INTERVIEW: Metals supercycle 'intact' on energy transition demand, says ERG CEO

Metals markets remain fundamentally in the "supercycle" identified in recent years despite the current global economic slowdown and fallback in prices, with demand for a wide range of metals to continue being driven by what is an "irreversible" global energy transition, according to Benedikt Sobotka, CEO of diversified miner Eurasian Resources Group.

"The fundamental supercycle in metals is very much intact: renewables are metals-intensive," Sobotka told S&P Global Commodity Insights in an interview. "Particularly in Europe the current energy crisis is only going to accelerate the energy transition: billions of dollars are being invested in wind and solar, while nuclear is being revived in some areas. This means millions of tons of steel, aluminium, rare earths and battery metals: and copper is needed when we use the internet."

Most steel and metals prices have plunged since March, when Russia's Feb. 24 invasion of Ukraine sparked a price spike on supply chain fears. Soaring energy bills and inflationary pressures, coupled with the dollar's strength, have eroded market demand and investor sentiment.

Copper, a barometer of economic health, slumped to $7,445/mt Sept. 23 on the LME cash market from $10,800/mt early March, while Platts' hot rolled steel coil ex-works Ruhr assessment hit Eur735/mt ($708/mt), half its March 18 peak. Lithium has stabilized at a Platts-assessed carbonate price of $72,300/mt after doubling earlier this year. Gold, also a financial markets indicator, touched a more than two-year low of $1,627/oz Sept. 26, below what pundits consider its support level.

"We can't deny the global economy is slowing down, in Europe the economy is very much dependent on gas and they face significant challenges... this winter will be tough," Sobotka said.

"But outside Europe the situation is better. In this industry a lot depends on China, which is now doubling down on infrastructure investment with a reported $75 billion stimulus package. Metals are becoming a lot more visible to policymakers and governments. For ERG, business prospects for the next 10-20 years look very positive."

Efforts by the Chinese to stabilize metals commodity prices, including via establishment of a centralized iron ore buying agency, selected stockbuilding and a lithium and rare earths price monitoring system, can be considered positive due to their potential to reduce market volatility: they don't represent an intention to control or lower prices, the ERG CEO indicated.

"It's in nobody's interest to have price swings of 50%, 100% or even 200% such as what we've seen over the last three years: these may impact not only refiners' margins but their entire existence," he said.

Electrification targets worldwide are often politically driven and do play a role in the mining industry's development, according to Sobotka. "But they haven't been discussed with us miners and will be very challenging because of the quantities of materials needed. In relative terms, mining is a small industry with small budgets – all mining companies together are worth less than Apple. To meet the demand for material the industry will need to grow incredibly fast, in increasingly complicated geographies with ESG and licensing regulations that are becoming more stringent."

Cobalt

Cobalt markets should be broadly in balance in 2023, after an expected surplus this year of between 6,000 and 7,000 mt following weak Chinese buying earlier in the year, and a deficit in 2021, said Sobotka. The total market for the product used increasingly in electric vehicle batteries is put at around 180,000 mt in 2022, with mechanized artisanal mining a swing supplier.

"2022 has not been a good year for electronics," the ERG CEO said. "However, there's a lot of pent-up demand for EVs: we see about 25% growth for cobalt in EVs this year."

China's Strategic Reserves Board is meanwhile "rumored to be buying material: the Chinese market is preparing a very strong recovery in 2023," Sobotka said.

ERG's Metalkol, which recycles copper and cobalt tailings left by previous mining operators in the DRC's Kolwezi region, supported by the company's Boss Mining processing plant, will produce some 25,000 mt of cobalt this year, based mainly on hydropower, and sold mostly to Chinese refineries. Another 3,500 mt/year production capacity will be added in a phase three development underway.

Iron ore

Markets continue to be unpredictable in terms of supply chains required to complete construction of rail and port infrastructure for ERG's BAMIN iron ore project in Brazil, Sobotka said. However, the miner expects to bring on stream its stretch of the FIOL railway essential for ore shipments in 2026, allowing shipment of around 16 million mt of concentrates in 2026 and then 25 million-26 million mt, including of direct shipping ore, in 2027, mainly into Europe and the Far East.

Recent blast furnace closures in Europe due to high energy prices and weaker automotive demand are not significant enough "in the larger scheme of things" to impact iron ore benchmark prices, which are more susceptible to uncertainties in the Chinese property market, COVID-19 lockdowns, Australian production levels and the US dollar's value, according to Sobotka. Analysts at Jefferies International estimate nearly 10% of European steel capacity is currently idle.

Current iron ore prices -- assessed by Platts at $99.60/dry mt CFR North China Sept. 23, way down from a May 2021 peak of $233/mt -- are fundamentally justified and China's centralized iron ore buying agency "should ease volatility, which should be good for the industry as a whole: we may see smoother pricing than over the last 3-4 years," the ERG CEO said.

The spate of blast furnace closures will in the longer-term intensify direct reduction pellet demand in Europe, Sobotka said. BAMIN therefore sees "very positive long-term future prospects" in Europe, where a gap persists in the niche market for high-quality pellet feed due to reduced output. Reductions in supply have occurred since a tailing dams collapse in Brazil in 2015, as well as at other operations.

"We'll likely sign offtake agreements years before starting to sell at the higher volumes," the ERG CEO said.