Material Matters: Copper, Nickel & Lithium

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A glance through the latest expert views and predictions about commodities. Copper; nickel; cobalt & lithium; and coal.

-Tightness expected to linger in copper despite slowing growth
-Higher prices likely required for nickel supply to keep up with demand
-Oversupply looms for cobalt & lithium. Time for de-stocking?
-Market may need to review thermal coal price outlook
 

By Eva Brocklehurst

Copper

Copper is widely used and hence its sensitivity to growth expectations is high. ANZ analysts point out the immediate effect of the US/China trade dispute was restricted to those metals directly affected by US import tariffs, namely steel and aluminium, but this has now escalated. The dispute now includes the technology and automotive sectors, which raises some concerns.

These developments are taking place amid signs that global growth is slowing. The main drag on ANZ's global growth index comes from the European area. EU manufacturing is affected by protectionism and trade concerns.

Growth has also showed signs of weakening in some of China's sectors. One of these is the power transmission network, a key consumer of copper.

The analysts do not envisage inventory will build significantly but whether this has any material impact on grid investment needs monitoring. China's credit environment is also tightening and this may start to dampen demand from manufacturers of semi-finished copper. Meanwhile, risks of supply disruptions are elevated. Unions are planning a 24-hour stoppage within the next two weeks at the Codelco Chuquicamata copper mine in Chile. At nearby Escondida BHP Billiton ((BHP)) and the unions remain locked in negotiations.

The analysts expect copper markets to record a deficit in 2018 and the tightness to linger into 2019, despite the slower economic growth. A fall in copper scrap imports should also boost demand for imported copper in China, particularly refined metal.

Nickel

Nickel's leverage to the growth in electric vehicles has mushroomed despite it being a mature base metal market. Ord Minnett expects the nickel market to remain in deficit beyond 2018, while higher prices are required to provide the incentive for new supply to keep up with the demand growth.

Nickel is also one of the few commodities that is trading below its long-run real average price and the new sources of supply are expected to be both higher cost and technically challenging. The broker forecasts long-term nickel prices of US$9/lb.

While BHP remains non committal regarding its Nickel West asset, it is investing, the broker observes, to maintain the business and prolong the mine life as well as develop downstream facilities.

A sufficient return requires the smelter to operate efficiently beyond 2020, when the current Independence Group ((IGO)) and Western Areas ((WSA)) offtake agreements expire. The products from these two companies are key blending ingredients for low quality feed to Mt Keith, and the long-term value of Nickel West relies on short-term business risks being resolved.

Ord Minnett believes it imperative that Nickel West secures these offtakes so the two companies are in a position to push for higher payability. Ord Minnett resumes coverage on Independence Group with an Accumulate rating and upgrades its rating for Western Areas to Hold from Sell.

Cobalt & Lithium

Macquarie envisages massive oversupply versus implied electric vehicle demand for both cobalt and lithium. Participants up and down the supply chain are starting to acknowledge that panic-led rallies in both metals have resulted in large stocks being accumulated.

The broker suggests now is the time for de-stocking, as Chinese electric vehicle sales are set to fall sequentially while subsidies are adjusted. Exacerbating this situation is expectations for further rapid growth in mine supply.

Macquarie remains bearish and expects downside for both cobalt and lithium prices in the medium term. The broker suggests discrepancies in demand and supply lie with the timing of metal consumption versus end-use consumption.

Production of electric vehicle batteries is taking place well in advance of deployment into vehicles, and some consultancies have suggested that over a year of lead time is currently factored in to the market.

Too much supply from new and returning mines is set to come to market, putting cobalt into difficulties from next year while lithium should already be in surplus. Hence, the broker observes the price is, deservedly, beginning to respond to the weakening fundamentals.

Coal

Newcastle 6,000cal coal has surged to US$115/t, a record premium of 46% over the 5,500cal high-ash coal price. Credit Suisse is not sure what this premium reflects. The market for high-grade has been tight but probably not so tight for this particular coal.

The broker suspects, somewhere, high-price cargoes have been bought, although this could just be traders caught out trying to meet contracts. While a South African shortfall initiated the rally Newcastle has now run on beyond Richards Bay.

Yancoal and Glencore, having taken control of Rio Tinto's ((RIO)) former NSW coal operations, now dominate Newcastle supply. Given their dominance, Credit Suisse questions whether the Newcastle price really reflects supply and demand.

If, as a large Indonesian producer suggested, the Newcastle price is whatever Glencore decides, the price might hold at high levels for longer than it should. Still, the broker interprets the failure of Japanese contract negotiations to indicate this current price is too high.

Credit Suisse suspects a reasonable price remains higher than the market anticipates, and perhaps forecasts need to be reconsidered. Consensus for the next financial year is for US$83/t.

The broker understands Glencore headed into the Japanese contract negotiations seeking a three-digit price while Japanese buyers wanted a price below US$95/t. As the contract negotiations failed this signals Japan, being the biggest buyer of 6,000 cal coal, remains willing to pay US$94/t for thermal coal for a year.

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