. Chile’s SQM, the second-largest producer, said its goal of expanding lithium carbonate production by 71% to 120,000 tons is expected to be completed by December. Australian Orocobre Ltd is paying $1.4billion for smaller rival Galaxy Resources Ltd, a strategy designed to increase its scale and help it grow faster in regions closer to customers.

Chris Berry, an independent consultant in the lithium industry, says the coming years will be critical in terms of the availability of enough lithium supply justifying the recent observed increase in prices.

The price increases resulted in major producers posting large increases in first-quarter profit and boosting forecasts for the year. Even the companies most burdened with debt, due to years of low prices, are expecting to make a profit this year due to the recovery in demand.

Forecasts indicate that demand for white metals rose from about 320,000 tons annually last year to more than 1 million tons annually by 2025, when many car manufacturers planned to launch new fleets of EV’s. Demand is expected to exceed supply by more than 200,000 tons by 2025, meaning lithium prices may need to rise to encourage producers to build more mines.

One of the risk factors when investing in lithium is the lack of transparency, due to the lack of a futures market, which presents challenges in tracking spot prices for lithium. Additionally, players with less environmental and sustainability concerns and who operate outside the regulations, can jeopardize the entire industry and the confidence placed on it, affecting the market as a whole. In the case of the mining industry, there is always a risk related to weather conditions and, since mines are usually in developing countries, political stability is not guaranteed. As such, country risk may also be present.

Iron Ore and Its Uses

Iron ore is a commodity from which iron and steel are produced. Around 98% of the world’s iron ore is used in steel production and thus its demand is highly connected with infrastructure, construction and development, vehicles and mechanical equipment.

Global economic growth is the primary factor that drives its supply and demand. When economies are growing, the need for steel in construction increases which drives the price up. Biggest producers include Brazil, Australia and China, the latter having been, in the last decade, the biggest consumer of iron ore due to its rapidly growing demand for steel.

How is it Transacted?

Iron ore is a non-fungible commodity and its quality varies based on its purity. Different percentages of iron ore content reflect natural variation in the mine deposits and the degree of processing employed to upgrade the ore for a certain use. Higher purity ore increases the metal yields in the blast furnace and keeps down the production costs due to lower fuel required, for this reason the higher purity ore is more expensive.

One can get exposure to this commodity through various derivatives such as Contracts for Difference (CFD) or futures contracts in the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE), there are also several ETFs that trade more broadly in the industrial metals sector as is the case with SPDR S&P Metals and Mining ETF. And finally there’s also the possibility of buying shares of the biggest players such as Rio Tinto, Vale or BHP to name a few.

Iron Ore Market Outlook

In the 12th of May 2021, the price of iron ore surged to a record high of 237.35 US dollars per tonne as strong Chinese demand continued to outpace supply. Currently the commodity market is roaring, iron ore in particular, due to supply chain restrictions, US and Chinese governmental economic stimulus related to the COVID-19 crisis and also new environmental regulations that limit supply. In China, demand for steel continues to rise which has led to a rise in its price since the beginning of the year.

The rally is a result from strong demand from the construction industry as well as China’s new steel supply reform/decarbonization and high iron ore prices.

After COVID-19, iron ore output dropped by 3% in 2020. GlobalData analysis points to around 5.1% recovery in 2021. The consensus is that supply will increase and even though prices will most likely fall it is still expected that they’ll maintain above historical averages for the remainder of 2021 and 2022 ranging from 140$ to 160$ per metric tonne in Q2 2021, according to the latest S&P Global Platts Iron Ore & Steel Outlook.

Water and its uses

Water makes up 79% of earth’s surface but 97% of that water is salt water or undrinkable water and 2% of drinkable water is trapped in ice caps and glaciers. That gives us only 1% of the total amount of water available to use in all our activities.

These small levels of global water resources contrast with the importance of water, not just for industries but, most importantly, for the survival of humankind. For example, on average, one person needs 190 liters of water per day to cover their basic needs. The mining industry requires at least 250 liters of fresh water to produce a tonne of coal. Agriculture needs enough water to irrigate 900 km3 of land per year. The manufacturing industry in the U.S requires 68 billion liters per day for use in production.

How is it Transacted?

There are two main markets for water – the first is in the USA and the second is Australia. The price in the US is given by the Nasdaq Veles California Water Index. The market is divided into the Central Basin, Mojave Basin, Chino Basin, and Main San Gabriel Basin. The price is US dollar per Acer foot, meaning that the amount of water transactions is 325,851 gallons (it needs to be enough water to cover an acre long with one foot of depth). The index started being used the 31st of October 2018 (prices started at $371.11 and have now reached $869.36).

On the other hand, Australia water trading started in the 1980s due to the fact that water is a scarce resource in a country that is mainly desert. The price is calculated once per week, and takes into account sales and rents of the prior week. In contrast to the USA, in Australia investors must buy rights to shares from a particular water resource. The trade can be temporary, permanent or in the forward market (to anticipate future needs). This can be further divided into water entitlements which are the rights to a share of water where the amount of water is fixed and with water allocation the amount of water can change depending on climate or resources available.

Water prices are not set by the market but rather are set by water utilities, regulators and government institutions.

Water Market Outlook

Growth is expected due to the increase in water demand. This is due to many factors such as the generalized increase in demand for products and agriculture due to population and economic growth.

The water market outlook englobes different markets like the industrial water market, water treatment market, bottled water market, industrial water market and functional water market. In general, there could be 3 scenarios for water supply conditions depending on rainfall and other climatic factors. The scenarios are the following: no rain fall, little rainfall and normal rainfall.

These scenarios would dictate prices and availability of this precious resource. Another important factor is the expected population growth – during the COVID19 pandemic, population growth was lower than expected with births and pregnancies decreasing by 3%, meaning water consumption also did not grow as much as expected. However, considering the exceptional circumstances of the pandemic, it is likely that growth, both in population and demand, return to expected levels.

Risk factors

There are several risks associated with water such as insufficient water resources to meet people’s basic needs, if there are insufficient water resources that could lead to higher prices, political and economic instability and migrations.

In a more specific aspect, liquidity of the asset is one of the biggest problems associated with water investment. Investments can’t be easily converted into cash and can’t be reversed. Water industry is considered more capital intensive than most of the commodities in this sector.

Investments required to provide this service are lasting as each project has a life span of 25-30 years. This means that they are the subject to many political and social changes. Bad regulations and political uncertainty can cause the termination of projects or contracts.