Material Matters: Cobalt, LNG And US Oil

Commodities | Apr 30 2019

A glance through the latest expert views and predictions about commodities. Cobalt; European ETS; Australian gold miners; LNG; and US oil.

-Macquarie suspects strong recovery in cobalt price unlikely
-Earnings risk raised for European materials companies
-Bullish longer-term theme emerging for Australian gold miners
-Strong consensus for weaker LNG prices long term
-US crude stocks finely balanced

By Eva Brocklehurst


A strong recovery in the price of cobalt is unlikely, Macquarie asserts. Cobalt prices have picked up over recent weeks because of tighter supply and another firm month of electric vehicle sales in China.

Further price gains now appear diminished, the broker points out, amid news that Glencore will resume some sales of Katanga units and as Umicore downgrades earnings guidance because of challenges in the battery materials division.

Weaker cobalt prices played a part in the latter's downgrade announcement but Macquarie also cites the company's statement that "demand patterns for cathode materials have deteriorated in the past couple of months".

There was some expectation that the de-stocking activity that often accompanies a slide in prices had come to an end and the buyers were returning after the Chinese New Year.Yet, after allowing for mine disruption and increasing discounts because of weak pricing, Macquarie still calculates a real oversupply for the raw material of 18,500t. The broker assesses the market is facing demand shocks, slowing sales growth in electric vehicles and a shift away from cobalt intensity in cathode materials.

European ETS

Changes to Europe's emissions trading scheme (ETS) could jeopardise the competitive position of energy-intensive European materials companies after 2020. Assets in steel, cement, aluminium and copper smelting have suffered from a deteriorating global competitive position.

Most of these assets are captured under the region's ETS via the passing through of carbon dioxide allowance costs in power prices by power producers. Allocations and compensation are agreed until 2020.

However, the new version of the system that comes into effect in 2021 provides no base around the level of free allocations and the ability to compensate for leakage of economic activity. Morgan Stanley believes these developments warrant close attention and the recent increase in carbon pricing has lifted the potential earnings risk materially.

Oz Gold Miners

Recently, Macquarie observes the only support for the gold price was weak manufacturing data in Europe. Still, a bullish longer-term theme for gold is the emerging prospect of a peak in the US dollar, as global growth finally stabilises.

After the March quarter's reports, the broker notes Evolution Mining ((EVN)) expects a big final quarter to achieve the top half of its FY19 production guidance range. Cowal remains a strong organic growth prospect and the broker upgraded the stock to Outperform recently.

Regis Resources ((RRL)) published an updated resource and maiden reserve as well as a new mine plan for the Rosemont underground. This delivered a 37% increase in resources and a maiden reserve estimate of 600,000t at 6.4g/t for 123,000 ounces. Macquarie upgraded to Outperform.

Meanwhile, Saracen Minerals ((SAR)) is on track to meet its upwardly-revised guidance of 345-365,000 ounces. Exploration and organic growth prospects continue to deliver results, which Macquarie believes will support the company's aspirational 400,000 ozs/pa run rate.


On current LNG contract prices, Citi calculates a tight spread at 11.5-12.0% FOB is likely to persist for 1-2 years. The broker notes strong consensus that long-term LNG prices delivered into Asia will be weaker, at around US$7-8/mmBtu as opposed to the US$8.5-9.0/mmBtu implied by ASX energy stocks.

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