Material Matters: Zinc, Cobalt, Oil & Oz Miners

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A glance through the latest expert views and predictions about commodities. Zinc; cobalt; oil; precious metals; base metals; and Oz miners.

-Bullish factors lining up for zinc
-Demand for cobalt continues to rise
-Have oil prices found a bottom?
-Palladium performance tops precious metals
-Price performance of aluminium & lead solid in 2017
-Morgan Stanley retains positive outlook for Oz miners
 

By Eva Brocklehurst

Zinc

Macquarie suggests the stars are aligning for zinc. Speculators have reacted to signals from London Metals Exchange warehouse data and Chinese output numbers, something the broker was anticipating. This is on the back of falling Chinese production and global stocks, and rising ingot premiums and imports. The issue of hidden stocks has been ongoing and, now stocks appear to be drawing down inside China, Macquarie sets about estimating the state of the market.

The broker notes there was a substantially large number of cancelled warrants recently in New Orleans, which means the metal has been earmarked for delivery and the warrants can no longer be traded within the system. The broker finds it difficult to believe that this tonnage, of which more than 90% is in New Orleans, is all the zinc that exists outside of China, noting the LME has admitted that the storage network is a location of last resort.

Hence, the broker suggests there must have been inventory hidden from view in order for the market to function. On the supply side, zinc ingot output, officially, in China was down -9.9% in May following a -5.6% drop in the month before.

All up, Macquarie believes the bulls are in play, in line with a forecast full year deficit in 2017 of 689,000t. The broker reiterates its view that zinc prices will move above US$3, 000/t by the end of the year and average US$3, 200/t in the first quarter of 2018 before a demand-led re-balancing begins.

Cobalt

Morgan Stanley attempts to model prices for cobalt, a small and opaque trade for which the end use is dominated by rechargeable batteries. Investor anticipation of an automobile-lead demand spike for cobalt has prompted aggressive stockpiling and lifted the spot price to US$29/lb from US$11/lb a year ago. Last year only 7% of the world's cobalt supply went to electric vehicles and most was consumed by rechargeable batteries.

However, Morgan Stanley's European automotive analyst expects global emissions legislation to prompt an investment in electric vehicle production in coming years, and forecasts sales of electric vehicles to total 9.4m by 2025. This suggests an extra 63,000tpa of cobalt demand.

Meanwhile, other applications such as superalloys are expected to deliver strong demand and there is only a minor substitution risk, the broker estimates. Most of the cobalt supply is a by-product of copper and nickel mining and around 62% of last year's output came from the Democratic Republic of Congo alone.

As a result, Morgan Stanley lifts the outlook for the cobalt price, expecting a small trade deficit in 2017-18 that should support the price at US$26-27/lb, above its historical level. After this, new mine supply should bring the market closer to balance and undermine the medium-term price.

Oil

Citi suggests oil may be close to the bottom of its trading range. Money managers have a record level of short positions open on ICE Brent contracts. Moreover, long positions on both Brent and West Texas Intermediate are around similar levels seen at the end of January 2016, when oil prices were at the recent historical lows. The broker considers it unlikely that investor net length will go lower.

Citi observes the three-way struggle for price determination is being dominated by financial flows at present and the bears are winning as market fundamentals appear confusing and geopolitics remains the bullish factor in the background. The bears' position is partly based on fund losses for those who expected the OPEC/non-OPEC extension of production cuts would be a time to add length. The broker suggests the pain is great enough to delay a significant price rebound any time soon.

There are other factors which may overwhelm this bearish outlook, although there is a chance any rebound will fall short of US$60/bbl this year. Citi is lowering its expectations that Brent will breach US$60/bbl in 2017, yet still expects drawing down of inventories throughout the year to bring the days of forward cover down into the five-year range.

This should help to repair sentiment and tighten physical markets, although the broker expects a lid on sharp price rises unless guidance for shale production is lowered, stocks move to 5-year absolute levels and/or OPEC decides to cut production further and for longer.

Precious Metals

Morgan Stanley observes palladium has delivered the top price performance for precious metals so far in 2017, in an otherwise quiet market that has rallied on a lack of inventory. Meanwhile, gold investors appear more concerned about rising political and trade tensions than a hit from the US Federal Reserve rate hike cycle, hence the yellow metal is level pegging for now.

Prices for the platinum and silver year-to-date have generally tracked gold but are now being undermined by flagging industrial drivers, the broker observes.

Base Metals

Aluminium and lead are the most uninteresting base metals, in Morgan Stanley's opinion, but have actually reported solid price performances and are up 10% so far this year. Investors are engaged by the possibility of large reductions in smelter output in China, while lead has benefited from a lack of concentrates on the tail end of the strong global automotive sector in 2016. Nevertheless, lead and zinc face bearish mine re-starts and a drag on prices going into 2018, in the broker's opinion.

Meanwhile, the weak price action in copper this year confirms the broker's belief that this is what happens when buyers defer consumption and wait for fleeting trade shocks to pass. Price upside has been delayed in nickel, the broker suspects, probably until a restocking in 2018, by a surprise return of Southeast Asian exports.

Australian Miners

Morgan Stanley remain positive on Australian miners, envisaging opportunities, particularly on a relative basis. Investors may be cautious but the broker finds the reasons to be positive include a favourable macro outlook, low risk of a growth slump in China and likely rotation towards miners on the ASX as credit rationing puts pressure on the domestic economy.

Moreover, bulk commodities are expected to find support levels. The optimistic setting is not rampantly so but the broker remains constructive. Topping the list is South32 ((S32)) as the stock has a strong free cash flow yield. There is also net cash to reinvest or return on a favourable, commodity exposure through thermal coal, manganese and aluminium.

Majors BHP Billiton ((BHP)) and Rio Tinto ((RIO)) remain at the top of the broker's list, given their strong margins and upside potential to the price target. In terms of the leverage to specific themes the broker likes Mineral Resources ((MIN)) with its exposure to lithium. Whitehaven Coal ((WHC)) rounds out the top five.
 

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