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Material Matters: Lithium, Oil & Thermal Coal

Commodities | Jan 23 2018

A glance through the latest expert views and predictions about commodities. Lithium; oil; aluminium & alumina; solar; thermal coal.

-Prices for battery raw materials expected to fade from current high levels
-Crude prices vulnerable to correction but timing is difficult to predict
-Spot alumina price appears unsustainable
-Thermal coal prices considered unlikely to stay above US$80/t

 

By Eva Brocklehurst

Lithium

China's electric vehicle sales rose considerably in 2017, correlating with strength in import demand for battery raw materials. UBS finds the latest data on Chinese new energy vehicles consistent with recent upgrades and a bullish stance towards battery commodities and related equities. The broker also expects full battery electric vehicles to continue to hold a dominant position versus plug-in hybrids.

The broker remains bullish in the long-term for lithium, graphite, nickel & cobalt yet expects prices for all but nickel to ease from current high levels. UBS maintains Buy ratings for Syrah Resources ((SYR)) and Neutral for Galaxy Resources ((GXY)).

Sociedad Quimica Y Minera de Chile, or SQM, the lowest cost producer of lithium globally, has obtained the right to increase its annual production quota by 4-6 times. Morgan Stanley expects the company to aggressively recover market share from 2020 and envisages downside risk to the lithium price as a result.

The company has been able to expand its quota in Chile to 2.2mt until 2030. Morgan Stanley's view has been for lithium prices to fall gradually, bottoming at US$8000/t by 2022. The broker concedes this could now happen faster as SQM recovers the capacity to determine global prices.

Oil

As net long positions in WTI crude are at an all-time high prices are vulnerable to a correction and ANZ analysts suggest this could be induced by a sudden increase in drilling activity in the US shale industry. Timing for such a move is difficult to predict so the strength could last longer than fundamentals would suggest.

The analysts also note that unplanned disruptions are near historically low levels, despite the rising geopolitical risks. Hence, any rise in disruptions could have a significant impact on oil prices.

Citi has increased Brent oil forecasts for the first half of 2018 by US$3/bbl, but does not change its view regarding weakness occurring from the second half onwards. The broker acknowledges a bearish catalyst is needed for liquidation to begin and there is potential for this later in the first half, depending on the weather, supply outages and refinery maintenance.

The broker considers the oil sector expensive and the price is the key risk. The broker's preference in the sector remains with Sino Gas & Energy ((SEH)) and Caltex ((CTX)).

Aluminium & Alumina

UBS suggests downside risk is looming for London Metal Exchange prices over the next couple of months as aluminium inventory continues to lift. The tightest aluminium market appears to be in North America where visible inventory is low and merchant premia are lifting. Alumina prices, meanwhile, are down to US$385/t from a peak of US$480/t in November.

The constraints on bauxite mining in China, which acted in part to rally prices, have now eased. The broker suggests the alumina market may remain tight until March and envisages spot alumina prices are more stretched than aluminium prices and unsustainable in the short term. The broker retains a Sell rating on Alumina Ltd ((AWC)) and is Neutral on South 32 ((S32)).

Solar

Falling costs for solar panels, coupled with rising power prices, are making solar, and renewables in general, attractive, Ord Minnett observes, although China remains the largest driver of the trend currently. China accounted for 55% of global solar demand in 2017 and this year the broker expects global markets to be slightly in oversupply.

Ord Minnett considers the trend encouraging for the engineering, procurement and construction industries. Risks appear to be market based, with relatively low risk during the construction phase. In the broker's coverage, RCR Tomlinson ((RCR)), with a Buy rating, has a highest exposure to solar.

Thermal Coal

Credit Suisse no longer expects China's coal prices to retreat into the government's target range of RMB500-570/t over the next two years. Instead, the broker aligns its Newcastle price forecasts with its China analysts forecasts for 2018 and 2019, ie RMB600/t and RMB580/t respectively. This translates to US$85/t and US$81/t respectively, using a price parity basis.

The broker expects the price to soften from the current US$105/t in February, as China's winter ends and slowing demand pushes the global price lower. For 2018, Credit Suisse forecasts a 15mt surplus in export coal will also suppress pricing, although there could be demand peaks and troughs through the year.

The export thermal coal market is expected to be nominally in deficit from 2019, although this is uncertain as it reflects restrictions in Indonesia on coal production. At any rate, Credit Suisse doubts the price can sustain levels above US$80/t, as that would prompt a strong supply response. The US and Russia, in particular, have capacity for higher output and Indonesia's discipline may erode in the face of higher prices.

While developed world demand for coal-fired power is falling growth still exists in ASEAN. Credit Suisse notes these 10 nations expect to add 32-56GW of coal-fired generation from 2015-25. While models to 2022 include Indonesia's aggressive power targets, Credit Suisse suggests there may be some upside to forecasts emanating from other ASEAN nations.

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