Mesa Minerals Limited
EMD Market Context


Overview

The pricing prospects for high purity EMD’s over the next few years are primarily dependent on the fortunes of the disposable alkaline battery. This battery technology has become the dominant technology in disposable batteries and continues to grow at an average of 7% per annum mainly at the expense of the older zinc/carbon battery technology that it has gradually replaced. Importantly for future EMD pricing, all new disposable battery formats likely to make inroads in this market are unlikely to diminish the requirement for high purity, high performance EMD’s.

Since its inception in 1962, the alkaline battery format has captured 54% of the rapidly expanding disposable battery market and is heading towards an 80%+ share by 2020, with zinc/carbon cell usage by then largely restricted to low drain applications. During the thirteen year period to 2020, the disposable battery market is expected to grow by a minimum of 30% and more likely closer to 60% if current growth rates persist. This future growth potential is underpinned by the popularity of new electronic gadgets requiring high drain capable batteries and the rise in consumer numbers across both the developed and developing world.

The annual consumption of EMD’s in alkaline batteries has grown steadily over recent years reaching an estimated 325,000 tonnes in 2007. Mesa sees a continuance of the trend for at least the next decade, with the only significant inroads into the disposable battery market being made by technologies such as lithium manganese primary cells (eg, Ultralife 9V cells), nickel-oxy-manganese primary cells (eg, Panasonic’s Oxyride cells) and various new technology alkaline cells that feature the addition of an exotic metal (eg, Energizer’s Lithium cells or Panasonic’s Evolta cells). Importantly, all of these new disposable cells contain virtually the same amount of high purity EMD or a very significant proportion thereof and their success will prove a positive for higher and differentiated pricing over time.

As the world production of truly alkaline quality EMD’s (ie, those having both the high purity plus the physical and chemical characteristics necessary to ensure optimum performance in the battery) falls well short of 325,000tpa, then it can be safely concluded that some lower quality EMD’s are being used to make up the shortfall. Whilst this practice has been successfully used by various battery makers in recent years, and has had the effect of constraining pricing for higher quality EMD’s, its continuance is becoming increasingly more difficult as electronic devices demand more power and consumers become more conscious of poor battery performance and less swayed by the claims of brand advertisers. (At the present time there is little option for battery makers but to use some lower specification EMD’s to make up the shortfall that exists.)

On the supply side, old non-Chinese plants that are reliant on high grade ore feeds, and often poorly located, continue to struggle despite recent strong price increases for their output. Those that persist are more often than not propped up by anticompetitive legislation which prevents more efficient plants selling into their local markets. Within China new plants continue to be built, but in the main these employ conventional technologies to treat carbonate ores, which results in a degree of pollution that is increasing being judged to be unacceptable by the communities in which they are sited.

The export and electricity subsidies, plus low wage rates, which taken together with the questionable environmental practices have enabled China to dominate EMD production, are now a thing of the past. As a result, many Chinese plants will struggle to survive as they seek to cope with higher costs, tougher environmental legislation and technologies that impede the achievement of both tonnage and quality targets. In the near term, China will remain the leading producer based upon its investment in the industry and its large manganese carbonate resource base, and it will produce a greater proportion of its output at truly alkaline grade. However, the days of selling its production at a loss, and ignoring the pollution issue created, are well past. Looking further forward, those countries which can learn how to utilise their low grade manganese oxide reserves in the production of quality EMD’s may well challenge China’s present industry dominance.

Over the next decade the pricing prospects for high purity EMD’s will increasingly be affected by the demand for lithium-ion batteries containing cathodic material derived from EMD. This battery technology has quickly become the technology of choice in the cordless power tool industry and is making a strong bid to be the technology of choice in the electric vehicle (EV) and hybrid electric vehicle (HEV) industries. These batteries require EMD with very low levels of impurities, and favour particularly low iron levels, which is more difficult to deliver using conventional EMD process technology, even when high grade ores are available as the feed stock. The Mesa process is ideally suited for the production of EMD for lithium-ion battery end use as it will deliver a very low impurity electrolyte regardless of the grade of ore available as the feedstock. Importantly, it will also deliver the very low iron levels that manganese cathode producers’ desire.

Fortunately for Mesa, the alkaline and lithium-ion/manganese battery technologies (also referred to in this website under the generic name ‘LiMn battery’) compete only at the margin, which augers well for a healthy high purity EMD market context over the next decade and beyond. At a minimum, the production of LiMn batteries will gently stimulate demand for both quantity and quality at the top end of the EMD market. More likely, the EV and HEV battery market will expand rapidly over the next few years and this will translate to attractive returns for those companies that can produce high-end EMD’s with the characteristics that the battery makers desire.


Historic Pricing

Mesa believes that the published US International Trade Commission import prices are the best proxy for high-end EMD pricing generally available. These figure will always contain some distortions due to product quality differences and they certainly did so over recent years when large volumes of lesser grade material was imported into the USA. They are also subject to large monthly swings, caused by irregular deliver patterns by importers and have an inherent bias towards long term contract pricing, thus tending to lag changes in the spot market. Nevertheless, the pricing trends are readily apparent when the long term data series is displayed as is done in the following chart:

Long Term EMD Price Graph

The last eight years have been traumatic ones for non-Chinese alkaline grade EMD producers as is evidenced by the above chart. In an attempt to cut costs and maintain profit (as the commoditization of the alkaline battery put downward pressure on their revenues) alkaline battery makers used the availability of low cost Chinese material to drive down prices for all suppliers. This has proved to be a failed strategy, as the low Chinese pricing was below real cost, and therefore unsustainable, plus the quality of the Chinese material was often not as claimed or found to be of inconsistent quality over time. This failed strategy has also been partly responsible for the premature closure of some non-Chinese EMD plants, which in turn is a factor in the market shortages that have now occurred and are beginning to report on the above chart as price spikes.

From the Chinese perspective, attaining market dominance in this industry has been a very expensive one for the country if the full cost of the energy consumed, the pollution created and the financial subsidies handed to foreign battery makers is considered.
Individuals and entities may have profited in the short term, but the country will only reap a reward for the costs it has absorbed if the position of market dominance can be maintained through the adoption of clean cost effective technologies for processing its manganese ore reserves into manganese electrolytic products.

It is Mesa’s view that the combination of demand and supply side factors noted above will continue to drive EMD prices higher and increasingly force a differentiation in pricing based on product quality. Additional information regarding the pricing of EMD can be found by reference to the following websites, although in most cases no distinction will be made between the quality, or end use, of the EMD’s referred to, which can make analysis of the data provided difficult. (Certainly, in the case of ‘battery’ websites it is often in the interests of the publisher’s members to blur the quality distinctions between EMD’s):


Substitution the Driver of Demand for High Purity EMD’s

The following graph shows clearly that while the production of disposable cells has increased nearly eight times since the introduction of the alkaline battery, and that this has been the primary engine for growth, it is the relentless substitution of alkaline cells for zinc/carbon cells that has driven, and will continue to drive, demand for high purity EMD’s:

Forecast Growth in Disposable Battery Cells

The assumption set behind the forecasts in the above chart make up what Mesa would regard as a worst case scenario for high purity EMD demand over the next thirteen years. These include the following key assumptions:

  • The 7% average growth rate of the last decade for alkaline cells will decline by 0.25% per annum from 2008 caused by an unforeseen factor which has a negative impact on the growth of all disposable cells containing high purity EMD;
  • The proportion of all alkaline cells produced continues to swing away from the large “C” and “D” formats towards the smaller “9V”, “AA” and particularly “AAA” formats;
  • Inroads in the disposable market by other disposable cells containing EMD will have a very small impact on he total volume of EMD consumed; and
  • The negative growth seen in recent years in zinc/carbon batteries will continue, but at an accelerating pace, with these cells being confined, in the main, to to ‘low drain’ applications and representing only 16% of the market.

If no ‘unforeseen negative factor’ arises, and growth in disposable cells containing high purity EMD remains at approximately 7% per annum, which is not an unreasonable assumption given world population growth, then by 2020, sales of disposable cells containing manganese would reach 75 billion, of which cells requiring high purity EMD for optimum performance would represent 84%. In this scenario, the requirement for high purity EMD, for use in disposable cells alone, would reach 590,000tpa. Should the Indian demand growth over the next decade be even a quarter of the Chinese demand growth over the last decade then a 7% per annum world average growth out to at least 2015 seems assured.


Investment in EMD Production

The production of high purity EMD’s in sufficient quantities and qualities to meet the demands of alkaline and LiMn battery makers will require a huge shift in investment in the industry. Plants that are sited in poor locations, either in regard to their surrounding communities, or their ore source, or their product market, will need to adopt new technologies that will enable them to improve their environmental and economic performance sufficiently to provide them with an extended lifespan. Failure to do this will inevitably lead to their closure in all but boom times when high product pricing sustains them despite their inherent problems. New plants will also need to be built that can efficiently process the lower grades of ore generally available, rather than continuing to compete with the steel industry for ever scarcer high grade ores. Such investment in the EMD industry will only occur if producers can foresee attractive returns from undertaking them.

Without new plants, the current shortfall in supply in truly alkaline grade material, which until recently has been somewhat masked by low grade substitution, will be exacerbated to the point where battery production will have to be curtailed. With battery technology now seen as the limiting factor in many applications that are critical to the maintenance and the lifting of our lifestyle standards, it seems very unlikely that the requisite level of investment will not be forthcoming.


LiMn Battery Dominance in Rechargeable Cordless Tool Market

The strong advantages LiMn battery over competing technologies has seen it rise to a position of dominance in the rechargeable cordless tool market. In 2007, the annual sales for power tool LiMn battery cells reached 1.35 million units with these units going into both amateur and professional ranges of construction, gardening and air-pressure tools. In addition, high-end cells are being increasingly used in military radio, computing and lighting systems due to their low cost, their high power to weight ratio, their low heat output and their wide operating temperature range. As new portable devices call for higher and higher current rate, the manganese variant of the li-ion battery has now moved to the frontline.

A good example of this technology being used can be seen in the Milwaukie V28™ power tool range. The batteries used in these hand tools now provide 28 volts of power at a weight that is slightly less than their older 18 volt Ni-Cd battery technology. The V28™ battery delivers significantly more power, up to twice the run time, plus ‘fade-free’ consistent power throughout each usage cycle. Unlike Ni-Cd and NiMH battery platforms, the V28™ battery performs significantly better in extreme hot or cold temperatures. A very important factor! E-One Moli Energy, Milwaukie’s supplier, is a leading manufacturer of manganese lithium-ion technology, as are also Sanyo, Panasonic and Sony.


LiMn Batteries for Electric and Hybrid Electric Vehicles

The number of EV and HEV offerings is increasing rapidly as the technical, economic and political hurdles faced have been overcome and as the demands for lower green house gas emissions has strengthened. All major world car makers and many small niche players are rapidly moving in this direction.

Li-ion batteries, containing manganese derived from high purity EMD, are now a front-running technology to power vehicles and this could mean a very big surge in future demand for EMD. The May 2008 joint announcement by Nissan and NEC, which indicated their commitment to the manganese variant of the lithium ion battery as the energy source for Nissan’s planned EV’s and HEV’s, is yet another important step towards this battery technology becoming dominant in the vehicle sector. Nissan has also recently announced that it has committed to 12 billion yen joint venture to produce LiMn batteries for electric fork lifts planned to be marketed from 2009. This announcement outlines some of the benefits of the manganese variant of the lithium ion battery very well.

Mesa believes that announcements like this, which commit large capital expenditures rather than just words, means that the ‘war’ to decide the next generation of vehicle batteries has clearly been won by the li-ion battery format. However, it is also clear that that the ‘battle’ between li-ion variants to be the sole winner in the EV and HEV markets, or at least to share this prize, has yet to be won.

In years past, we touted “LMO” as being the ‘blue-sky’ for a high purity EMD producer. It truly was then ‘blue-sky’ as historically new battery technologies took upwards of 20 years to move from invention to first production use. The rapid progress of the LMO battery, or LiMn battery as it is referred to in this website, has surprised many observers. However, the reason for its rapid progress is obvious. Its competitors, which include new technology lead/acid batteries, variants of the nickel metal hydride battery and other variants of the li-ion battery, all have very significant problems that are yet to be overcome.

As always in the battery industry, technologies that reach production stage early, will often dominate even superior technologies which follow. Once capital is invested in battery plants, and in the devices or vehicles they power, then the acceptance hurdle for later developing technologies lifts higher and higher.

There is a proliferation of websites that contain information of varied quality on this topic. The following links will provide a starting point for a reader seeking a far more detailed insight into the developments in the vehicle battery field:


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