Rising rates and energy prices take heavy toll on equities, with greenflation and slowbalisation adding to the woes

Lithium was the perfect example of “slowbalisation,” an economic force best described as the opposite of globalisation with the growth normally associated with an interconnected world replaced by contraction into competing fiefdoms.

Russia’s war in Ukraine is the most obvious cause of the slowdown in global growth courtesy of its impact on trade flows and a near-record oil price, which is crushing consumer demand and driving inflation closer to the double digits last seen in the 1980s.

Europe and the U.K., from where this edition of Prospector’s Diary is being filed, have been badly rattled by the worsening economic outlook, as are the U.S. and China.

Perhaps the greatest concern for business and households is that interest rates will be driven higher much earlier than planned because central banks reacted too slowly to the threat of inflation and now find themselves playing catch-up to the super-charging of interest rates through an oil squeeze which has the hallmarks of what happened in the 1970s.

At its simplest, soaring prices for oil, gas and coal mean that industry and households have less money to spend elsewhere in the economy and while it’s hard to pin down precisely, that appears to be a factor in this week’s big lithium correction that knocked 15% off the price of lithium leaders such as Allkem, which dropped back to $11.60, where it was a month ago.

Other lithium stocks were caught in the sell-off, which was sparked by a Goldman Sachs report that the key battery metal had run too far too fast. Pilbara Minerals shed 18% to $2.30, roughly back to where it was at the start of the year. Liontown was down 12% to $1.15.

Painful as the lithium falls were, it is highly likely that the retreat will prove to be temporary because the underlying theme of shifting the world off fossil fuels into renewables remains intact, albeit delayed by a slowdown in growth.

Discovery news was dominated by the continued flow of assay results from Galileo Mining’s Callisto platinum and palladium discovery in WA with the stock rocketing to an all-time high of $1.97 on Monday (it was a 20c stock just two months ago) before profit takers moved in, driving the price down to $1.34.

Leading London-based commodity investor, Evy Hambro, was unmoved by this week’s sell-off in metals and mining stocks, declaring that the second half of the year could deliver a return to boom conditions.

Hambro, who runs the mining and commodity investment arm of the world’s biggest investment house, BlackRock, said the trigger for a revival would be the fiscal stimulus China is pouring into its economy ahead of an end to the country’s Covid lockdowns.

“At some point, China’s Covid numbers are doing to decrease and for China to get even close to its growth estimates there has to be a hell of a ramp-up in activity in the second half of 2022,” he said.

Australia’s new Prime Minister, Anthony Albanese, will be one political leader hoping that Hambro is right because he needs a strong resources sector to deliver the cash required to deliver promises made in the lead up to last month’s election before his honeymoon is overpowered by the sort of cost of living crisis which is gripping the UK and Europe.

Greenflation, the other economic force created by the cost of shutting down conventional sources of power and forcing car drivers into electric vehicles, could be seen at work during the week in the collapse of Origin Energy which shed 13% to $5.91 after withdrawing earnings guidance because management cannot get a clear picture of future commodity prices or customer power demand.

Origin is caught in the same dilemma which has exposed AGL to militant investor action which threatens to accelerate the closure of Australian coal-fired power stations with an assurance that renewables can plug the gap.

What’s happening in the market today is a continuation of a theme identified in past editions of Prospector’s Diary, that the big issue for the next few years is energy, old and new, and the core problem of the world being caught short.

Adding to the shortage of traditional energy, such as coal, oil and gas, is the slow evolution of renewables such as wind and solar and the equally slow return of nuclear power.

It’s probably too simple an explanation but the energy crisis gripping the world appears to be a case of trying to change horses mid-stream, abandoning old energy too quickly without proof that new energy can do the job.

One suggestion floated during the week is that the energy crisis presents a unique investment opportunity which starts by acquiring conventional oil and gas stocks to enjoy their strong profits and flow of dividends, with those dividends reinvested in new energy metals, including lithium, cobalt, graphite and copper.

This week’s big fall in lithium stocks certainly seems to have created an entry point, especially if banks such as Citi are right in their advice that the long-term outlook for lithium remains strong.