Commodities | Nov 15 2017
A glance through the latest expert views and predictions about commodities. China; Alcoa; crude; and nickel.
-Low confidence in demand outlook for steel in China
-Analysts doubt sustainability of high alumina margins
-Oil prices expected to be well supported in the near term
-Stainless steel still the main driver of nickel performance
By Eva Brocklehurst
After a visit to China ahead of the winter production reductions for steelmakers, Morgan Stanley observes low confidence in the demand outlook has deterred a build-up in inventory. A re-start of 20-30mt of old electric arc furnace capacity and increased usage of scrap are further bearish points.
The price of iron ore is also expected to weaken as a result. The broker notes both mills and smelters are complying with the winter reductions, confident in the government's capacity to enforce restrictions. Winter maintenance has been rescheduled to coincide with the cuts at aluminium smelters.
The aluminium smelters are arguing that energy consumed to re-start operations offsets the savings gained by the restrictions and are lobbying the government, so Morgan Stanley suggests it remains to be seen what will occur next winter. The shortfall of carbon is seen as a short-term issue, as induction furnaces owners turn to carbon production.
The price hike in alumina is widely believed to be driven by speculators, although both the quality and quantity of Chinese domestic bauxite has declined. Morgan Stanley also met with battery makers preparing to begin mass production of NMC 811 by 2019-20 and notes Chinese domestic lithium supply is improving in both quantity and quality, reducing dependence on imports.
Deutsche Bank held discussions with Alcoa management that centred on the sustainability of Chinese curtailments affecting the global supply chain, as well as the company's capital allocation as free cash flow rises. The broker is more confident in Alcoa's ability to generate free cash flow and, as de-leveraging plays out, valuation should re-rate upwards to the peer group average.
Prices have surged for aluminium and alumina, Deutsche Bank notes, as inventory is ostensibly built up heading into the seasonal capacity shutdowns in China. However, other input costs to aluminium smelting have also risen, such as pitch, carbon and anodes because of some unintended consequences of the permanent capacity closures for both environmental and other grounds.
Hence, the broker suggests the cost-push of higher raw material alumina should theoretically support higher global aluminium pricing.
Deutsche Bank notes that with alumina cash margins well above normal levels, many analysts doubt the sustainability of what is considered to be a "made in China" situation. Given Alcoa is net long alumina, current spot prices, if held constant for 2018, could imply US$934m of incremental operating earnings, or around 37% upside to the broker's 2018 estimates for the company. Similarly, spot aluminium could lead to 5% upside to 2018 estimates.
ANZ analysts suggest the likelihood of the disruption to oil supply, after the arrests of dozens of government officials in Saudi Arabia, remains low. Still, they believe the events raise the possibility of the country taking a more aggressive stance on production cuts. The risks now lie with curbs remaining in place for longer than expected. Hence, the analysts expect oil prices will be well supported in the short term.
The Crown Prince Mohammed bin Salman is intent on restructuring the economy to be less reliant on oil but significant challenges have arisen as the country's fiscal position deteriorates since the era of US$100/bbl oil ended in 2014. This suggests the prospect of prices falling back below US$50/bbl is unpalatable for Saudi Arabia.
The analysts believe the government would rather over-tighten the market than risk prices falling again. They envisage a heightened probability that a staged approach is taken to the phasing out of the production reduction agreement once it expires. A gradual and more disciplined return to normal production levels would take some risk out of the market over the next 18 months.
Nickel prices have staged a remarkable recovery over the past month, Macquarie observes. Although copper, zinc and aluminium remain the best performers among the base metals over 12 months, nickel is catching up. The broker is optimistic about the prospects in coming years but remains cautious about the near-term, because of an ongoing correction in Chinese stainless steel production and a surge in Chinese and Indonesian nickel pig iron production.
While the use of nickel in lithium ion batteries for electric vehicles is rapidly growing as an end use it is still a relatively small application, and Macquarie finds it difficult to believe that this has been the driver of nickel's performance. Primary nickel use in lithium ion batteries for electric vehicles accounted for no more than 10-15,000t of nickel last year and has probably grown to 20-30,000t this year, which is still just over 1% of the total market.
The stainless steel market, in contrast, accounts for over 70% of nickel demand. Also of note, Macquarie ascertains, is significant losses to production from the main nickel producers because of mine and refinery closures. Over the past two years, the broker estimates closures of mines, smelters and refineries have taken over 200,000t of supply from the market.
Meanwhile, the broker estimates, conservatively, China's apparent consumption of stainless steel rose 24% in the September quarter to 6.5mt. Combined, these factors signal why nickel prices have been so strong but also raise fears of a correction in demand before the end of the year.
There are reports from China indicating that stainless mills are losing money at current prices and some are already cutting production. Macquarie observes history shows that two good years are often followed by a slower year. For 2018 the broker is forecasting global growth of 2.2% for stainless steel, versus 5% this year and 8.4% last year.
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