Commodities | Jul 02 2015
-Nickel market tightening?
-Manganese doldrums continue
-Palladium nudging 2-year lows
-Thompson Creek mines close
-Steel, aluminium prices descend
-More coking coal closures needed
By Eva Brocklehurst
Nickel
Fundamentals may be improving for nickel, despite the weak price. Macquarie retains a positive bias towards Australian nickel miners, although concedes they are already pricing in a meaningful recovery. The Shanghai Futures Exchange has allowed Russian nickel to be delivered to warehouses which has unwound a short squeeze, sending London Metal Exchange nickel down below US$12,000/tonne for the first time in six years. Macquarie suggests prices for nickel pig iron are now at a premium to LME, while ferronickel price discounts have narrowed and nickel in scrap is also recovering. All this signals the market is tightening.
Macquarie expects nickel prices will move higher by the end of the year, reflecting the beginnings of a deficit in the market. When short covering begins – generated by financial players and stainless steel users – the broker suspects prices could move up very quickly. Credit Suisse observes the recent pull back in pricing has likely been a trading attack, timed to coincide with the turmoil in Greece. The broker observes it is not year clear whether Chinese imports have increased to account for consumption or whether Norilsk refined plate is being imported as a deliverable brand for the Shanghai contract.
Manganese
Manganese ore prices are down 30% year to date, making it one of the worst performing mined commodities this year. Macquarie believes spot prices are likely to stay flat now, as the peak season for crude steel is slowing and broader demand conditions appear structurally weak. The broker wants to witness a major supply response from producers and there is little evidence this is occurring so far. Macquarie suspects global steel production is likely to exhibit low growth at best over coming years and intensity of use of manganese ore appears to have peaked. The best prospects may be outside of China, where vehicles and some construction applications still drive demand for high manganese steel. Nevertheless, Macquarie finds little to get excited about in the manganese ore market.
Palladium
Prices are nudging 2-year lows and the underlying weakness is because of a sharp slowing in global vehicle sales growth. A better performance is expected in the second half but the decline in palladium's price is a reminder to Macquarie that supply and demand are not elastic. This means even a small imbalance requires a large change in price to bring supply and demand into line, aggravating price declines in bad times and gains in good times. One caveat Macquarie offers to this scenario is that investors can buy up or release stocks to cover surpluses or shortages. At present it appears they are not willing to do so.
Molybdenum
Molybdenum prices are falling as a result of a supply glut. The price is down 33% year to date. The removal of a Chinese export tax at the beginning of May opened up supply and weighed on the price, as the Chinese government looked to support domestic miners. This has resulted in Thompson Creek closing its Endako mine in Canada. The company closed its Thompson Creek mine at the end of 2014. Molybdenum is used in the steel industry as an alloying agent and to increase corrosion resistance.
Steel
Steel prices are descending and putting China's steel sector in the red but mills have been reluctant to curtail production. Credit Suisse observes output now appears to be easing with some mills beginning to on-sell contracted iron ore. This should assist iron ore imports to catch up and rebuild port stocks, lowering the iron ore price.
Aluminium
Price cuts appear set to trammel Australian producers. The major market for Australian aluminium is Japan and Japan uses a quarterly contract for premiums. The premium fell to US$380/t in the June quarter from US$420/t in the March quarter. The negotiating range for the September quarter has narrowed to US$90-100/t. If realised this means Australian producers will lose around US$280/t in revenue just on the premium. Credit Suisse notes three-month aluminium prices have declined around US$60/t to US$1720/t.
Macquarie believes the market structure has been altered in aluminium, where supply continues to grow at a rapid pace. The all-in price needs to get to a level where capacity can be cut sufficiently and it appears that the producers outside of China will have to take up the burden. In the medium term, the price needs to be at a level where supply stays offline and inventories are drawn down. Macquarie suspects prices will remain at or below current levels in real terms for the next five years. The broker 's commodities team has cut FY16-20 aluminium price forecasts by 13-16% and alumina by 4-7% following significant deterioration in demand/supply fundamentals.
The broker reduces second half 2015 forecasts for aluminium prices on LME to US$1675/t with expectations there will be brief periods where prices are significantly lower. One positive is that demand continues to grow. Even when steel is expected to struggle for any growth, aluminium demand is forecast to grow 4.4% this year. Still, Macquarie maintains, that is where the positives end. China has added substantial volume to the market and a dip to a price of US$1500/t, while not impossible, is needed for at least 40% of ex-China capacity to be under water and pressured out of the market.
Metallurgical Coal
Major contracts for metallurgical (coking) coal have settled for the September quarter with hard coking coal at US$93.00/t, down 23% year on year, and LV-PCI at US$72.50/t, down 28%. These agreements have been weaker than UBS was anticipating. Producer currency devaluation has cushioned the impact. The broker notes a meaningful lift in Russian coking coals trading into seaborne markets as a result of the slump in the rouble. While the Australia-China Free Trade Agreement should improve the competitiveness of Australian coking coal, with the removal of the 3.0% import tariff, the degree of benefits depends on the extent to which competing coals are taxed or tax exempt.
Nevertheless, the settlements confirm the weak state of the market with soft demand and robust supply. UBS believes recently announced closures need to be sustained and matched with further cuts to stabilise prices.
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