Material Matters: Bulks, Base And EV Metals
China's steel production and consumption have risen to record levels recently, as steel prices have been elevated because of strong demand from the construction sector and speculative inflows. Nevertheless, analysts believe looming large-scale capacity closures over November to March are likely to have a major impact on demand.
Iron ore prices have retreated rapidly, linked to steel mills cutting orders ahead of the capacity closures. National Australia Bank analysts expect the spot price to trend around the US$60/t mark over the next year, given ample supply.
CIBC Capital Markets also expects the oversupply in iron ore to persist. Given realities of the previous cycles investment firm, supply appears strong enough to keep the seaborne market in balance. Macquarie increases 2019 iron ore price forecasts to US$55/t but maintains a view that this level is required over the next couple years to clear an accumulative surplus of around 120mt.
Metallurgical coal prices are expected to ease from levels near US$200/t as weaker steel production affects demand, heading down to US$100/t by the end of 2018.
Macquarie has made a significant revision to its estimates for manganese ore, because of a swift supply response from South Africa. Chinese imports have increased around 38% but visible of port inventories remain low and this is expected to support prices in the current quarter, despite reductions to steel capacity. A structural shift in Chinese manganese ore production should support seaborne demand.
The broker still expects a price correction in the next year, as two of the largest mines in Australia are expected to increase supply to a slowing crude steel production in China. Still, stronger import demand is expected to mean more marginal trucked tonnage from South Africa to balance the market. As a result, Macquarie revises up 2018 price forecasts by 11%.
Macquarie observes, after manganese, thermal coal has had the largest upgrades in its forecasts on a stronger Chinese currency, amid ongoing logistics bottlenecks in China. The broker also expects a sharp correction in prices during the northern winter as the Chinese government moves to increase domestic coal output.
CIBC analysts expect a softer profile in 2018 and 2019 for metals. For copper, supply increases will be forthcoming and provide downward pressure on prices. In the near-term, spot prices are running above marginal costs and, for both copper and zinc this could persist, given what are relatively slim stockpiles.
Macquarie expects a better macro environment for copper in the near-term and a deficit is expected to open up from 2021. In between, the broker believes this will be a difficult period, characterised by too much cathode. This should be enough to suppress prices below US$6000/t. In the next decade, with a lack of mine development prices are expected to move back above US$7000/t.
CIBC analysts envisage a re-balancing in aluminium and a further winding down of very high inventories suggests a relative outperformance versus copper by 2019.
Macquarie's main changes in the base metal sector are aluminium, alumina and copper. Aluminium prices may experience some spikes as the initial Chinese winter shutdown hits the market, but this should be softened later in the season by the significant stockpiling which has proceeded the reductions. The broker raises forecasts for aluminium by 4-8% beyond mid 2018 and upgrades alumina estimates by 6.8% and 8.7% to 2017 and 2018 respectively.
Morgan Stanley believes the cuts to Chinese production should bring some reprieve to the alumina market, as smelters are forced to reduce output and draw down inventories. Refineries are also targeted by the cuts and the outcome for the alumina market over the coming months depends on the balance between reductions at refineries and the cuts to aluminium production capacity.
The bauxite market is expected to remain tight and provide support for the alumina price. Chinese bauxite accounts for 60% of the country's total requirement with the remaining 40% imported mostly from Australia, Guinea and Malaysia. The broker notes alumina refineries have drawn down bauxite inventories and turned to overseas markets.
A better macro environment is expected for copper in the near-term and later on a deficit is expected to open up from 2021. In between this Macquarie believes this will be a difficult period, characterised by too much cathode. This should be enough to suppress prices back below US $6000/t. In the next decade, with a lack of development of mines prices are expected to move back above US $7000/t.
Macquarie updates forecasts for lithium, cobalt, nickel and manganese. The broker now expects electric vehicle/plug-in hybrid electric vehicle sales to reach 5.0% of global sales by 2022 from just 1.0% in 2016. Lithium prices have enjoyed a strong run, surpassing the broker's more bearish expectations.
In the near term, too many Australian rock producers may crowd the market and the broker raises estimates for oversupply to 70-130,000 t for lithium carbonate over the period of 2018-20. However, the major implication is the outlook and upgrade over the long-term. Long-term nickel price estimates are raised to US$17,500/t from US$13,000/t, cobalt to US$26/lb from US$16.50/lb and lithium to US$9,000/t from US$7,000/t.
After lithium, cobalt is considered the next big EV story. Unlike lithium this metal can be drifted away via the use of alternate battery technologies. Macquarie makes major upgrades to reflect the strong demand, with prices expected to rise 20-95% over the next few years and reach US$41/lb in 2022.
The broker suspects at this point in time an under-supply combined with heightened demand will spark a buying frenzy. New projects and mine re-starts in the next few years will push the market into oversupply in 2019-20 and allow prices to drop back, the broker contends.
Clean Teq ((CLQ)) has increased grades from its Syerston mine by 30% as a result of optimising the resource model for cobalt production. The increase in contained cobalt metal of 16% is likely to improve project economics and expected to be confirmed in a definitive feasibility study during the March quarter.
Canaccord Genuity believes much of the appeal in the stock is priced in, as the share price performance has benefited from sentiment regarding lithium ion batteries. As a result the broker downgrades to Hold from Speculative Buy and increases its target by 12.5% to $1.15.
Macquarie lifts average production rate forecasts by 43% to to reflect the improved cobalt grades. The company now expects Syerston to produce around 5,000tpa of cobalt and this could increase further depending on the outcome of work in the DFS. Cobalt now represents 45% of Macquarie's revenue estimates and 57% at spot prices.
The main hurdles are securing additional offtake agreements and a funding solution for the pre-production capital expenditure, estimated at US$800m, that is assumed in Macquarie's base case scenario. The broker has an Outperform rating and raises the target to $2.10 from $1.90.
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