The Ingham Analytics Weekly Letter on Sunday - 24 January 2021

Sunday, 24 January 2021

Welcome to our Ingham Analytics Weekly Letter on Sunday where we take a step back to see wood for trees, in South Africa and around the world - with a mix of irony and humour, not too seriously.

This was the week America had two presidents - an outgoing and an incoming one on Wednesday. The new Democrat administration is unashamedly "liberal" (US speak for leftist, in some cases far left).

Politics isn't our field, but we can spot hypocrisy a mile off. Even before swearing in had been complete the US had a newly minted do as we say not as we do administration.

Climate change is the in policy and one of the first executive orders was to revoke a permit for the Keystone XL oil pipeline from Canada, immediately annoying the Canadians as part of the new American diplomatic offensive to win friends and influence people.

The carbon emission conscious new president presided (pun intended) over a gigantic motorcade of gas guzzling armoured Chevy Suburban SUV's and seven Beast limousines in Washington DC, dressed up as Baghdad for the day. An armoured Suburban does less than 10 miles per gallon around town and a Beast does 3 mpg. A posse of secret service and 25,000 national guard, all armed to the teeth, were the observers, riff-raff voters disallowed.

To be seen to battle COVID-19 is also in so a mask is the must-have accessory. This was all too evident at the US Capitol. In case you are keen, Louis Vuitton offers a high-fashion face shield for $1,000.

Such was the social distancing at the mask-wearing, woke inauguration that kissing, hugging, and backslapping was widely in evidence.

It has become a tradition for an outgoing president to leave a letter for the successor on the Resolute Desk in the Oval Office. In a day of speechifying waffle, the new president made at least one pointed but telling remark about the outgoing president - "The President wrote a very generous letter."

The COP26 climate change summit will be held in Glasgow in November with hundreds of attendees. They doubtless won't be flying in on magic carpets and traveling around on bicycles.

The previous 25 summits achieved the square root of not very much so we doubt this talkfest will either. Also taking a starring role will be a couple of those presidential inauguration Beasts and a cohort of Suburban SUV's, together with a Marine One helicopter, all transported by two huge C-130 aircraft. We would expect a now well-known teenage Swedish environmental activist to be on the VIP invite list. Kodak photo moments will abound and there'll be righteous indignation in abundance at the state of the planet. As with Davos, private jets there will be aplenty.

This week we issued two mining themed notes, with "Lithium's Tesla disconnect" giving a nod to electric vehicles. For all the talk of saving the planet, the mining industry still has a vital future for decades to come.

EV's are the current big thing. For Hollywood celebrities, a Tesla is a must-have for appearances. Showing up at the local shops in a Tesla is just the ticket to embellish your electrifying credentials. A Toyota Prius used to be the transportation mode of choice but that's so last decade, and as a hybrid, it does after all have an internal combustion engine. These folks tend to have a V8 engine Suburban or Escalade tucked away for longer trips such as an outing to the country ranch for the weekend.

Our note "Lithium's Tesla disconnect" speaks to the fact that lithium, nickel, and copper prices aren't keeping track with the share price of electric vehicle maker Tesla, which has gone crazy. There simply isn't anywhere near enough production of lithium, nickel and copper if a green future is going to be delivered.

An earlier note entitled "Nickel for Elon?" pointed out too that Elon Musk has said that nickel production needs to be ramped up significantly. EV fans generally ignore this inconvenient truth.

Whilst US-based specialty chemicals company Albemarle is investing to double the current production of lithium in Nevada they have also made the point that prices will need to climb for meaningful expansion to make commercial sense.

We have seen cobalt prices rise this year but at $38,500/t still far below the spike to over $90,000/t in 2018. Energy-dense cobalt is used as the stabilizer in batteries and helps protect the battery's cathode from corrosion.

Cobalt, as with some other minerals, are often minded in some less-desirable places - most of the world's cobalt is mined in that risibly named "Democratic" Republic of the Congo. This brings political risk and we've seen in Congo that China is muscling in to try and gain a stranglehold on supply. Chinese companies control more than 40% of Congo's cobalt-mining capacity.

And then of course South Africa has shot itself in the proverbial foot with a mining policy, if it can even be called that, which deters exploration and new mine development. When a leading mining executive says "I'm deeply disillusioned with South Africa, there are better places to invest shareholders money in the mineral sector than in South Africa" it's a sad inditement.

Playing this EV supply chain theme through a listed security isn't quite as straightforward as it may appear. There are some interesting pure-play names in the US, Canada, and Australia, some of whom are termed mining "juniors." BHP, Rio Tinto, and Glencore are examples of big, diversified miners that also have exposure to some of the EV themes.

Share prices of miners tend to be variable as miners, in general, are sensitive to even small changes in the price of a commodity or currency.

Take Rio Tinto as an example. A 10% change in the price of copper, up or down from a base level in 2020, has a more than $270m impact on profits whereas a 10% change in iron ore has an almost $2bn impact. When the price of iron ore is now double what it was for the first six months of 2020 that adds up to lots of extra dosh. In the case of BHP, a seemingly tiny one-cent difference in the average AUD/USD FX rate has a more than $100m impact on the P&L.

A fast fact: EVs require four times as much copper as internal combustion engine cars.

And back to those celebrities. EV's are expensive with the battery alone accounting for 40% of the price. This week, Tesla launched the Model Y in China, produced at the Shanghai factory. But the cheapest is $52,425 and a forthcoming performance version will cost $57,050. The basic Model Y sells in the US for $41,990 with the Long Range and Performance versions costing $49,990 and $59,990 apiece, before taxes.

As any supplier to an auto company (OEM) will tell you, the annual price discussion goes something along the lines of "well, Mr. X, what price decrease can we look forward to this year." Now, with a culture of squeezing suppliers for all their worth firms like Tesla or VW betting on EV's have a conundrum - sales volumes will need to get many times higher to have any discernible unit cost advantage, there aren't enough minerals to meet anticipated demand so commodity prices need to rise to stimulate supply, and you already have a product that most people in the world can't afford. The issue of charging and range is a challenge for most countries aside from this.

Keeping to the topic of mining our other note this week entitled "The gift that keeps on giving for BHP" speaks to the fact that iron ore is that very gift, with the price of 62% Fe fines currently $170/t, the highest since 2011. Whilst the China-Australia trade spat has hit coking coal exports to China iron ore hasn't been impacted.

China produced an astonishing 1.05bn/t of steel in 2020, a first, and its imports of iron ore amounted to 1.17bn/t. Steel mills are working 24/7. Other data this week revealed China's economy expanded by 2.3% in 2020 and rising 6.5% in Q4 from a year earlier. This makes the 6.8% fall in GDP in Q1 last year a distant memory and makes China the only major economy to grow in the face of the pandemic.

BHP is a beneficiary of not only iron ore but copper too - that price is now $3.64/lb, up from an average of $2.50/lb for the year ended June 2020. EV punters will be pleased to know that BHP exploration is focused on copper and nickel. The price of Nickel exceeded $15,000/t for the six months to December 2020 and is currently $18,350/t. BHP refer to the metal as a "future-facing commodity."

Whilst we do see currency headwinds from a stronger Australian dollar, we nonetheless now forecast a 50% growth in BHP's adjusted earnings per share in US dollar for the year ended June 2021. That's a whopper of a figure to end off with.

A cavalcade of gas guzzling vehicles at the US presidential inauguration is the carbon conscious deal for us this week.