Material Matters: PGMs, Coal & Nickel

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A glance through the latest expert views and predictions about commodities. Platinum group; manganese; thermal coal; and nickel.

-Palladium at a rare premium to platinum but unlikely to last
-Manganese exports to China likely boosted by sharp fall in Chinese production
-Thermal coal price likely to fall as northern winter gets underway
-Nickel supply shortfall expected to be resolved relatively quickly
 

By Eva Brocklehurst

Platinum Group

Palladium is as valuable as platinum. It shouldn't be, Macquarie asserts, but has reached platinum status for the first time since 2001. At that time it spiked higher on a fund-related squeeze and the only time prior that palladium was as valuable was way back in 1913.

Macquarie notes, on the supply side, platinum is more expensive to mine and on the demand side, platinum can substitute for palladium in many automotive catalyst applications. This is not the case vice versa. Further, platinum also has a very large jewellery market.

The most important current influence on the two precious metals is automotive catalysts, where palladium and platinum compete directly. Demand for palladium has been strong whereas for platinum it is weak. The broker suggests the internal forces that normally keep palladium at a discount to platinum are presently very weak.

Still, Macquarie expects overall demand for palladium will weaken. Car sales in palladium's key gasoline vehicle markets in China and the US are expected to moderate over the next few months while the share of electric vehicles continues to rise, which in time is much more damaging for the palladium price.

Manganese

The price of manganese has been volatile, with prices jumping above US$9/dmtu at the beginning of the year, a 10-year high. The price then halved to around US$4/dmtu in March before climbing back to around US$6.50/dmtu.

Meanwhile, Macquarie notes, Chinese manganese ore imports are up by around 39% in the year-to-date. South African miners have responded by boosting exports which are now running at a record high. In Australia, Bootu Creek and Woodie Woodie, which account for around 4% of global supply and were shut amidst low prices, are in the process of re-starting.

What surprises the broker is that despite the strong supply response, visible inventories at Chinese ports remain low. It would appear that demand has not increased at the same pace as imports. The numbers show consumption cannot explain the surge in Chinese imports but rather, Macquarie suspects, there was a sharp fall in Chinese production. There are no official statistics on manganese mining in China.

The broker suspects the industry, with low grades, power intensity and polluting processing, fell victim to government-led environmental restrictions during the summer. Domestic manganese is also unlikely to be popular among ferro-alloys in the current market, given a push to quality by producers.

Macquarie's analysis still require some displacement of high-cost supply over the next three years for the market to balance. Nevertheless, higher Chinese imports should prevent a fall to the 2015 lows in price and keep some of the higher cost, seaborne mines in the market. The broker envisages price support around US$4-4.5/dmtu in the medium term, in line with the marginal cost of trucked tonnage in South Africa.

Thermal Coal

Credit Suisse expects the thermal coal price to fall over the the northern winter. Reducing air pollution in China appears to be highest priority and several local governments have brought forward their curtailments. Henan province and Handan city in Hebei are curtailing steel production by -50% from October 1, rather than November 15. Anhui, west of Shanghai, has announced curtailment to many industries including copper smelting.

The broker suggests widespread reductions in industrial activity in China during winter should reduce demand for thermal coal and, with new policies to enhance the supply side, the price is likely to drop.

Credit Suisse observes the government appears to have moved its focus to enhancing supply – accelerating commissioning of new coal mines and ceasing the practice of closing mines before the safety inspectors arrive – from one of restricting output of thermal coal.

The broker believes is every chance now that the spot price should fall back towards the targeted range of RMB500-570/t from the current rate of RMB695/t by mid winter.

Nickel

Morgan Stanley does not believe that an increased requirement for nickel sulphate in electric vehicle battery production will will drive the price substantially higher. Nickel is critical for EV battery manufacturers and the preferred feedstock is high-purity nickel sulphate. The broker acknowledges there is insufficient nickel sulphate production capacity to meet even conservative growth scenarios.

While expecting a significant impact on demand for a range of metal markets as a result of the expanding EV market, Morgan Stanley expects the shortfall in regard to nickel to be resolved quickly.

The nickel market is one of the smallest in the metals and features one of the most complex supply chains. Moreover, for a relatively small investment the industry is capable of adjusting flows to quickly deliver into a nickel sulphate shortfall, as BHP Billiton ((BHP)) has demonstrated with expansion at the Kwinana refinery in WA.

A price altering inflection point is flagged for 2019-20, so Morgan Stanley believes there is sufficient time for the nickel raw materials to adjust and accommodate. That said, the broker continues to forecast a growing market deficit, reducing the longstanding inventory overhang and supporting the price in the medium to longer term.
 

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