Commodities | Jun 06 2017
A glance through the latest expert views and predictions about commodities. Stainless steel; tin; battery materials; and oil.
-Indonesian stainless production economics extremely compelling, Macquarie suggests
-Robust outlook for tin as supply struggles to catch up with demand
-Difficulties with funding suggest battery suppliers will struggle to keep up with demand
-OPEC production decision sends strong support signal for oil prices
By Eva Brocklehurst
While the first quarter of this year was strong for stainless steel production, Macquarie observes orders, subsequently, have fallen sharply across the globe as buyers de-stocked. This is particularly the case in China. The main reason for the strong rise in stainless pricing was increases for the raw materials of nickel, ferrochrome and molybdenum.
Macquarie expects raw materials and stainless steel prices to stabilise. For 2017 as a whole, the broker expects production growth of 3.5%. Downside risk is embodied in Chinese economic growth, if this slows sharply in the second half. Nevertheless, the broker envisages production will be supported by strong underlying consumption growth in Europe, the US and Japan.
For 2018 onwards, Macquarie assumes Chinese exports will fall, partly as a result of Chinese-owned stainless steel production in Indonesia. The broker believes all production growth out to 2021, outside of China, will be in India and Indonesia.
The economics of building melt facilities in Indonesia are so compelling that over the next 10 years, Macquarie suspects, once Indonesian nickel pig iron production is established, there could be wholesale closures of melt/hot rolled coil capacity outside of China, and an integration of this capacity into cold-rolling and finishing capacity in other markets.
At current costs, integrated nickel pig iron/stainless steel mills in Indonesia could put nickel into stainless production at almost half the current London Metal Exchange price.
After one of the strongest recoveries in 2016, tin prices, along with zinc and lead, have faltered. Macquarie observes stock levels on the London Metals Exchange have receded but Chinese exports have not risen substantially, while Southeast Asia producers have shown sensitivity to prices in commercial activities. Exports from Myanmar are also down.
That said the broker believes the outlook is robust. Prices are expected to hold up above US$20,000/t this year, capped by Indonesian producer action on the upside, before moving to average US$23,000/t by 2019, amid persistent under supply.
The broker expects a small deficit in 2017 and another in 2018, as supply works to catch up after a number of years of major shortfalls. In 2019 a supply response should be available to replenish inventories and soften the market, allowing prices to retrace back towards US$20,000/t.
The broker notes tin is an important component in consumer electronic circuitry and some of the more questionable mining practices around the world have prompted calls for sustainable and responsible supply. Apple recently announced plans to eliminate primary supply altogether and stick to recycled sources, which Macquarie observes is one way to avoid questionable mining practices (although this is not too positive for tin miners).
The shift to new energy vehicles indicate stronger demand for solder and greater start-stop battery penetration, which is more positive for tin versus lead acid battery demand. The broker notes there are some concerns regarding the energy storage sector about the ongoing shift towards lithium ion batteries, which use less, or even in some cases zero, tin.
After hosting a battery materials conference, Canaccord Genuity observes many projects are rapidly progressing, although difficulties in securing funding from traditional sources may mean that the supply-side struggles to keep up with longer-term demand forecasts.
Given the importance of mine supply in feeding demand, this may lead to increased involvement of the downstream participants in project financing. Other challenges include slower-than-expected production responses, geopolitical impacts and a lack of experienced personnel.
There have been bullish signals from the world's largest automobile producer, Volkswagen. Volkswagen has signalled electric vehicles and sustainable mobility are becoming central to the company's strategy over the coming years.
The company provided a target penetration rate for electric vehicles of 25% by 2025, which combined with other European automobile makers suggests the industry plans for faster adoption rates than what the broker had forecast. This outlook remains bullish for key materials such as lithium, cobalt and graphite.
Canaccord Genuity notes that battery costs have fallen by an average of -19% since 2010. Industry has set targets for further significant reductions in an effort to improve competitiveness. Most participants at the conference continue to expect growing lithium battery production to drive significant, long-term demand growth.
Even bear case projections call for significant increases in demand. This supports the broker's view that lithium battery-driven market demand may increase by over 200% by 2025.
ANZ analysts observe, at present, market sentiment is extraordinarily bearish for oil. Yet, OPEC has confirmed it will extend its production reductions to March 2018 to reduce inventories. This sends a strong signal that the cartel is determined to rebalance the market and reduce stockpiles. The analysts believe it provides an even stronger support level for prices to rally in the second half of the year.
The analysts now expect the market to record a deficit in the second half of 1.2m barrels/day. This should achieve Saudi Arabia's goal of sending stockpiles back to the five-year average. The main concerns surround US shale production. The analysts find signs that growth in drilling activity in the US is about to end, but do not believe this diminishes the risks around a rejuvenated US shale industry.
With 160m barrels of oil economically recoverable at current prices, they believe the scenario needs to be watched carefully. The relationship between oil prices and the rig count also suggests the number of rigs operating in the US will start to decline.
Overall, the oil market appears increasingly tight in the second half as strong growth in demand, combined with OPEC production cuts, is expected to push the market into deficit, and this will ultimately drag down global inventories to below the long-term average of 55 days of consumption, the analysts suggest.
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