Energy metals face financing headwinds in global high interest rate environment

Higher financing costs are impacting traders across different minor metals despite greater availability of cheaper materials

Higher costs have posed challenges for market participants looking to leverage potential long-term demand stemming from the energy transition.

Trading firms involved with energy transition metals face rising trade financing costs, placing additional pressure on their trading activity and forcing some to cut inventoried material.

Destocking has been reported across a number of minor metals, including those vital to the energy transition.

“With these interest rates, if people can sell [material] they’d rather take the cash than carry large inventories,” one battery raw materials trader source said.

Fastmarkets’ price assessment for lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices cif China, Japan & Korea was $36-40 per kg on Thursday April 13, down from $58-63 per kg a month earlier on March 13.

Fastmarkets’ price assessment for cobalt standard grade, in-whs Rotterdam was stable at $16.50-17.30 per lb on April 13. Prices have been on a general downtrend over the last year, but this recently reversed, with prices increasing compared with Fastmarkets’ price assessment of $15.15-16.50 per lb on March 1.

Prices have come off the highs seen last year due to weak demand and growing supply. These metals are key to decarbonization goals in the West, given their usage in electric vehicles. Some market participants have looked at the lower prices as a potential entry point to materials used in the battery supply chain.

Despite the appeal of starting or increasing a position in those markets, financing poses a challenge, especially as interest rates in Europe and the West have increased significantly in recent weeks and months because central banks want to tame rampant post-COVID inflation with rate hikes.

In March, the European Central Bank (ECB) decided to raise its three key interest rates by 50 basis points (0.5%), the Bank of England rose rates by 0.25% and the US Federal Reserve raising its target interest rate – also by 0.25%.

Relatively-high interest rates are expected to persist in the medium term.

In an ECB survey of professional forecasters earlier this year, respondents expected the rate on the Eurosystem’s main refinancing operations to increase to 3.0% in Q1 2023 and 3.5% in Q2. They expected it to remain around this level for the rest of 2023 before declining slightly in 2024 and to below 3% in 2025.

In March, the US Federal Reserve forecast it would raise interest rates one more time in 2023.

“In general, traders [across all markets] are reducing stock to deal with the shock of financing costs,” a European minor metals trader source said.

“Some people were overstretched and had too much stock of low-margin material, so they ran into problems – personally [I think] this was their fault, but this is how trading is,” a second minor metals source said.

“Inventory is not cheap to hold onto with interest rates being what they are at the moment,” a fourth market participant said.

Small, medium traders particularly vulnerable

Destocking because of high interest rates leaves market participants vulnerable to upside risk should demand pick up in the shorter term.

“I think it sets the stage for volatility later in the year,” a US-based minor metal trader source warned.

Another trader source disagreed that destocking would lead to volatility. “I don’t see extreme volatility imminently,” this source pointed out, clarifying that the metals they are active in are generally delivered by air, and less vulnerable to potential supply chain disruptions in slower sea freight.

Volatility, however, is already impacting financing, as corroborated by a Europe-based battery raw materials trader source.

“The banks don’t want to see traders holding onto the materials, they want to see traders sell their materials as fast as possible. These higher interest rates have definitely made it more challenging for traders,” the European trader source said.

The impact of rising interest rates has been particularly pronounced for small- to medium-sized traders, whose larger counterparts are able to leverage long-term, high-value relationships with lenders to continue securing credit lines at comparatively favorable rates.

“We have a really good credit line so our financing is not really affected by higher interest rate. We actually benefit from the higher interest rate because everyone else is struggling to finance [battery raw materials] and this means less competition for us,” a trader source from a larger trading house said.

Uncertainty, high costs reduce liquidity, longer-term speculation

The development has also impacted risk appetite for certain traders when it comes to entering long positions.

“If we saw a good buying opportunity, we used to be able to buy and hold onto the materials. But now, the cost to finance cobalt can add extra $1 per lb over a year, so you should only take the buying opportunity if you know the prices for cobalt will recover in 10 months’ time,” a second European trader source said.

When asked by Fastmarkets, a third European trader source denied having missed out on deals due to high financing costs.

A director at a medium-sized European trading house, active in a number of minor metals, flagged difficulty to Fastmarkets last week, saying: “Of course [high-interest rates] are affecting us. We can’t do the same deals [as previously] considering the financing costs.”

Another director who was particularly active in silicon - a vital metal for the secondary aluminium industry and the circular economy - explained the particularly concerning outlook facing traders in softening markets.

European silicon prices have maintained a general downward trend in recent months, as market participants report weak demand and low liquidity.

Fastmarkets’ price assessment for silicon grade 4-4-1 99% Si min, in-whs Rotterdam was stable in the most recent pricing session on April 6, at €3,000-3,300 ($3,307-3,638) per tonne, marking a significant decline from the €3,400-€3,500 per tonne reported on January 6.

Fastmarkets’ price assessment for silicon grade 5-5-3 98.5% Si min, in-whs Rotterdam was stable on April 6, at €2,600-2,900 per tonne, down from €3,250-3,650 per tonne on January 6.

“The high interest rates are definitely playing a role in the situation. We’re seeing many medium-size traders having [operational problems] and many are scared of what’s happening, where they’re holding positions in a downtrend market and being slammed [with high interest rates],” another trader source said.

A European minor metal consumer source corroborated this, reporting that traders are decreasing inventories because their profits have been eaten by a combination of low demand and high interest rates.

“It’s a fact that traders are stepping back on holding inventories, because their [profit] margins have eroded,” the consumer source said.

The situation has also impacted consumers, one trader source explained, pointing out that they are reducing stockpiles and living hand to mouth.

High interest rates are also impacting base metals, with Fastmarkets reporting that costly financing fees are causing ripples in the European refined copper market.

Alexander Cook and Sayaka Kurata in London contributed to this report.

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