Commodities Archives - Bankers Anonymous

September 25, 2024September 25, 2024

One Word For You: Lithium

A very cool story in the October 2024 issue of Texas Monthly hit me personally as a modern version of that memorable moment in the movie The Graduate, like a quiet investing tip given out by the pool during a cocktail party:

Texas Monthly Article: “I just want to say one word to you. Just one word.”

Me: “Yes, sir.”

TMA: “Lithium.”

Me: “Exactly how do you mean?”

TMA: “There’s a great future in Lithium. Think about it. Will you think about it?”

I thought about it.

The Bull Case For Lithium

Oil and gas isn’t going away any time soon, but we are in the early years of rapidly ramping up alternative energy sources, including especially here in Texas.

To get from here to there in the energy transition, we’re on a path to use a lot more lithium, a central ingredient in the lithium-ion battery powering your utility scale batteries for renewable-energy storage, your Tesla, and also your iPhone.

The chart showing demand for lithium is a one-way line, straight up.

A McKinsey study from 2023 expects 27% annual growth of demand for lithium-ion batteries between 2022 and 2030.

The growth of batteries is closely linked to the growing demand for lithium, of which 90 percent is for electric vehicles and battery storage. As a result, the International Energy Association foresees an eight-fold increase in demand for lithium between 2023 and 2040.

The three largest sources of lithium mining are in Australia (33 percent), China (23 percent), and Chile (12 percent.)

The US hasn’t opened a lithium mine since the 1960s, and for a variety of good environmental reasons maybe we shouldn’t. Current techniques may make it impossible to onshore lithium mining to the United States – due to environmental concerns such as water contamination and injury to the landscape.

China currently dominates the lithium-ion battery industry, supplying 80 percent of batteries worldwide. It is also the largest lithium refiner in the world. Average prices for lithium were five times higher in 2022 than 2021.

Texas Monthly article

So, back to the Texas Monthly article, which is excitingly titled “The Lone Star Lithium Boom,” and the story is quite cool as well. A Baylor-trained chemist living in northeastern Texas developed a process – a while ago – for extracting lithium from briny water. He set up a company called International Battery Metals (IBAT) to commercialize his patented process.

Smackdown_Formation — Map from Texas Monthly: Shows area of high lithium concentration in briny water in these areas in red

The other weirdly exciting Texas angle is that a large southern swathe of Arkansas and northeastern Texas is unusually rich in the briny water that makes for concentrated lithium extraction using his technique.

According to the article, IBAT recently opened its first commercial lithium-extraction operation in Utah this summer. Meanwhile a Norwegian oil company has partnered with an Arkansas-based company that has a similar lithium extraction method. They are aggressively leasing briny water acreage in East Texas. Reuters reports that Exxon Mobil also has big plans in a section of Arkansas to begin lithium extraction.

Houston-based companies SLB and Occidental, plus Saudi Aramco and the Abu Dhabi National Oil Company all have indicated interest in lithium extraction, giving further credence to the large scope of the opportunity. A further hope and claim of lithium-extraction from briny water is that it avoids the high environmental impact of traditional mining.

As a hot tip, Is this a good investment?

In the specific sense of one man’s entrepreneurial quest to invent and perfect a process to respond to a global market opportunity – it’s undoubtedly super risky as a standalone investment. IBAT in particular is a penny-stock company listed on the Canadian Securities Exchange, a situation which always gives me the ick.

On the other hand, you can’t help but cheer for a guy who was super early in developing a process that might respond to a megatrend of the next decade, and has many giant companies looking to get in the game.

Malthus versus reality

My biggest takeaway from this story is renewed optimism. A few years ago a frequent complaint about the energy transition was that the rare metals required to make large-scale batteries and other high-tech hardware were located in dangerous or unfriendly countries, creating a choke point against progress.

But you know what? When the demand gets high enough and prices respond, entrepreneurs get busy finding new ways to solve most any choke point.

In the late 18th Century, economist Thomas Malthus proposed a view – totally wrong as it turns out – that scarcity and increasing shortages of vital goods would be the fate of humanity as our population grew. The Malthusian worldview – proven wrong over and over again – often dominates our expectations for the future.

“Peak Oil” has been declared numerous times since the 1970s. Decelerationists and anti-growth people often adopt a Malthusian mindset – this idea that the world is running precipitously towards a commodities cliff, after which declining living standards will follow scarcity and shortages. Instead, our actual lived experience – decade after decade, century after century – has been one of increasing abundance since Malthus. Abundance not just of food but also fresh water and sources of electricity and all the things that make humanity materially better off generation after generation.

This is the right framing of the lithium story. Step 1: Demand explodes for lithium due to the innovative roll-out of batteries to solve a huge number of human problems in the twenty-first century. Step 2: Prices of lithium rise fivefold in response to the demand. Step 3: Some clever chemistry PhD develops novel extraction techniques. Step 4: If prices get high enough and the technology gets good enough, he could be rewarded handsomely. Step 5: In the meanwhile, others will follow his lead, improve upon the technology, provide massive amounts of capital if the price is right and the need is there, and discover commercially profitable ways to get the thing we need.

Incidentally, after a huge spike in price and demand for lithium in 2022, prices actually dropped 75 percent since the beginning of 2024. Commodity prices are notoriously volatile. As exciting as the future opportunity for lithium is, don’t go investing everything just yet based on the “one word” whispered to you at a cocktail party.

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

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December 31, 2021December 31, 2021

Revisiting Recycling in late 2021

The two biggest macroeconomic worries in the US right now are burgeoning inflation and supply chain issues. A plausible narrative for both is that the rolling global COVID pandemic has disrupted our ability to efficiently move products to markets, while loose money policies have ignited inflation.

These both sound bad. But with markets, sometimes good or bad results depend on who you are. A disrupted supply chain for one business is an opportunity for another business. And high prices? Well, in recycling commodity markets for example, it’s the best market they’ve seen in the last ten years.

Colored trash bins used to recycle paper, plastic and glass.

What does this mean? Recycled materials – in the big four categories of paper, metal, glass and plastic – all have secondary markets. The business goal of a recycling provider is to sort, package, and sell as cleanly as possible these four types of materials to the end user.

“Cardboard and paper prices are both on the rise. Plastic prices have skyrocketed compared to what they were, let’s say, five years ago,” Josephine Valencia, Deputy Director at the City of San Antonio Solid Waste Department, tells me. Her explanation points to the same macro trends we’re all worried about.

Valencia continues explaining high prices of recycled commodities, “In the past two years, and this is just my guess, it’s COVID-related supply shortages. There’s a shortage of just about everything these days. And I think that has really driven up the price of certain [recycled] commodities.”

So if you’re in the recycling business, these are the best of times.

If your personal subscription to the online newsletter “Resource Recycling” has recently lapsed, allow me to quote a few price changes for you.

Baled steel cans have risen from $78 per ton last year to $250 per ton.

Baled aluminum cans jumped from $0.45 a pound last year to $0.77 a pound last year.

On the paper side, corrugated containers trade for $171 per ton, up from $60 per ton last year. Another paper product, sorted residential paper, sells for $117 per ton compared to $38 per ton a year ago.

As the band Chic used to sing back in 1979, These. Are. The. Good. Times.

If you were hoping to have a disco-era earworm stuck in your head for the rest of the day, dating back to the last time we saw high inflation, you’re welcome.

When last I checked in with the recycling markets in 2019, a few trends were made clear to me.

First, glass is infinitely recyclable but generally a money loser for recyclers unless it can be sorted by color and delivered to a nearby glass recycling operation. Second, paper and cardboard was in a multi-year decline because of the lack of demand for newsprint (RIP the newspaper industry!) and the awkward adjustment to a world in which ubiquitous Amazon cardboard didn’t fit traditional cardboard-sorting machines. Third, plastic prices were in freefall because China had begun refusing most deliveries. Fourth, metal was the only reliable money-maker.

But high prices in 2021 have swung recycling programs from losses two years ago back to a money maker. Things are a lot better now in San Antonio, for example, says Valencia.

I’m going to simplify the math a bit, but here’s the basic deal in my city. We pay approximately $50 a ton to dump recycled bins with the city’s provider, which currently is the large waste processor Republic Services. Republic sorts and processes the stuff, and then sells it in the secondary commodities market, and agrees to share half the resulting revenue with the city. If the revenue from sales generates $120 per ton, the city makes $60, and can count a “profit” of $10 per ton. That’s approximately the economics – admittedly simplified – right now.

In a bad year like 2019, the revenue share didn’t quite cover the upfront $50 cost to deliver, so the city had a “loss.” A bunch of other factors makes my explanation overly simple – they average out prices, contaminated commodities change the final revenue-sharing formula, losses can be carried forward – but Valencia endorsed my explanation as basically approximately true.

A factor which tempers the celebration of 2021 recycling profit is that – just like any business – the city’s costs are also affected by inflation. In the past year, the cost of purchasing new plastic household bins has increased from roughly $50 a barrel to $75 a barrel. Because they are made of plastic and plastic prices are way up. With a million barrels in circulation right now, that price increase affects the annual budget in a real way. And just as the price of new and used cars has increased, so too has the price of garbage trucks. In that past year, that’s gone up from $365 thousand per truck to $425 thousand per truck, says Valencia. Because of course trucks are made up of steel and plastic, all of which costs more now than last year.

“On the one side I can say, I’m excited as the city recycling revenues have gone up, so we’re making money. But on the other side, at the end of the day, we’re not sitting on a windfall because even though our revenues went up all our expenses went up as well,” continued Valencia.

Like any volatile financial market, hindsight is 20/20 and past performance is no guarantee of future results, included for recycled commodities. We don’t know what happens next.

By the way, the multi-generational fix that recycling experts would ideally have us do remains the same: Wean us off the big blue unsorted barrel of mixed commodity waste. We should all be sorting the multiple waste streams in our households into many different smaller homogenous-material barrels. Civilized countries (and by “civilized” I explicitly exclude here both the United States and the Republic of Texas) have figured out how to do this basic sorting at home. Everyone would recycle more stuff and make more money.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

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March 31, 2020May 18, 2020

Oil and Gas For The Little Guy

Editor’s note: Yeah Yeah Yeah I have the worst timing of all time. Still, the idea that this vehicle exists is important!

One of the regrets of my last ten years as a Northeasterner-turned-Texan is that I’ve only fulfilled some of the stereotypes.

To be fair to me, I’ve accomplished important ones. I wear Lucchese boots. I wear bespoke guayaberas – shout-out Dos Carolinas! I am not yet, however, an investor in oil and gas. I say this with some wistful regret. I want to fit in as a real Texan.

I have recently discovered a possible way to correct this – the subject of the rest of this column – but I should start with a few reasons why I haven’t yet invested in oil and gas. The most obvious reason is that I don’t have enough money to be invited into large-scale opportunities. Next, I have no particular expertise that would assist me in oil and gas investing. Prudence suggests – and I always suggest – doing the simplest, low-cost investing thing that requires the least amount of knowledge.

Oil and gas investments are famously opaque and high-cost opportunities – meaning if you buy into some heavily-promoted deal, it’s hard to avoid just funding a dry hole while paying many layers of fees to the operator or promoter, who makes money whether they are successful or not. The proverbial “heads you win, tails I lose,” kind of situation.

Having laid out some caveats – which hold true no matter what – I am intrigued by a Houston-based online platform called Energy Funders designed for the little guy (like me) to invest in oil and gas opportunities.

When you create an investor account on Energy Funders (as I did this month) you can access specific oil and gas exploration opportunities, with a minimum as small as $5,000. Garrett Corley, the VP of investor relations who called to vet me as an investor, says they average about one opportunity per month on their platform, with 34 deals closed to date.

CEO Casey Minshew says over the last five years they have been “Beta Testing” their thesis: That they can disrupt the closed, highly capital-intensive, and high fee world of oil & gas exploration, by giving access to smaller investors while reducing fees.

Minshew shared with me the results so far – involving 34 deals closed to date – as well as the direction he intends Energy Funders to go in the future.
Of 34 deals, 11 have been dry holes. Sixteen have produced appreciable oil and gas to date. Six of the deals, he considers, will be significant wins for investors. I did not independently verify his reported results, but those feel like results one should expect from high-risk investing, and therefore strike me as credible.

Minshew says that for this type of investment, small-dollar participants should split their money between a variety of projects, to lower their risk of failure on any one investment.

Unlike the past five years, however, Minshew explained that the next few years will look a little different in terms of project style. Until now, Energy Funders has mostly backed so-called “wildcat”-style drilling, in which funders inevitably drill dry holes, but hope to have enough big winners to compensate for losses.

Future capital raises on their Energy Funders will focus on lower-risk investing, through two methods. One is to create a portfolio approach to projects, allowing investors access to multiple drilling projects, for diversification purposes.

Their second risk-reducing plan is to open up access to “unconventional,” or horizontal drilling projects.

For those familiar with oil and gas extraction lingo, you’ll know what that means. For the rest of us, conventional means drilling a traditional, vertical, hole in the ground.

The way you lose money in conventional is if your vertical hole is dry, with insufficient oil or gas available for extraction.

Unconventional refers to horizontal drilling techniques and deep underground rock-formation smashing, known colloquially as fracking. The way you lose money in unconventional drilling is if the high cost of fracking exceeds the value of the oil and gas extracted – particularly if there’s too much gas and not enough oil. Success or failure is mostly a function of costs rather than dry holes. As an extremely general rule right now, gas is not profitable and oil is profitable, although markets obviously vary and will change in the future.

The project up on the site that I reviewed this week is one of their unconventional offerings, which has already been pumping oil and gas. The structure of that deal, as a result, offers less risk and less reward. But Minshew believes that’s increasingly what investors on their platform want.

I don’t mean to endorse Energy Funders as an investment vehicle in particular because, again, I know nothing about oil and gas investing. But the theory seems plausible to me that a larger market exists for lower-risk, lower-return investments in oil and gas, especially among the smaller-size investors that Energy Funder’s online portal will appeal to.
Since at least 2014, margins in oil and gas exploration have been thin. But like any good entrepreneur, Minshew finds a silver lining in tough market conditions for drillers. As he says,

“It is a capital-starved environment right now. [Oil and gas operators] are now willing to play ball with us. Which is to remove fees and reduce prices.” In addition to drilling risk, fees are largely what has hurt small investors. But Minshew believes “The more and more capital starved the industry, the more valuable we will be.”
In other words, he believes drillers will value the money Energy Funders can raise that much more, and that they can negotiate relatively strong terms for participants. That strikes me as a plausible theory.
I’ve written about and invested in, music royalties in the spirit of democratizing access to previously closed markets.

I’ve also written about, but not invested in, customer loyalty-based funding at Houston-based NextSeed which offers little-guy investing opportunities in startups like bars and restaurants. Energy Funders investments are also a kind of democratizing platform, but from a regulatory standpoint is only offered to accredited investors, who must meet a relatively high income or net worth threshold. While their investment minimums are very small – $5,000 – you do have to have some income or wealth to burn in order to participate.

Final note. I understand that to many readers the idea of investing in oil and gas – in the age of climate change – is akin to investing in cancer. I disagree, but ok.

A version of this ran in the San Antonio Express-News and Houston Chronicle.

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