Commodities | Aug 10 2017
A glance through the latest expert views and predictions about commodities. Nickel; oil; LNG; and aluminium.
-Fears of Philippines ban on nickel ore exports considered overdone
-Renewed oil demand growth in the US and China
-Oil price supported but not seen sustaining a major rally in 2017
-Conflicting signals for aluminium amid doubts over the enforcing of Chinese production cuts
By Eva Brocklehurst
Nickel
While recent comments from the Philippines president regarding restricting nickel ore exports have spooked the market, Macquarie suspects that significant disruptions to 2017/18 supplies are unlikely. Following the removal of Gina Lopez as secretary for the Department of Environment and Natural Resources it was assumed by many investors that most mines would be allowed to continue operating.
Macquarie suggests the majority of miners are not concerned about any imminent change, believing that the current review process will run into next year and most mines will be able to address the issues. It appears likely that some smaller mines, currently closed, will not be permitted to re-open. An outright ban on exports is not expected to gain traction, as in reality projects for processing domestic ores are clearly not economic.
The Philippines will supply around 400,000 tonnes of recoverable nickel this year, 20% of world supply. Exports of nickel ore from the Philippines are expected to grow from reduced levels in 2016 but remain well below 2015 levels. Macquarie observes the main threat to 2018 supply could come from the surge in ore exports from Indonesia following the relaxation of its ban.
With the prospect of further licences being granted before the end of the year it is possible that Indonesian exports could exceed 10mt in 2018. In the short term, the broker notes the slow start to Indonesian ore exports and an extremely tight situation for stocks at Chinese nickel pig iron producers has meant that ore prices remain at attractive levels for suppliers.
National Australia Bank analysts concur that the outlook for nickel remains uncertain. Demand from China appears to have weakened, as scheduled maintenance by steel producers was carried out and some switched to carbon steel from stainless steel to tackle the stainless steel glut. Average prices for 2017 and 2018 are forecast at US$9920/t and US$9770/t, respectively.
Oil
Having rallied around 17% from the lows of the year-to-date, oil prices have paused as the bullish fundamentals are being countered by a West Texas Intermediate price of around US$50/bbl, which is triggering the selling of deferred crude futures. This situation, Citi notes, has led the crude structure to do most of the heavy lifting in getting spot oil prices back above US$50/bbl.
As a result, further gains will need to be triggered by a rally in the crude structure and/or a fresh wave of long positions being added by the investment community. The broker expects, if fundamentals remain strong, new long additions are likely.
Citi notes, after a sluggish start, oil demand this year has renewed life, led by growth in both the US and China. Along with very strong petrochemical demand, growth for key refined products is also on the rise and this has filtered through to stronger refinery margins. Meanwhile, the broker observes from weekly inventory data that clean product stocks have fallen since the peak in the first quarter.
Citi also suggests summer in the northern hemisphere may not be the peak for oil prices in 2017. Broader macro sentiment and geopolitical risks appear supportive of the oil price for now, as is the US dollar weakness. The main factors working against further rises in oil prices are seen as a defensive speculative community and technical traders continuing to exert a significant influence, having been heavy sellers of crude in the northern hemisphere spring.
National Australia Bank analysts believe the worst of the June slump in oil prices is over and optimism is building. In late July, Saudi Arabia made further commitments to cut oil exports while US shale production appears to be tapering off after a steady growth for much of the year. The analysts acknowledge there is some pessimism returning to the market, as surveys have pegged July OPEC production at higher-than-expected volumes in July.
Ultimately, they believe the oil market will not sustain a major rally this year. There are some signs that US shale growth may be slowing but production remains a fairly high levels. Moreover, it remains unclear whether OPEC is in a position to maintain its production cuts in perpetuity.
Without further cuts to production or a sustained up-tick in demand, prices are expected to remain in the low-to-mid US$50/bbl for the rest of 2017. The analysts forecast Brent to trade at around US$53/bbl in the December quarter. Prices are still expected to climb to the mid US$60/bbl levels by the end of the decade.
LNG
With most Australian LNG export prices tied to the price of oil, and oil likely to remain subdued, the National Australia Bank analysts do not expect major upside for export prices and forecast around $8-9/GJ in the coming two years. Domestic spot gas prices continue to trend higher and, in many cases, are above export prices.
The analysts note, while earlier modelling indicated Victoria should be paying less for gas than Queensland, because of higher net-back costs, the opposite appears to have occurred, as gas remains scarce in Australia's largest domestic market. While contract prices are not publicly available, the analysts note some reports are pegging prices at up to $20/GJ. They also point out it remains unclear whether the Commonwealth government will declare 2018 a domestic shortfall year.
Aluminium
Aluminium has lagged the rest of the base metals complex and is confronted by conflicting signals. ANZ analysts observe China is attempting to minimise the impact of the industry on the environment, with closures planned for the winter. The aluminium market has been under pressure from excess Chinese capacity for several years and the build up has pushed the domestic industry into a significant surplus.
Despite new capacity being added, the analysts expect the market to significantly tighten over the next six months and prices ascend above US$2000/t in coming months. China's aluminium production continues to grow, and was up 11% for the first six months of this year. However, the analysts estimate up to 6mtpa in capacity could be shuttered and most of this will be in Shandong, with about 9% of the total production for 2017 at risk of closure.
The analysts have a base case of around -350,000t of reductions to occur over the northern winter and around 500,000tpa of capacity being closed because of a lack of approval over the next 18 months. This could push the market into a -200,000t deficit in 2017.
National Australia Bank analysts note there is increasing doubt over the enforcing of cuts to Chinese production. Chinese production accounts for over half of the global primary aluminium output. There have been reports that June re-starts have offset curtailments while some closed "illegal" capacity has the ability to apply the production permits retrospectively.
They suggest the markets may have doubted the extent and the serious nature of such reductions, which explains the limited movement in aluminium prices. Overall, the analysts forecast prices to be steady or to rise slightly for the rest of the year.
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