Why supply problems will worsen for these 5 metals

As a general rule, the most successful man in life is the man who has the best information



The world economy can’t seem to catch a break. Just when it seemed like things were on the up and up - a Phase 1 trade deal signed between the US and China, the United Kingdom leaving the EU without major incident - here comes a pandemic rooted in China, the largest importer and exporter of mined commodities.

The coronavirus that has so far killed 362 and infected over 17,000 now threatens to overshadow trade frictions as the global economy’s biggest threat. There have been enough cases for the World Health Organization to declare a global health emergency; apart from China, two dozen countries are now affected. Fearing spread of the virus through air travel, most international carriers have canceled flights to China. The United States issued a travel advisory warning Americans to stay away. 

The epicenter of the outbreak, Wuhan, is basically in lockdown. All public transportation and ride-hailing services have been suspended, no trains or flights are leaving the city of 11 million, and residents have been told to avoid non-essential travel. The Chinese New Year holiday was extended to try and lessen the threat of the virus spreading through people coming back to work. Millions have been asked to work from home if possible. 

So what does a virus that mimics the symptoms of the regular flu have to do with world commerce? There are a number of implications. 

Some of the largest companies in the world have decided it’s too risky to keep stores open. That includes Starbucks and McDonald’s. You know it’s bad when you can’t get a Grande or a Big Mac.

Disruptions to these and hundreds of other supply chains will have a ripple effect - especially on China’s immediate neighbors which buy and sell goods and services. The outbreak is expected to knock 1.7% off Hong Kong’s GDP in the first quarter, with Japan, South Korea and Vietnam also likely to lose growth percentiles.  

Economists predict the economic punch will be harder than the last comparable pandemic, SARS, in 2003, because China’s economy is that much larger and more consumer oriented. According to Bloomberg Economics, China now accounts for a whopping 17% of global GDP, more than four times its 4% in 2003. Chinese stocks on Monday had their worst day in 9 years, prompting the Bank of China to unexpectedly lower short-term interest rates in an attempt to minimize the damage. 

The most direct tie-in between coronavirus and commodities concerns the nascent trade deal signed between the US and China on Jan. 15. China has agreed to increase its purchases from the US, but that might be a hard promise to deliver if supply chains are badly enough impacted. If either side fails to comply with the deal, it would trigger a fresh round of consultations, even if an escape clause is enacted due to coronavirus being seen as a “natural disaster or other unforeseeable event”. Chinese trade officials are reportedly hoping their American counter-parts will show some flexibility with respect to pledges made in the phase-one trade agreement. 

Another hiccup, let alone a re-do, of the trade accord would not be good for commodities, particular base metals like copper, nickel and zinc that rise and fall on industrial demand, which is pushed lower by protectionism. 

Also in play are monetary policymakers like Jerome Powell. The Federal Reserve Chairman could be persuaded to keep interest rates low, or even cut them, if the Federal Open Market Committee don’t like the economic growth figures they take direction from. Mined commodities including gold, silver and copper benefit from low interest rates because companies are enabled to borrow more cheaply, hiking metals demand. 

The coronavirus is just one headwind the mining industry faces as it seeks to ramp up supply of metals that will be in high demand in the economy of the future - “clean and green” minerals like copper, nickel, silver, palladium and lithium that are integral to the electrification of the global transportation system, and the shift from fossil fuel-powered to renewable energies.  

Other obstacles are neatly outlined in a recent report by global law firm White & Case, titled ‘Mining & Metals 2020: ESG front and center’. Topping the list are trade tensions and the related slowdown in the Chinese economy, resource nationalism which we have written about extensively, and increasing regulations due to climate change mitigation. 

The report names productivity and ESG policies as the two main priorities for the mining sector in 2020, and delivers the results of a survey, by White & Case, that asked mining industry participants to gauge market sentiment this year. 

ESG means environmental, social and governance. It refers to the way mining companies are handling issues such as tailings dam failures, conflicts between communities, and governance - referring to whether companies are following the rules and mining responsibly. 

The chart below shows the commodities most likely to outperform are, in order of preference according to 64 mining professionals surveyed, copper, gold, lithium, nickel and zinc. Copper was the overwhelming favorite at 35.5% followed by gold at 21.6%. It’s reassuring to note all five commodities are among metals being explored for, by clients of Ahead of the Herd. 

AOTH subscribers were presented with articles last week on the value of copper-gold deposits to major gold miners; and how robust growth in the number of electric vehicles on the road in the next 15 years will impact the supply of EV battery metals including lithium, nickel, cobalt and copper.

Thus, we certainly agree with White & Case’s predictions of who the “outperformers” will be in 2020 - and we can back that up with solid evidence, summarized in the following sections. However, the performance of the outperformers will depend to a large extent on the influence of the obstacles that are likely to affect them this year - also summed up below. 


In telecommunications, copper is used in wiring for local area networks (LAN), modems and routers. The construction industry would not exist without copper - it is used in both wiring and plumbing. The red metal is also used for potable water and heating systems due to its ability to resist the growth of water-borne organisms, as well as its resistance to heat corrosion.

EVs contain about four times as much copper as regular vehicles. 

Copper is a crucial component for auto-makers because it is a fraction of the cost compared to silver and gold, which also conduct electricity. According to Visual Capitalist, by 2027 copper demand for EVs is expected to rise by 1.7 million tonnes - almost the entire copper production of China in 2017. 

One of the largest manufacturers of public charging stations, ChargePoint, is targeting a 50-fold increase in its global network of loading spots by the mid-2020s. A Level 2 charging station requires 7kg of copper, a DCFC station uses 25kg. 

How are we going to find that much more copper? As we have written about extensively, the base metal is heading for a supply shortage by the early 2020s; supply is already tightening owing to events in Indonesia and South America, where most of the world’s copper is mined. 

Meanwhile demand keeps going up. Copper products are needed in homes, vehicles, computers, TVs, microwaves, public transportation systems (trains, airplanes), and the latest copper consumable, electric vehicles. Research by the International Copper Association found China’s Belt and Road Initiative (BRI) is likely to increase demand for copper in over 60 Eurasian countries to 6.5 million tonnes by 2027, a 22% increase from 2017 levels.


Tesla recently expressed concern over whether there will be enough high-purity “Class 1” nickel needed for electric-vehicle batteries. 

According to BloombergNEF, demand for Class 1 nickel is expected to out-run supply within five years, fueled by rising consumption by lithium-ion electric vehicle battery suppliers. Nickel’s inroads are due mainly to an industry shift towards “NMC 811” batteries which require eight times the other metals in the battery. (first-version NMC 111 batteries have one part each nickel, cobalt and manganese).

But a lot of nickel will still need to be mined for stainless steel and other uses. The nickel industry’s dilemma is therefore how to keep the traditional market intact, by producing enough nickel pig iron (NPI) and ferronickel to satisfy existing stainless steel customers, in particular China, while at the same time mining enough nickel to surf the coming wave of EV battery demand?


It’s true the lithium market is currently oversupplied, at about 300,000 tonnes of demand versus 363,000 tonnes of supply. This accounts for the price slippage in the lithium market recently. Some lithium miners are pulling in their sails, holding off on expanding operations until better prices return. Albemarle and SQM, the two biggest lithium producers, are both delaying plant expansions.

The two main reasons for lower prices are oversupply from Australian hard-rock lithium producers, most of whom sell their spodumene concentrate to China; and reduced Chinese demand for lithium, after Beijing cut EV subsidies that made electric vehicles more affordable.

Low spodumene prices though are really hurting Australian lithium miners; how long before their production cuts start reversing the downturn in spodumene prices? With prices for hard-rock lithium mines low until the supply overhang can get sopped up, it falls to lower-cost lithium brine and claystone operations to meet the industry’s long-term supply challenges.

But there are problems in South America’s salt flats (salars), too. Obstacles to increasing lithium supply in the “lithium triangle” of Chile, Argentina and Bolivia are mounting. They include social unrest happening in Chile and Argentina, problems with water in the Salar de Atacama, low lithium grades in Argentina, and difficulties processing lithium in Bolivia because the salars are higher in altitude, not as dry, and contain more impurities, magnesium and potassium, than in neighboring Chile, making the extraction process much more complicated, and costly.


Despite new zinc mines opening in Australia and Cuba, zinc supply has failed to keep up with consumption. Some very large zinc mines have been depleted and shut down in recent years, with not enough new mine supply to take their place.

Tighter environmental restrictions in China are lessening the amount smelters can produce. National production of refined zinc in 2018 fell to just 4.53 million tonnes, the sharpest downturn since 2013. The result has been a record amount of refined zinc imported by the world’s largest metals consumer, 715,355t in 2018. The high demand in China has also pulled a lot of zinc out of LME warehouses.

In October 2019 zinc prices hit a four-month high due to falling zinc stocks - inventories in London Metal Exchange-registered warehouses plunged to 57,775 tonnes - a smidgen higher than the 50,425t in April, the lowest since the 1990s, Reuters said. Prices are holding steady at $2,218.95/t and inventories have kept dropping, currently sitting at just 19,775 tonnes.


Gold prices started to run last summer when the US Federal Reserve reversed course and began cutting interest rates instead of raising them. The ECB and a number of other central banks followed suit, wanting to keep interest rates low to try and boost flagging economic growth.

The precious metal kept climbing for the rest of the second half, eventually posting an 18% gain for the year, on the back of dovish monetary policies and safe haven demand from a number of volatile issues including US-Iran tensions, Brexit fears, Trump’s impeachment enquiry and the trade war.

Gold recently jumped to a seven-year high, as fears over the spread of the coronavirus had investors clambering for risk-off assets like gold bullion and US Treasury bills. Other safe-haven triggers for gold so far in 2020 have included the assassination of Iranian General Turkey’s Qassem Soleimani and the subsequent missile strikes by Iran on Iraqi bases housing US troops, Turkey’s invasion of northern Syria, the deployment of Turkish forces to Libya, and the arms buildup between the US, Russia and China.

Gold’s sister precious metal, silver, has had a more volatile year, losing about 60 cents on Jan. 28 but gaining it back three days later - it currently trades at $17.69/oz, as of this writing. The current ratio of 89:1, which is far out of whack from the historical ratio of 54:1, means silver is on sale. As we wrote in Hi-yo Silver Away! silver is expected to do well in 2020 through a combination of higher industrial and investment demand, and tightened supply owing to mine production issues and output cuts.

Gold’s fundamentals are also very bullish on the supply side. Gold output peaked in 2018 at 3,503 tonnes, in 2019 it fell to 3,463t - the first annual decline in 10 years. We  believe it will continue to drop further, owing to all the reasons I’ve been writing about: the depletion of the major producers’ reserves, the lack of new discoveries to replace them, production problems including lower grades, labor disruptions, protests, etc.


Having summarized why these five metals have supply problems, when set against strong demand for each, we see prices remaining buoyant at least throughout 2020 and likely beyond. The prospect of higher prices is also why we agree with the law firm White & Case in its report which says the top five metals most likely to outperform others in 2020 are copper, gold, lithium, nickel and zinc.

Now we need to identify what are the headwinds that could blow these metals off course, or quite possibly, tighten supplies even more. Some assistance is provided from White & Case’s chart above, that shows what are mining’s key risks in 2020.

Let’s tackle the top two as one: trade tensions and Chinese slowdown. According to the report, about 40% of survey respondents expect continuing trade tensions will cause a slowdown in metals demand; one third believe agreements on trade are forthcoming and that commodity prices will rise.

At AOTH, we agree with the latter position because we believe the trade war, along with slowing Chinese growth, is temporary. The Trump administration has an obviously strong incentive to get a trade agreement before the presidential election in November - unless the coronavirus forces another round of consultations, something the administration surely wants to strenuously avoid. 

The outbreak if it continues could shave up to a percentage off of China’s GDP growth, and therefore crimp metals demand, but outbreaks are seldom long-lasting, and we are optimistically expecting containment and a gradual reduction of cases. Chinese GDP is predicted at 4.5% in the first quarter, before a recovery in the second quarter and stabilization in the second half, according to Bloomberg Economics.

The Mining & Metals report states that, while global trade tensions and slowing manufacturing across Europe and the US, exacerbating the Chinese slowdown that started in 2018, “this was partially offset by increasingly tight supplies of metals amid dwindling stockpiles, demonstrating that the underlying fundamentals of the industry remained strong.”

It’s interesting that respondents to White & Case’s survey see growth - higher production numbers historically being of utmost importance to major mining companies, since they are a key determinant of profitability - in 2020 as a lower priority than ESG policies, tailings management and safety, and climate change response.

These issues are important and should obviously be addressed. The Brumadinho dam collapse in Brazil which killed over 250 people, states the report, “led to a renewed focus on the safety of mining and the impact on the communities that exist around its operations, with investors demanding fresh transparency on how tailings dams are operated and inspected.” We wholeheartedly agree.

Communities near a tailings impounded should not live in constant fear of a collapse. Closer to home, the Mount Polley tailings breach in 2014 was a reminder not only of the mining industry’s responsibility for environmental protection, but a need for tighter government oversight of these facilities.

Climate change response is a more complicated issue for the mining industry. On the one hand, companies are under pressure to mitigate their climate impacts, for example through emissions reductions. Yet many of these same companies are benefiting from the surge in renewable energies and transportation electrification which boost demand for minerals including copper, cobalt, nickel, lithium and manganese for EVs, silver for photovoltaic cells and new hydrogen fuel cell vehicles, and rare earth elements for permanent magnets that go into wind turbines.

One sign that the industry is taking climate impacts seriously, is a focus, at Mining Indaba this week, on making the mining industry more sustainable by running mines on renewable energy. The annual mining conference also has a talk by industry experts who will tackle the industry’s role in addressing climate change and decarbonization in the next decade.

The White & Case report notes that 2019 will be looked back as a watershed year, when diversified miners lost appetite for increased investment into thermal coal. It notes that “Rio, BHP and Anglo all faced pressure at their annual shareholder meetings to distance themselves from lobby and industry groups with climate change policies that do not align with the Paris Agreement of 2016.”

Mining companies are addressing climate change in different ways. BHP noted at the end of last year that its 2017 emissions were below those in 2006; it has set a new target to cap 2022’s emissions at 2017 levels. Anglo American’s sustainability agenda includes reducing its use of water and energy, and lowering its carbon emissions. The firm is also weighing what its contribution could be to a lower-carbon world and “how Anglo American can thrive through and beyond that transition.”

Of course, there is a big difference between talking the talk and walking the walk.

BHP has committed $400 million over five years to reduce greenhouse gas emissions from its operations, including “Scope 3” emissions generated by end users such as steel mills. The mega-miner has also said it will switch two of its copper mines in Chile from coal and gas power to solar, wind and hydro sources.

BHP's rival, Rio Tinto, signed a pact last year with China’s largest steelmaker to implement ways to reduce carbon emissions in the heavily-polluting steel sector.

Anglo American has installed floating solar panels on one of its copper mine’s waste ponds, and Fortescue Metals is expanding a $700 million program to switch iron ore mines to renewable energy and battery storage in the Australian Pilbara. 

Select examples, however, are not enough to assuage the growing wave of opposition against high-carbon activities like mining. According to a report out this week by Deloitte, the mining sector is facing greater scrutiny from host countries, along with consumers and society that are demanding ethical supply chains and a lower carbon footprint.

The report notes that, as of 2020, around 800 financial services organization with $118 trillion in assets under management, have committed to disclosing climate risks in their portfolio investments.

Current investing by the mining industry in environmental, social and governance (ESG) is estimated at over $20 trillion - proof that the industry is taking very seriously the risk that failing to deliver could result in financial consequences and a blow to reputations.

Yet concerns over ESG are also reason for investors to reject investments in mining. Specialized ESG investment funds have come out that often exclude mining and oil and gas companies.  According to a recent Reuters story, a capital squeeze that started two years ago has worsened - with many investors driven out of mining into cannabis stocks and cryptocurrencies.

The news outlet states that mining-specific equity funds raised just $0.3 billion in 2019 - one fifth of the amount raised in 2009 and barely more than the $0.2 billion raised during the global commodity crash of 2014.

Another article this week in Bloomberg notes a drying up of deal opportunities in mining, with private equity firms spending just $500 million last year versus $2 billion in 2018, quoting a report by law firm Bryan Cave Leighton Paisner:

Private equity poured money into the mining sector several years ago when big producers were forced to shed assets amid a collapse in commodity prices. That trend appears to have ended, and the law firm said private equity is now focused on raising additional funds for existing investments rather than looking for new deals. There was also a dearth of big single deals last year.


This latest disturbing trend in mining, private equity’s near-abandonment of mining, has serious implications for the industry because it means that companies are losing a major source of funding for capital expenditures such as expansions or transitions from open-pit to underground operations.

Of particular relevance to junior mining, the loss of private equity funding could mean cuts need to be made to exploration spending, and acquisitions are put on hold or canceled. Juniors are the life-blood of the exploration cycle, constantly making new discoveries, but without investments by mid-tiers or even majors, such as property buy-outs, earn-in agreements, or company take-overs, a junior’s end-game, to be bought out by a larger company after developing a deposit, may never be realized. Starved of capital, some juniors will undoubtedly wither on the vine.

On the other hand, if investment dollars dry up, production by major miners is unlikely to grow significantly, which will put additional pressure on already-tight supplies of minerals - some of which have been covered in this article. And remember, mining companies are not only facing a dearth of investment capital, they are also having additional expenses foisted upon them, including climate change mitigation, more environmental regulations to guard against tailings dam collapses (money well spent, imho), while having to contend with structural supply deficits. In other words, existing challenges to ramp up enough supply to meet demand are exacerbated. 

Of course, there is always the possibility of these deficits being lessened by crimped metals demand, owing to the factors discussed earlier, ie. a continuation of trade tensions, maybe due to China invoking the Phase 1 escape clause because of the coronavirus, leading to another breakdown in US-China talks; and the slowing Chinese economy, which not only hurts Chinese GDP growth but the economies of countries that trade heavily with China, such as the United States and Germany.

But as stated, we believe these factors to be temporary and the structural supply deficits for the above-mentioned metals to be a long-term, investable trend.


Richard (Rick) Mills
subscribe to my free newsletter
Ahead of the Herd Twitter


Legal Notice / Disclaimer

Ahead of the Herd newsletter, aheadoftheherd.com, hereafter known as AOTH.

Please read the entire Disclaimer carefully before you use this website or read the newsletter. If you do not agree to all the AOTH/Richard Mills Disclaimer, do not access/read this website/newsletter/article, or any of its pages. By reading/using this AOTH/Richard Mills website/newsletter/article, and whether or not you actually read this Disclaimer, you are deemed to have accepted it. 

Any AOTH/Richard Mills document is not, and should not be, construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

AOTH/Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified. AOTH/Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of AOTH/Richard Mills only and are subject to change without notice. AOTH/Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, AOTH/Richard Mills assumes no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this AOTH/Richard Mills Report.

AOTH/Richard Mills is not a registered broker/financial advisor and does not hold any licenses. These are solely personal thoughts and opinions about finance and/or investments – no information posted on this site is to be considered investment advice or a recommendation to do anything involving finance or money aside from performing your own due diligence and consulting with your personal registered broker/financial advisor. You agree that by reading AOTH/Richard Mills articles, you are acting at your OWN RISK. In no event should AOTH/Richard Mills liable for any direct or indirect trading losses caused by any information contained in AOTH/Richard Mills articles. Information in AOTH/Richard Mills articles is not an offer to sell or a solicitation of an offer to buy any security. AOTH/Richard Mills is not suggesting the transacting of any financial instruments but does suggest consulting your own registered broker/financial advisor with regards to any such transactions

No Charge  Newsletter Signup


Newsletter Unsubscribe

To contact us please email rick@aheadoftheherd.com

Ahead of the Herd