JH Explorer in Chile: Supplying the metals for decarbonisation
A recent research trip suggests to Portfolio Manager Tal Lomnitzer that limited supply to meet rising demand should continue to underpin copper and lithium markets.
3 minute read
Key takeaways:
- Chile is a leading producer of copper and lithium, which are seeing rising demand to facilitate the move towards decarbonisation.
- Copper faces headwinds such as water and labour issues, ore quality, underinvestment and taxation, while lithium markets also remain tight, which should continue to support prices.
- Unprecedented demand for natural resources to transition to a global clean economy presents a unique investment opportunity.
| The JH Explorer series follows our investment teams across the globe and shares their on-the-ground research at a country and company level. |
Copper plays a vital role in the transition towards clean energy, being a key component in renewable infrastructure and electric transportation. Chile is the largest copper producer, supplying 27% of global copper production in 2021, and home to the two largest mines in the world, Escondida and Collahuasi. Copper production has declined because of water issues and declining ore grades at major mines, combined with labour woes and insufficient rates of reinvestment.
On a recent research trip I met with various producers, including national mining company Codelco. The meetings suggested that there may be further risk to consensus copper production forecasts due to ongoing environmental and operational challenges, compounded by an uncertain taxation outlook as Chile seeks to increase royalties imposed on mining companies. Some companies such as Teck Resources and Lundin Mining are looking to increase production, bucking the trend, but at an aggregate the level the headwinds to copper production in Chile make one incrementally more positive on the outlook for copper in 2023 and beyond.
Salar de Atacama salt flat, in the driest place on earth
Lithium is arguably ‘the new oil’ and Chile is the equivalent of Saudi Arabia in the oil world with enormous resources in the rich brines of Salar de Atacama. With 8 million tons, Chile has the world’s largest known lithium reserves, well ahead of Australia at 2.7, Argentina with 2 and China with 1 million tons. The Atacama desert is considered to be the driest place on earth. The intense sunlight is used by lithium producers as a free energy source to evaporate water, concentrating the lithium content in the brine before it is transported to the coast for processing into lithium carbonate, used in batteries for electric vehicles and consumer electronics.
Concentrated 6% lithium rich brine before shipment for processing into lithium carbonate                                                                                                                       Â
Evaporation ponds at a lithium operation in Salar de Atacama
My site visits to two lithium operations suggest that lithium production could be ramped up in the coming years due to recovery improvement projects and implementation of new extraction technologies. This makes me a little more cautious on the medium-term outlook for lithium prices once the current supply-demand squeeze has passed. But for now, tight markets where there is simply not enough lithium to meet demand, should support current prices at elevated levels.
The learnings from my trip further strengthened the Global Natural Resources Team’s multi-year positive outlook on the resources sector, which is facing unprecedented demand for the raw materials needed to make the transition to a global clean economy a reality.
*World Economic Forum.org, 12 December 2022: Which countries produce the most copper?
IMPORTANT INFORMATION
Commodities (such as oil, metals and agricultural products) and commodity-linked securities are subject to greater volatility and risk and may not be appropriate for all investors. Commodities are speculative and may be affected by factors including market movements, economic and political developments, supply and demand disruptions, weather, disease and embargoes.
Natural resources industries can be significantly affected by changes in natural resource supply and demand, energy and commodity prices, political and economic developments, environmental incidents, energy conservation and exploration projects.
Sustainable or Environmental, Social and Governance (ESG) investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than the broader market.
JHI
JHI
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- The Fund follows a responsible investment approach, which may cause it to be underweight in certain sectors (due to the avoidance criteria employed) and thus perform differently than funds that have a similar financial objective but which do not apply any avoidance criteria when selecting investments.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
3 minute read
Key takeaways:
- Chile is a leading producer of copper and lithium, which are seeing rising demand to facilitate the move towards decarbonisation.
- Copper faces headwinds such as water and labour issues, ore quality, underinvestment and taxation, while lithium markets also remain tight, which should continue to support prices.
- Unprecedented demand for natural resources to transition to a global clean economy presents a unique investment opportunity.