New technology constantly reshapes the commodities market.
We frequently learn new applications for certain commodities, like using lithium for lithium ion batteries. Research from Citi now forecasts that the lithium ion battery market will triple in size in the next decade. This is great news for lithium stocks, and graphite stocks too, as they provide the key raw materials for lithium ion batteries.
The commodities market is also reshaped by technology that allows us to access previously inaccessible resources.
One Diggers and Drillers gold stock has just announced a successful world first use of Xstrata’s ‘Albion Process’ technology to extract gold and silver from sulphide ore that normally can’t be processed. This could rewrite the rules for the many gold companies finding themselves stuck with what used to be useless sulphide ore.
One huge development that has rewritten the rules in the energy market is the development of ‘fracture stimulation’, or fracking; as well as horizontal drilling. This allows production from vast untapped shale gas deposits.
The chart below shows estimated natural gas reserves for each country; with the known conventional natural gas resources in the middle in light blue, and shale gas resources around that in dark blue.
Global Shale Gas (Dark Blue) Resources Compared to Conventional Gas (Light Blue)
The US blazed the trail in the shale gas space. Its shale gas resources are now estimated to be around 482 trillion cubic feet (tcf), compared to 273 tcf of conventional natural gas resources.
This has been a game changer for US gas supplies. The natural gas price has more than halved over the last five years. With so much new supply coming on line from shale gas exploration, it’s hard to see gas recovering to its previous highs. The CEO of General Electric describes the natural gas price as now being ‘permanently low’.
Natural gas markets tend to be more local than oil. It takes specialised ships and hubs to transport gas internationally, so the glut of shale gas in the States has not caused the gas price to fall in other markets.
But if you look at just how much shale gas other countries are sitting on, you can see how they could follow suit in time. Australia is sitting on almost 4 times as much shale gas as conventional natural gas.
Argentina’s and China’s shale gas reserves dwarf those in the US.
The US isn’t exporting its gas yet, but the falling gas price is still having a huge effect on us in other ways.
The Unforeseen Consequences of Cheap Natural Gas
There are always unforeseen consequences with new technologies. The availability of natural gas means less coal is now used in the States. The surplus coal is hitting the international markets, which in part explains why our coal price has fallen out of bed. In the last 12 months, the Newcastle coal price has fallen by 25%. If shale gas is behind this fall, then it’s hard to see the coal price recovering any time soon.
But it’s not just coal.
Uranium is now in the cross hairs. ‘Permanently cheap’ natural gas is giving the economics of nuclear energy a run for its money too. The uranium spot price held above $52/ lb between last September and this May. But in the last few months, the uranium price has been slipping, and is back down to $49 / lb, which is a worrying sign.
The CEO of General Electric, Mr Immelt, also had a few words to say about uranium. His company is a major manufacturer of nuclear equipment. He recently said (my emphasis in bold):
‘It’s just hard to justify nuclear. Really hard. Gas is so cheap and at some point, really, economics rule … So I think some combination of gas, and either wind or solar … that’s where we see most countries around the world going.”
This is not what uranium companies or their investors want to hear. I’m sure they would argue the long-term case is still intact given that China, India and other Asian nations are committed to building a huge new fleet of plants, right at a time when a shortage is looming.
But a huge natural gas supply is also looming, and like GE’s boss said, at some point economics rule. I’ve been bullish on uranium in the past, but had to recommend selling out of uranium stocks after the trade turned sour.
I’ve found it increasingly hard to make the case for uranium. The market seems to have made its mind up at any rate: the share price of so called ‘blue chip’ uranium stocks like Paladin (ASX:PDN) has tanked 30% in the last three months.
The resource market has been a brutal place in the last 12 months, and investors have had to be nimble to even preserve their capital. My strategy with Diggers and Drillers has had to adapt to the drastically changing environment, focusing squarely on oil, precious metals and strategic minerals like graphite and lithium.
Graphite and lithium both stand to benefit from the surging lithium ion battery market. Oil is still a very tight market, and can only fall so far until tensions in the Middle East improve. As for precious metals, I wrote to you about silver yesterday. After a 14 month fall, it’s starting to look like the worst might be behind it, in which case we could be brewing for the next rally.
Something else to think about is the possible silver demand from solar energy. Mr Immelt likes the look of the future for solar, now that solar panels have come down in price by 75% in the last three years.
(Surprisingly, your regular editor, Kris Sayce has got onto the solar story recently, tipping a solar stock to readers of Australian Small-Cap Investigator.)
Solar panel manufacturing uses around 5% of the annual global silver production, even though solar only makes up less than 1% of the global energy mix. From such a low base, even a small increase in the proportion of solar will create a meaningful increase in demand for silver.
Like most technologies that compete with established industries, solar has had a few false starts. It is getting interesting now that it is cheap enough to compete with mains power in some countries, and this has implications for silver demand.
Dr. Alex Cowie
Editor, Money Morning
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