Markets Overview

  • ASX SPI 200 futures up 0.2% to 7,157.00
  • Dow Average up 0.6% to 32,120.28
  • Aussie down 0.3% to 0.7088 per US$
  • U.S. 10-year yield little changed at 2.7452%
  • Australia 3-year bond yield fell 9bps to 2.73%
  • Australia 10-year bond yield fell 8bps to 3.24%
  • Gold spot down 0.7% to $1,853.26
  • Brent futures up 0.7% to $114.39/bbl

Economic Events

  • 10:30am: (AU) Australia to Sell A$1 Billion 91-Day Bills
  • 10:30am: (AU) Australia to Sell A$500 Million 119-Day Bills
  • 11:30am: (AU) 1Q Private Capital Expenditure, est. 1.5%, prior 1.1%

Stocks in Asia look set for a positive open after US equities advanced as Federal Reserve minutes struck a less hawkish note than markets had expected.

Futures rose in Japan, Australia and Hong Kong. The S&P 500 rebounded from earlier losses to end higher, while the tech-heavy Nasdaq 100outperformed.

Treasury two-year yields — which are more sensitive to imminent policy moves — edged higher, while the 10-year rate wavered. A dollar gauge rose, but came off the session’s highs.

Chinese stocks traded in the US gained as investors remain watchful of measures to combat an economic malaise from strict Covid curbs. China’s economy is in some respects faring worse than in 2020 when the pandemic first emerged, Premier Li Keqiang said, urging efforts to reduce a soaring unemployment rate.

Investors took some comfort from the Fed minutes that didn’t show an even more aggressive path being mapped to tackle elevated prices. Still, volatility has spiked as the risk of a US recession, the impact from China’s lockdowns and the Ukraine war simmer.

Most US policy makers saw half-point rate increases as appropriate at the next two meetings, consistent with Chair Jerome Powell’s comments. While they noted the potential for rates to go high enough to constrain the economy, there were hints of a possible pause — an “expedited” tightening would leave the Fed “well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”

Other News

Elon Musk wants to mine it, China is scouring Tibet for it, battery makers are crying out for it. Lithium, the wonder metal at the heart of the global shift to electric cars, is in a full-blown crisis. Demand has outstripped supply, pushing prices up almost 500% in a year and hindering the world’s most successful effort yet to halt global warming.

The shortage of lithium is so acute that in China, which makes about 80% of the world’s lithium-ion batteries, the government corralled suppliers and manufacturers to demand “a rational return” to lower prices. Analysts at Macquarie Group Ltd. warned of a “a perpetual deficit,” while Citigroup Inc. nearly doubled its price forecast for 2022, saying an “extreme” rally could be coming.

The consequences of failure to produce enough lithium are potentially devastating. Global investment in EVs has grown faster than any other new-energy sector over the past few years, outstripping even wind and solar power. Current lithium spot prices could add up to $1,000 to the cost of a new vehicle, Benchmark Mineral Intelligence said. Along with higher prices of other raw materials, that is reversing years of falling prices as EVs race to become cost-competitive with gasoline-powered cars. If battery makers can’t get enough lithium, it would curb the expansion of clean-energy vehicles, making it harder to meet global emissions targets.

“It looks like the expansion ramp up is not going to be fast enough to hit demand” over the next three years, said Cameron Perks, an analyst at Benchmark. EV makers “have been asleep at the wheel.”

The crunch prompted a characteristically blunt tweet from Musk in April. “Price of lithium has gone to insane levels!” he posted on Twitter. “Tesla might actually have to get into the mining & refining directly at scale, unless costs improve.”

Musk’s Tesla Inc. and Chinese automakers BYD Co., Xpeng Inc. and Li Auto Inc. have all already raised sticker prices, as has Contemporary Amperex Technology Co. Ltd., the world’s biggest EV battery maker. “The industry is facing very strong headwinds in terms of cost escalation,” XPeng President Brian Gu told Bloomberg TV in late March.

The silvery-white metal, the third-lightest element after hydrogen and helium, is in the throes of an unprecedented boom because a slump in 2018-2020 that halved its value caused chronic underinvestment in new sources of supply just as EV demand was taking off. For battery makers, those woes have been compounded by the pandemic and Russia’s war in Ukraine, which have snarled supplies of other ingredients they need, including nickel, graphite and cobalt.

Tightening supply and higher prices have prompted a flurry of acquisitions and joint ventures as battery makers and automakers try to secure supplies, and unleashed a wave of resource nationalism among governments. As early as last June, Fitch Solutions said lithium had become a “strategic mineral,” and warned of “rising government intervention.”

EVs and batteries drew $271 billion and $7.9 billion of investment respectively in 2021, according to Kwasi Ampofo, head of metals and mining at BloombergNEF. “The upstream part of the value chain has, on the other hand, attracted relatively low investment over the last five years,” he said.

Lithium has taken a long time to hit the mainstream. Discovered in 1817 by Swedish chemist Johan August Arfwedson, it wasn’t produced in quantity until the US government began stockpiling it to make hydrogen bombs in the late 1950s. After the Cold War, production declined until the metal began to be adopted for use in light alloys, coin cells and then mobile phone batteries in the 1990s.

More than half of the global resources are located in the so-called lithium triangle between Argentina, Bolivia and Chile, where producers pump lithium-rich brine from underground lakes and allow the liquid to evaporate for 12-28 months to yield a slurry that can be profitably processed. Current technology recovers only about 50% of the lithium in the brine.

Much of the remaining supply comes from deposits of an igneous rock called spodumene, with Australia the biggest miner. The ore is roasted and leached with sulfuric acid and the silvery-gray residue typically shipped to China to be made into lithium hydroxide and lithium carbonate – compounds that can be combined with nickel or cobalt to make battery electrodes, or with solvents to make electrolytes.

The quickest way to increase supply is to ramp up output from these existing sources. Ganfeng Lithium Co., one of the world’s largest producers, said it’ll use record profits to boost output. Australia’s Pilbara Minerals Ltd. aims to raise production capacity more than 50% by the September quarter by expanding its Pilgangoora mine in Western Australia, a project that includes Chinese partners Great Wall Motor Co. and CATL.

For many brine-lithium producers, increasing output quickly is constrained by their permits and the time taken to let the liquid evaporate.

One longer-term solution is to find new deposits.

Mining superpowers Australia and Canada has both promised to help develop critical mineral resources, including lithium. China recently announced that its geologists had discovered a spodumene deposit on the Qinghai-Tibet plateau in the region of Mount Everest that could hold more than 1 million tons of lithium oxide. But it takes years to develop a new mine and, in some countries, the process is becoming more difficult due to resistance from local communities.

“There is plenty of lithium in the ground, but timely investment is the issue,” said Joe Lowry, founder of advisory firm Global Lithium. “Tesla can build a gigafactory in about two years, cathode plants can be built in less time, but it can take up to 10 years to build a greenfield lithium brine project.”

Rio Tinto Group’s proposed $2.4 billion Jadar mine on farmland in western Serbia, which would be Europe’s biggest, stalled as thousands of protesters marched in the streets. Rio says the mine, originally scheduled to open in 2026, would create more than 2,000 jobs and meet the highest environmental standards, including using recycled water and electric trucks. Savannah Resources’ Barroso project in Portugal and Lithium Americas Corp.’s proposed mine in Nevada are others that have to negotiate local opposition.

Chile’s Constitutional Convention this month approved an expansion of environmental governance that includes reshaping water rules and other environmental protections that could affect lithium producers if the charter is ratified in a September referendum. “If you’re a multinational company going in to Chile right now, you have to think twice, because you don’t know what the rules are,” Lowry said.

But lithium producers face an even bigger problem. Part of the reason consumers are prepared to pay a premium for an electric vehicle is that it’s better for the environment. But the lithium supply chain is far from green.

“Lithium mineral producers have the greatest need to reduce their emissions profiles,” said Dominic Wells, senior sustainability and cost analyst at Wood Mackenzie Ltd.