Interview: Hot commodities

Alberto Migliucci, the CEO and Founder of Petra Commodities is regarded as one of Asia’s most successful deal makers and has helped stitch together over $150 billion commodities deals across the Asia-Pacific region over the last 15 years (Forbes Asia).

Before founding his own business, Alberto was Credit Suisse investment bank’s managing director, Global Energy Group and Head of Metals and Mining for Asia from 2008 to 2013. While in that position, Credit Suisse led all its competitors as the number one dealmaker in metals and mining during that period, with a total for the period of 38 deals, a 20% market share and net revenues of $132.5 million, according to Dealogic data.

Alberto has a unique background combining geology and investment banking, with 25 years of experience, 18 of those spent in Asia. He played an important role in several commodityrelated IPOs, such as those for Berau Coal Energy, Borneo Lumbung Energi and Bumi Resources Minerals. Unlike many other bankers, he has a solid academic understanding of commodities, getting a Bachelor Science with major in geology (with first class honors) from the University of New South Wales in Australia.

Coal & Minerals Asia’s Editor in Chief, Adianto Simamora caught up with Alberto recently to hear his insight into current commodity trends and where he sees the market heading. Below is an edited excerpt of the interview.

What do you think are the hottest commodities right now?

I’d say 3 of the hottest commodities now are nickel, coal and gold. There are a few key trends that I’m tracking right now.

First, nickel. Nickel has hit a sixmonth high and I expect there to be a lot of action in the corporate and development space for this metal, especially on the processing side (e.g. the multibillion-dollar investment in the Indonesia Morowali Industrial Park (IMIP)). The electric vehicle (EV) market still represents only a tiny fraction of overall demand for nickel worldwide, and nickel’s day won’t come right away, but I see EV batteries as a game-changer for nickel in the medium to long term. Analytical group CRU estimates that around 1.1 million tons of nickel will be needed for electric vehicles in 2030, 87% for the cars themselves, and 13% for the grid storage. This equates to 52% of last year’s global nickel demand.

Next is gold. Any view on gold needs to be seen through the prism of macroeconomic forces and talking about macro, numerous of the world’s Central Banks have been buying the yellow metal.

It is estimated that Central Banks bought more than 650 tons of gold in 2018, that’s the most in 47 years and nearly 75% more than the year before. For example, the Central Banks of India, Indonesia, Thailand and the Philippines have re-entered the market after multi-year absences. Such demand, while supportive to the gold price, may not move the needle as much as say U.S. macro factors like the U.S. dollar and U.S equities. Supported by safe-haven bids, uncertainties such as US-China trade, Brexit and the EuroZone will heavily weigh in on gold. Should increased volatility and heightened global uncertainty remain in 2019, which thus far, appears to be likely, gold should continue to outperform. Gold has been a traditional hedge against financial and economic crises, playing that role during the Global Financial Crisis 2008-09 meltdown. Gold rallied 17% from the collapse of Lehman Brothers on Sept. 15, 2008, until the stock market bottomed on March 9, 2009, a period during which the S&P 500 fell more than 40%. We are seeing a bit of this currently with the latest carnage in some of the tech stocks and cryptocurrencies, investment is heading back to the yellow metal.

Lastly coal – The energy world is in a state of rebalance, and (thermal) coal is essentially filling the gap while the world makes up its mind on which energy mix to deploy in future years. Investment in coal has been subdued in the last few years with many of the developed countries cutting back on new coal-fired power projects due to social ideologies and environmental pressure.

Various industry estimates perceive global coal demand to be modest, with declines in Europe and flattish growth in China offset by demand from India and ASEAN countries, mainly Thailand and Indonesia. However, I believe, supply risks are potentially on the rise, I anticipate the next coal bull cycle to be primarily driven by the supply side following several years of underinvestment in new capacity. Essentially coal is needed for more than 70-80% of Asia’s base load power so reliance on the black stuff is necessary over the short to mid-term.

With regards to the above-mentioned commodities, where do you see the big investment dollars?

The world’s largest mining companies are already betting big on that big EV nickel demand projection. The big miners are banking on it - BHP Billiton, Glencore and Vale are among a growing list of miners investing in a potential boom in nickel demand. Australian tycoon and politician Clive Palmer, for example, plans to reopen Queensland Nickel’s Yabulu refinery. Located in Townsville, Queensland, the nickel-cobalt refinery was one of the world’s largest for 40 years until it was shut down in early 2016 as nickel prices slumped to a 12-year low.

Indonesia, which produces one-third of the world’s nickel ore, has been gradually raising output since early 2017 when it partially lifted a three-year export ban. Indonesian state miner PT Antam now aims to export 5 million tonnes of nickel ore in 2019, up from an estimated 3.9 million tonnes in 2018. PT Antam and state-owned energy company Pertamina are also teaming up to build their own lithium-ion battery factory.

Cash is also pouring in to Indonesian nickel production from abroad. Investors from China, Japan and South Korea are reportedly investing $4 billion to build a lithium battery factory at the IMIP on the island of Sulawesi. The IMIP site is already home to 20 nickel ore processing facilities feeding 1.5 million tonnes of nickel pig iron annually into the nearby Tsingshan stainless steel mill. One of the suppliers of nickel to the Chinese-owned facility is Hengjaya, a mine owned and operated by Australia’s Nickel Mines that raised A$200 million ($150 million) via an IPO in August 2018 on the Australian Securities Exchange.

You focus quite a bit on the electric vehicle (EV) story and the rise of the battery metals. What is your outlook for this industry in particular?

The continued global focus toward cleaner energy solutions has meant the battery metals such as nickel, cobalt, copper, vanadium and lithium to underpin the energy and mobility transformation. The surge in interest in electric vehicles has led to strong rallies in these “new age” metals in recent years and the trend is expected to continue.

The International Energy Administration outlook predicts annual demand for electric cars to reach 125 million by 2030 from three million presently. It is batteries and battery technology that are of the greatest relevance to base metals when it comes to the entire question of electric vehicles.

Estimates of the metals demand for batteries still involve considerable uncertainty and vary widely. Individual research and data providers themselves point out that it will be many years before electric cars reach commercial market maturity. Many estimate the mid-2020s as being this point.

What’s your latest view on gold and cryptocurrencies, looking at the value of gold in a digital world? I understand you have been focussing on this. Can you give a short introduction to this?

Gold has been around for millennia and its track record as a monetary instrument stands solid, but then came along the “cryptocurrency”, which in a very short time-frame brought a new product to a new market creating a new class of investors. As an investment banker, I found this quite notable, and cryptocurrencies were touted as taking over gold’s role in a crisis. Until, panic hit the markets and in late 2018 which saw Nasdaq investors pulling their money out of the formerly high-flying tech stocks, with the tech-centric equity benchmark posting its worst day in seven years. The China stock market fell to its lowest level in almost four years following added concerns about rising interest rates and a bruising trade dispute with the U.S. Most of, if not all of the cryptocurrencies started free-falling, with Bitcoin, the biggest world’s digital currency, losing more than 80% of its value since it hit an all-time high of almost $20,000 in December 2017 down to below $4000 within less than 12 months leaving many investors concerned about its volatility and underlying value. In the last few months we have seen over $1 trillion in tech stocks wiped out, honestly, I don’t know what’s more alarming – that these stocks lost more than $1 trillion in just a few months or that investors drove them higher by more than $1 trillion in just a few months without any material change in circumstances.

In response, the spot gold price posted its largest single day gain in percentage terms (+2.5%) since June 24, 2016, the day after the UK Brexit vote. Indeed, the precious metal surged above $US1,230 as investors began to question the valuations of some of Wall Street’s riskiest assets and we are beginning to see the gold price penetrate the psychologically important level of US$1,300 per ounce. This is gold price’s best performance since 2010.

The long-standing argument for gold is clear, it is, and perhaps the only financial instrument that is not simultaneously somebody else’s liability.

Petra Commodities is currently exploring how to relate the crypto world and gold back to commodities investments, with gold and the creation of a new class of investors. The exodus from many cryptocurrencies may be the catalyst for yellow metal to shine once again as gold has historically been negatively correlated with risk-on assets. Petra Commodities is working on ways to best utilise blockchain (the underlying technology of cryptocurrencies) to disrupt and transform traditional monetary and gold business models. Many industry leaders have already achieved significant business benefits using blockchain technology, including greater transparency, enhanced security, improved traceability, increased efficiency and speed of transactions, and reduced costs. We believe that blockchain can be applied to the gold industry, particularly in relation to the transparency and security of the metal.