As the World Undergoes a Radical Technological Shift, a Couple of Metals Will Become the Resource of the Fully Electric Future
From personal computers through the internet to smartphones, the past forty years have ushered in incredible technological innovations that have changed the way people experience the world. In the past twenty or so years one thing has become abundantly clear – everything is bound to become either electronic, electric, or digital. And while some technologies like electric vehicles are still developing, they have the capacity for exponential growth. In the coming decades the resources that make our electric world possible will become the unit of exchange as demand for them grows and their supply tightens.
The Transition
The analog to digital transformation that began in the '70s is nearly complete today. Thanks to this, now we can all enjoy listening to podcasts on our smartphones while we're driving around in our electric cars on our way to work where we'll use a computer to send some emails over the internet and hopefully get some work done.
This was all nearly unthinkable in the first half of the last century but thanks to incredible advances in technology, we are quite literally living in the future. All of this has to do with a bunch of really smart people who found out how to channel electricity through thin metal wires in complex arrangements to make images and sounds appear out of thin air.
Those are the microprocessors that make everything in our daily life possible – from our microwave ovens to our air conditioners. Because of how prevalent they are in our lives, chips are in extremely high demand, especially now that artificial intelligence is here and is very power-hungry. This is naturally attracting investor interest in the technology field since there is a lot of money to be made with high tech.
It's no wonder that the most influential and well-known companies in the world are namely tech companies such as Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). Recently, Nvidia (NASDAQ:NVDA) has been stealing the spotlight as the most important player in the market simply because they design the chips everyone else is using.
And while companies are scrambling to get their hands on the best chips available, countries are fighting over the import and export of these devices because they see them as the most crucial bargaining chip for the future. It's safe to say that investors are also enjoying this tech uptrend, which is the closest thing to a crypto rally the equity market has ever seen.
The US and China have often engaged in trade wars over the decades and now their focus has shifted towards safeguarding their competitive edge on the global stage. The United States have tightened exports of high-end chips to China while the latter have answered with a protectionist policy of their own – restricting the outflow of the resources needed to make those same chips.
This cat-and-mouse game is just an example of the premium the most powerful economies in the world are putting on the technology that powers the world. But even then, while the tech boom is happening, few are paying attention to an arguably even more important facet of contemporary life – batteries.
The Insatiable Demand For Batteries
The technological upheaval happening right now is not contained to just microchips. While they are essential to any piece of electronics, there is another technology that is just as crucial. Batteries are becoming a necessity rather than a convenience. Virtually all consumer electronic devices are using them, and they have also found their way into vehicles.
And while we all know by now that electrification is becoming more and more commonplace, we might not be placing the same importance on it as we do on chips. The gradual transition to renewable energies is felt everywhere as companies and governments are attempting to pivot away from fossil fuels and into more sustainable resources like wind and solar energy.
Batteries occupy a key role in that movement as they are the only portable energy source for the automotive sector other than petroleum. To understand how important this is, we need to put it in context. Demand for EVs is expected to comprise 59% of all new cars by 2040, according to BloomberNEF, which dwarfs the current 14% in comparison.
Interestingly enough, most of the resources that go into either chips or batteries are quite abundant on the planet, meaning there is no immediate supply-side pressure to speak of. For the latter, the two primary resources used are cobalt and lithium. As of late, their prices have plummeted significantly because their production was ramped up on expectations of explosive EV production.
Simultaneously, battery demand is expected to increase several times over by 2030 mainly due to explosive demand in the automotive industry. IRENA reports that out of the world's total lithium demand (a main metal used in batteries), 34% was from EVs in 2020 and is projected to rise to a three quarters by 2030.
While electric cars are becoming more and more prevalent, it's clear that they're not flooding the market just yet, which means that there's an oversupply of their basic components. When supply is abundant, price levels tend to slide.
This metal glut might be short-lived as a 2020 UBS report outlined demand outpacing supply incredibly soon. By all probability, the need for lithium would outgrow its production anywhere between 2024 and 2027. Its price started dropping right around 2023 which would indicate that the turbocharged mining pushed that critical point further down the line, but how much further?
At some point it will occur and when that happens, there will be a supply crunch. If the push to a zero-emission world is so strong, what's preventing it from happening sooner rather than later? And if we are electrifying our lives inside and out, wouldn't batteries become the most valuable piece of tech after chips?
Is it possible that almost everyone is looking at the wrong side of tech for the future? After all, Earth's fossil fuels are finite – we have another fifty years or so of petroleum reserves left on the planet, according to Our World in Data. After that, everything will theoretically run on renewable energies. When batteries are in high demand, will that make their components more valuable?
Both lithium and cobalt are niche commodities because their applications and usage are somewhat limited compared to other more popular metals. Consequently, they are traded only on a handful of futures exchanges and not for investment purposes either. Getting exposure to their market is challenging.
However, the overarching demand growth for battery technology is very likely to have a rallying effect on other materials used in their production. For example, rechargeable batteries are 15% aluminum. Unlike lithium and cobalt, it’s readily tradeable on the market. A surge in battery consumption can easily drive its price up, especially since it’s a key metal used in a closely correlated sector – electric vehicles.
In all probability, nothing would stop aluminum’s price from reaching its past peak of $4,061 per ton. From current prices, that would mark a 68% growth. And with recent examples of how other commodities rally during supply squeezes, it wouldn't be too difficult to imagine the metal making a similar comeback in the not-too-distant future.
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Technical Analysis of Aluminum
Key Levels
- $2,154 – Monthly Key Level. It acted as a significant support in September 2022 and held firm for 256 days (about 8 and a half months) in 2023. The price of aluminum consistently found support here, highlighting its strength and fair value around this price zone.
- $2,393 – Daily Key Level, which served as resistance in December 2023 and is now acting as a support, close to the current price levels. If the price declines further, we could expect a potential bounce off this level.
- $2,678 – Daily Key Level, which was a significant resistance in January '23, April '24, and June '24. It represents a critical barrier for the price. If a bullish trend emerges, breaking above this level could open the path toward the previous all-time high of $4,058.
Bollinger Bands Analysis
- The Bollinger Band channel is currently wide, showcasing the increased volatility in price as a result of the large upward price movement in the past month.
- As the bands begin to narrow, we could see the price move lower, potentially finding support at the middle band. This narrowing typically indicates that consolidation and sideways movement may occur, likely around the $2,400 range.
Range-Bound Movement
- The price of aluminum has been range-bound between $2,154 and $2,678 for the last 2 years and 3 months, within a range of about 24%. This prolonged consolidation suggests stabilization within these levels. A breakout from this range could attract large trading volumes. Market sentiment might change and lead to significant price movements once the range is broken.
Conclusion
- The daily key level at $2,393 and the middle band of the Bollinger Bands are likely to converge, creating a stronger support level. As the Bollinger Bands narrow, this could indicate upcoming consolidation and sideways movement around the $2,400 range. Additionally, the price of aluminum has been range-bound between $2,154 and $2,678 for approximately 2 years and 3 months, within a range of about 24%. This prolonged consolidation suggests stabilization within these levels. A breakout from this range could attract trading interest and potentially larger price movements. Monitoring these key levels and the Bollinger Bands' behavior will be crucial in determining the next significant move for aluminum.
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Contributions
Technical Analysis provided by Tiago Afonso.