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Material Matters: Oil, Nickel, And Thermal Coal

Commodities | Feb 19 2018

A glance through the latest expert views and predictions about commodities.

-Oil prices tipped to stabilise or fall slightly over 2018 as OPEC ends production constraints
-Copper to recover as China scrap imports grow and threat of mine strikes in South America continues
-Nickel and stainless steel supply likely to be boosted by Indonesia further relaxing its export ban
-Thermal coal price in China rises in response to cold winter, despite policy interventions

By Nicki Bourlioufas

Oil

World oil prices are still being supported by the decision by OPEC and Russia in early 2017 to reduce production, but a return to higher output is likely to restrain prices. CIBC has reiterated its average price forecast of US$57/bbl in 2018 and US$59/bbl in 2019, despite WTI Crude recently edged up over US$60/bbl. CIBC stuck with its call, even though strong underlying global economic activity has raised suggestions WTI could hit US$65/bbl this year. Supply developments in the OPEC world and the US will really tell the story ahead, CIBC analysts predict.

According to the analysts, restricting supply made sense to OPEC when prices were mid-US$40/bbl because bumping the price up from those levels would not stimulate much of a supply response from competitors. But by continuing to restrain production now, when prices are high enough to prompt greater US activity, the cartel and its allies cannot be sure they are not simply giving up market share to the Americas without causing a further lift to the global price.

CBIC says that if output rebounds to the levels seen in November 2016, just before OPEC cut production, this will add nearly 1.5m barrels per day. The increase would almost fully offset the growth in global demand expected in the year ahead, keeping downward pressure on prices.

In the US, Cushing inventories fell in late 2017 due to the aggressive hurricane season and a major winter storm. But even with those disruptions, US inventories are only back to the mid-range of their five-year average for this time of year. Shale oil output in the US has been climbing steadily since early 2018 and CIBC analysts predict more is on its way. The stockpile of drilled but as yet uncompleted wells has shown considerable growth, particularly in Texas’s booming Permian region.

CBA concurs with CIBC’s view of the market, arguing that downside pressure will build on oil prices as supply outpaces demand. CBA cites the US Energy Information Administration’s (EIA) most recent monthly outlook, which predicts global oil output will rise 2.5%, outpacing demand growth of 1.7%. The EIA forecasts that OECD stockpiles will take another leg up in 2019 when the OPEC-led accord expires.

CBA says OPEC and its allies have been aiming to reduce global oil stockpiles to the five-year average since they decided to sideline about 1.8% of global supply from the beginning of 2017. But the rise in prices caused by the decline in OECD stockpiles has mostly benefited US shale oil production. OPEC and allied producers are now in the uncomfortable position of having to decide how much they are willing to keep sacrificing to curb oversupply.

Copper

Copper prices dipped below US$7,000/t last week for the first time in 2018, but ANZ maintained its short-term target of US$7,200/t. ANZ sees the weakness as relatively short-lived, saying the risk of further supply disruptions remain high and the restriction on copper scrap imports into China is likely to support refined metal imports. This all comes amid broad recovery in economic growth across the globe.

ANZ see a risk of higher-than-average levels of disruptions due to strikes, despite some successful labour negotiations in recent months. It calculates that there is still over 6m tonnes of copper mine supply at risk from strike action in South America. As a result, it has raised its disruption allowance to 6% in 2018 from the normal 5%, pushing its market balance forecast into a -250,000t deficit in 2018.

Furthermore, environmental constraints in China are likely to affect material flow and smelter production. China’s ban on imports of certain copper scrap products could see the amount of copper imported via scrap drop by as much as -200kt. China imported 3.6mt of copper scrap in 2017, up 6.3% from the previous year. As a result, ANZ expects to see China’s copper imports grow higher than the underlying growth in consumption in 2018.

Nickel and stainless steel

Global markets for nickel ore and stainless steel are likely to be affected in 2018 by a rise in exports from Indonesia, which reflects the contradictory impacts of the Indonesian government’s evolving industry and trade policies in recent years, says Macquarie.

Mineral exports by Indonesia have been a major focus for commodities markets recently, due largely to shifts in the government’s policy stance towards its raw material industries. In January 2014, the government banned nickel ore exports, causing Indonesia’s contained exports to drop from 35% of global supply in 2013 to less than 10% in 2014. Global prices rose by more than 60% from January to July 2014, then collapsed as Chinese buyers drew down substantial stocks of nickel ore and turned to lower-grade ore supplies from the Philippines. This was compounded by a fall in global demand in 2015.

Chinese investors responded to the ban with a flood of investment into Indonesia to build nickel ore processing facilities (nickel pig iron plants) and, from 2017, to develop nickel-using stainless steel production. For domestic political reasons, and to provide accommodation for the state-owned mineral mining entity PT Aneka Tambang, the government then partially relaxed the ore export ban for five years from February 2017 by issuing export permits. In 2017, Indonesia’s combined exports of nickel, excluding nickel in stainless steel, rose more than 50%.

Macquarie says that by relaxing the 2014 ban, Indonesia reduced overall export revenue by diverting domestic ore resources away from existing nickel pig iron producers. As well, the relaxation potentially adds to global nickel supply by allowing China’s nickel pig iron production to rise by at least 25% (or 100kt) above what it would otherwise have been. This caps the overall nickel price below what it could have been.

Even so, there is little prospect of the relaxation of the ban being reversed before Indonesia’s 2019 elections. Macquarie forecasts that Indonesia’s nickel exports in 2018 will top 500,000t, assuming that nickel pig iron production rises a further 230kt Ni (a conservative estimate since installed capacity will exceed 300ktpa) and that stainless steel production is just under 2mt (also a conservative estimate, since potential capacity is 3mtpa). Macquarie further assumes that nickel ore exports will rise to around 20mtpa (which also could be an underestimate in light of the export permits issued so far and the potential for more permits to be issued).

Thermal coal

Seaborne thermal coal prices continue to track at the highest level since late 2016, observes CBA, as a cold winter in China pushes Chinese demand higher. A lack of coal railway transport as well as snow in certain regions in China have also constrained thermal coal supply, adding upward pressure to coal prices. In late October, Chinese policymakers sought to implement stricter rules to avoid thermal coal price gouging during winter. Supply was to be added if prices rose above RMB 600/t (US$95.55/t). However, the policy seems to have failed in the face of the cold winter, with domestic thermal coal prices at RMB 745/t (US$117.45/t) and utilities holding stockpiles of only 10 days.

CBA argues China’s thermal coal supply will eventually increase on the back of policy support and higher thermal coal prices, but that may come after winter. The more immediate event is the Chinese New Year holiday period from February 15 to 22, which should weigh on Chinese industrial demand as people go on holidays. In any case, the downward correction in thermal coal prices is taking longer than expected, and adds upside risks to the thermal coal price.

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