It’s always wondrous to see how the journalistic types never quite do understand the financial types. Here we’re a note from Goldman Sachs on possible prices for future metals prices – driven, of course, by the expansion of electric vehicles and their batteries.
What the journalist is doing is turning an assumption to illustrate a point into a prediction. This is rather if my aunt had testicles then she’d by my uncle. Although not, necessarily, these days of course, could be my xer:
Growing demand for electric car batteries will cause prices of the main materials to surge, Goldman Sachs analysts said in a March 18 note.
That in turn will drive prices of batteries higher by about 18%, affecting the total profit of electric car makers since the battery accounts for about 20% to 40% of the vehicle cost, the Goldman analysts said.
While the report didn’t give specific price targets for the commodities, the analysts’ model predicted a return to historical peak prices would more than double the cost of lithium for electric battery makers. That of cobalt would also double, while the cost of nickel would rise by 60%.
Prices will indeed rise if as and when demand does. Whether they will stay up depends upon how much supply rises. For those supply and demand curves at the beginning of the textbook are indeed correct, as prices rise then more people become willing to supply. The actual price being the mix and match point where willing demand is met by willing supply.
Markets are also forward looking which means that the expectation of the rising demand is already increasing the prospecting for and financing of deposits of those target metals. Some pretty odd propositions are gaining finance too, like Piedmont Lithium. The last bout of excitement about batteries led to both Nemaska and Altura gaining at least some finance and they both then went bust when supply did roar ahead of demand and prices didn’t, therefore, meet forecasts.
However, look at what the Goldman’s thing really is: “a return to historical peak prices would more than double”. Well, OK, yes, if prices rise then prices will rise. But the assumption that prices will rise is indeed an assumption, not an output of their model.
My best guess – and it is just a guess – is that supply will increase more than demand. Even if that’s not true I would insist that supply will increase more than current estimates have it. Simply because the general view is incorrect about how much there is out there. The lithosphere is a big place and it’s all made up of only the 92 elements. We really, really, are not facing a shortage of anything we might want to use. Sure, a lot of that is uneconomic at current prices. But there’s a lot more that is economic than most think.
But that real point there. Goldman’s have said that if prices rise then prices will rise. CNBC has taken that to mean that prices will rise. No wonder the general public gets so confused about matters economic when those trying to explain it are as well.