A glance through the latest expert views and predictions about commodities. Base metals; cost curves; lithium; and mine closures.
Base Metals
While infrastructure expenditure in China slumped over February and demand for base metals dropped, activity slowly restarted in March. Canaccord Genuity notes, however, spot treatment charges have increased within the copper market and remain elevated in zinc, reflecting the fact concentrate levels are adequate.
This is likely to negate any demand-led improvement to prices in the short term. Another influence, the dramatic fall in the oil price, has probably lowered the cost base across the base metal spectrum.
Moreover, coronavirus-related supply disruptions at major copper operations are yet to have an impact, and the broker does not believe this will offset even a -5% contraction in demand over 2020.
Meanwhile, nickel market deficits are expected to emerge over 2022. Canaccord Genuity also notes balance sheets for both OZ Minerals ((OZL)) (copper) and IGO Group ((IGO)) (nickel) remain robust at spot prices.
Cost Curves
JPMorgan has reviewed the cost curves for base metals and iron ore. The broker assesses iron ore and copper industries are best placed as current prices are well above the cost curve. The next best commodities are alumina & zinc/lead. The worst placed are nickel and aluminium.
As it could be six months or more before demand and prices improve, and the possibility of significant mine closures exists, iron ore and copper are expected to have the largest downside risk in a prolonged bear market.
The broker finds copper particularly vulnerable, with demand weighted to countries outside China and inventory building. Many assets in the aluminium and nickel industries are facing negative margins and potential closures.
The outbreak of coronavirus may act to fast-track decisions, given global growth and therefore demand is likely to be depressed for most of the year and create a surplus, in the broker’s view.
Lithium
With drastic supply-side action as a result of government responses to the coronavirus crisis, JPMorgan expects lithium operations are likely to suspend production and projects will be delayed.
The three main sources of lithium globally are Chile, with 60% of the world’s lithium chemical supply, Argentina with 25%, and Australia with almost 100% of global spodumene (hard rock) supply.
While Chile’s copper miners are scaling back, JPMorgan notes there has been no announcements yet from Atacama lithium producers. To date, Australian spodumene producers continue to operate, but well below nameplate, while Wodgina are remains on care and maintenance.
On the demand side, US and European customers are likely to be affected but, with China, Japan and Korea supposedly through the worst of the crisis, the broker suspects a ratcheting up in demand could tighten the market quickly should production stay suspended.
Mine Closures
Across the globe government-enforced closures and social distancing measures have affected mine operations. Impacts range from complete cessation of activities such as in Argentina, South Africa and New Zealand to virtually no impact in Australia’s Pilbara, other than precautionary measures.
JPMorgan understands the Pilbara iron ore operations and shipments are largely in line with guidance. Companies have moved to prevent unnecessary interactions and travel to and from mine sites is being strictly controlled.
Peru announced its national emergency on March 14, with total shut-down of borders for 15 days. A number of copper, zinc and precious metal mines have temporarily halted production, including Cerro Verde (copper), Yanacocha (gold), Constancia (copper), four zinc operations and four silver mines.
While Macquarie maintains the view that changes to demand are the ultimate driver of prices, if enough mines and refiners close quickly then inventory build-up can be controlled. It appears that disruptions so far amount to around less than 50,000t of copper and 30,000t of zinc. Reductions for gold and silver are even less.
The Argentine government has announced a full lock-down until March 31. Morgan Stanley notes this affects Orocobre ((ORE)), and Galaxy Resources ((GXY)) to a lesser extent.
Orocobre has enough inventory for supply until the end of April and the only risk the broker envisages is if the lock-down lasts for a long period. Stage 2 expansion activities could be placed on hold and Naraha construction delayed.
The company is net cash and has flagged that, as of March 20, there is approximately US$164m available for corporate purposes. Meanwhile, Galaxy Resources is only doing test work at its Sal de Vida site which can be put on hold.
