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Material Matters: Steel, Alumina And Cobalt

Commodities | Mar 19 2018

A glance through the latest expert views and predictions about commodities. Steel & iron ore; aluminium raw materials; cobalt; copper; and coking coal.

-Short-term pressure, but steel & iron ore markets considered well supported
-Rising supply makes Macquarie bearish on alumina & bauxite
-Cobalt requirements likely to be increasingly supplied by DRC
-Credit Suisse takes more positive view on copper
-Includes risk of lower Queensland coking coal railings in forecasts

 

By Eva Brocklehurst

Steel & Iron Ore

ANZ analysts observe the lull that usually follows Chinese New Year will place pressure on steel and iron ore prices. In the short term, a lifting of winter steel restrictions could mean prices weaken as steel inventory is drawn down. There is also a risk iron ore prices ease back through US$70/t.

US trade tensions are also likely to continue. The analysts do not expect a major impact on Chinese steel exports as a result of the US steel tariffs. Rather, the greater risk is for a trade war as key trading partners retaliate.

Further out, supply-side reforms are expected to support these markets over the remainder of the year particularly as the National People's Congress has raised its target for capacity closures. The government has confirmed it is targeting GDP growth of 6.5%. Combined with growth in developed markets, the analysts envisage demand for these commodities will remain supportive this year.

Macquarie believes concerns about China's steel stockpiling are overdone. The build-up appears connected to a delayed pick up in demand. The broker expects a rise in construction steel demand at some point over the next two weeks, which should start to impact on inventory and support steel prices.

Raw material inventory has also increased although, provided crude steel production expands in April in line with seasonal trends, this should not weigh on prices. The broker continues to expect raw material demand to improve in coming weeks.

Macquarie has long argued that iron ore port stocks are a weak market signal and there have been plenty of times when changes did not correspond to an equivalent move in iron ore prices.

Nevertheless, the broker does flag the fact iron ore port stocks are the highest they've been since 2012. Looking ahead, the broker observes Chinese sentiment so far remains relatively bullish and there is no sign of a let-up in demand.

Aluminium Raw Materials

Rising supply is providing a bearish perspective on the seaborne markets of alumina and bauxite. Macquarie believes these markets are likely to stay soft. Bauxite prices have recently started to drop and the availability of Guinean material has worked to keep a lid on prices.

As with aluminium production, alumina output in China has also recovered after reductions that were ordered were less onerous than initially feared. Bauxite imports, as a result, also began to recover, with Guinea contributing close to an average of 3mt per month of material in November and December. This increased to 3.5mt in January.

Macquarie expects bauxite prices to stay under pressure, as seaborne volume rises and operations geared to export ramp up. The possibility also exists that Malaysia will relax some of its export ban.

Over a longer horizon, Macquarie observes the alumina market is experiencing rising process capacity with no constraints on the availability of bauxite. The broker believes the future trend for alumina prices in the longer term is downward.

Cobalt

Canaccord Genuity expects large-scale operation such as Kamoto and Kolwezi in the Democratic Republic of Congo will provide the majority of near-term supply of cobalt and increase reliance on that country's mined production to 72% in 2021 from 65% currently. This comes at a time of increased sovereign risk.

Product is likely to improve, as artisanal ore supply is curbed, as is payability associated with the building of refined cobalt capacity. The broker notes a recent approach to miners by Apple and Samsung for long-term cobalt supply, which indicates a willingness to directly invest in supply and reflects these companies' aggressive growth plans.

Prices over 2017 were sustained into 2018 and Canaccord Genuity suggests a supply/demand imbalance, rather than speculation, is likely to be the main influence over the medium term.

Cobalt demand forecasts are largely unchanged and the broker believes a revised Chinese policy on electric vehicles is likely to favour a larger battery size. The broker has already factored into forecasts the potential for thrifting cobalt for nickel within NMC cathode formulations but slows the speed at which this is assumed to occur.

Cobalt remains critical to retaining crystalline structure within the cathode and demonstrating replaceability with nickel is critical for product acceptance. This is the focus of ongoing research. In terms of using manganese as a transition metal, Canaccord Genuity notes its advantages need to be traded off with reductions in performance.

Demand for traditional markets will be satisfied through existing refined metals while meeting the growth segment in battery powder will be contingent on chemical capacity coming on line.

Overall demand is expected to continue to grow at 8% annually to 2025. Industrial applications such as super alloys are assumed to only grow 0.5% per annum as end-users are expected to reduce cobalt content within chromium alloys.

The broker revises its pricing method to reflect recoverable cobalt supply and demand. Long-term prices are lifted 32% to US$49/lb. Over the short term the broker envisages a strong likelihood for structural deficits, which may exacerbate the inclination to stockpile.

The LME cobalt price is expected to breach US$50/lb in 2019 and companies that have near-term development projects or physical exposure are seen as best placed to benefit.

Copper

Credit Suisse upgrades copper price forecasts for 2018 and the first half 2019 because of a change in its macro view on China. Previously, the broker took a view that China's property construction boom would fade over 2018, reducing copper demand. However, following a visit to China in October/November Credit Suisse has returned with a more positive view.

The broker believes the backlog of projects in housing and infrastructure will support metal demand irrespective of new orders. Credit Suisse expects the copper price to hover close to current levels for much of the year as there are no upcoming catalysts to move the price either up or down.

Coking Coal

Credit Suisse now includes the risk of lower Queensland coal railing in its forecasts for seaborne hard coking coal, as Aurizon ((AZJ)) is expected to cut 20mtpa from its shipments because of a new maintenance plan.

The broker raises price forecasts for the remainder of 2018 by US$20/t to US$195/t. By 2019 the broker expects that higher exports from the US could offset the reduction in Queensland railings and makes no changes to forecasts beyond 2018.

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