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Material Matters: Battery Metals, Rare Earths, Base Metals, LNG

Commodities | Aug 07 2019

EV growth no panacea for battery metals; nickel rises in price as alumina falls; step-up in global LNG production projects; rare earths draw attention.

-Strong outlook for battery metals over long term, but short term weakness
-Nickel shortage expected to ease; alumina appears oversupplied
-LNG capacity to explode, but supermajor links vital for new projects

By Nicki Bourlioufas

Electric vehicles promise bright future for battery metals, but no guarantees 

Battery metals including lithium, cobalt and graphite had a spectacular run in 2017 powered by expectations of a boom in electric vehicles (EVs), but prices have since tumbled on fears of oversupply. 

Canaccord Genuity predicts that sales of passenger EVs will rise to 11m in 2025 and 28m in 2030, up from 2.1m in 2018. This means EVs will increase to 14% of new vehicles sold in 2025, from 2.6% in 2018.

Such growth would underpin a requirement for 927kt of lithium and 208kt of cobalt in 2025, up from 230kt and 111kt, respectively, in 2018, according to the broker. The need for greater battery density will also drive a transition to lithium hydroxide rather than lithium carbonate.

On the negative side, Canaccord Genuity notes that battery metals producers are not immune to the delays and technical problems common to all miners, and that traditional sources of equity finance are cautious given a series of blowouts in capital expenditure.

As well, the Democratic Republic of Congo’s share of cobalt production is likely to rise to 70% from 60%, while China controls nearly 90% of refining capacity of some battery metals and rare earths. The situation could trigger concerns about concentration in the supply chain.  

Nickel on a roll, alumina on downward track

Nickel has retraced recent gains following its speculator rally this year, while aluminium and copper too have fallen on poor macro sentiment as fears of a sharp global slowdown grow.

Nickel supply grew by 9% in the first six months of 2019 compared to the same period in 2018, but that was still not enough to meet demand, according to analysts at Macquarie.

Nickel is trading at about US$14,520 a tonne, having risen from just over US$10,000 a tonne a year ago.

The fastest growth was in nickel pig iron (NPI), which grew 30%, while non-NPI declined due to a major fall in production at Brazil’s Vale. “The market should move into balance by the end of the year,” predicts Macquarie.

Almost all NPI is consumed in making stainless steel, and the rapid growth in supply is elbowing out class 1 nickel metal in its production, Macquarie says. NPI represents almost 10% of recoverable nickel ore, and the vast majority of it is produced in Indonesia and exported to China, raising doubts about whether this intense trade can be sustained.

Alumina is moving in the other direction, with Morgan Stanley saying the price has fallen sharply despite a short-lived disruption to supply at a Chinese refinery. “Falling prices for bauxite, caustic soda and energy have pushed down production costs and China is adding significant capacity this year.” 

The alumina free on board (fob) price in Australia has fallen from US$650 a tonne in September 2018 to US$300 a tonne in late July. The less volatile price of China domestic alumina (ex-VAT) has declined from about US$450 a tonne to US$325 a tonne over the same period. 

The gold price has rallied over US$1,400/oz in response to last week’s US Fed decision to lower interest rates. Silver has continued to gain on speculative buying by those who missed gold's initial rally, suggests Morgan Stanley.

For oil, the outlook is grim, according to Macquarie’s oil team who sees greater US supply and subdued demand as the key bear risks to oil's price outlook.

LNG gets set for major expansion, but links with supermajors are key

A new wave of investment is coming for the liquified natural gas (LNG) industry, highlights Morgan Stanley. This will be driven by the “Supermajors” – Royal Dutch Shell, Total, BP, Eni, Exxon Mobil and Chevron.

Companies that partner with the supermajors will benefit, but the challenge for investors is that there is a long list of projects vying for expansion. “Not all will proceed and some projects will be left stranded,” Morgan Stanley points out.

Today, more than 40 countries import LNG, compared to nearly 10 around 15 years ago. With China's recent increase in consumption, the industry is positioning for higher demand.

However, spot LNG prices moved lower recently “due to short-term over-supply, a disconnect between the price that buyers are willing to pay to support new projects (required to meet longer-term demand) and the price suppliers need to achieve to make sufficient returns and to secure the financing to develop them.”

Morgan Stanley has upgraded its rating of Oil Search ((OSH)) to Overweight and maintained its Equal Weight on Woodside Petroleum ((WPL)). “We view Oil Search's partnerships with ExxonMobil and Total, and their low-cost nature and proximity to Asia as keys” to its PNG projects moving forward, the stockbroker explains.

Rare earths worth eyeing as demand grows

Ord Minnett has initiated coverage of the rare earth sector and issued its first ratings of producer Lynas Corporation ((LYC)) and developer and explorer Hastings Technology Metals ((HAS)).

The rare earth elements are 17 metals that occur together in the Periodic Table.
The group comprises yttrium and scandium, plus the 15 elements classified as lanthanides, such as neodymium, praseodymium and cerium.

The major use of rare earths is as chemical catalysts, such as in vehicle exhaust systems for pollution control. They are also added to alloys to make them more durable, and used in making magnets for motors and generators and in polishing gemstones and optical quality glass.

 Demand has been boosted recently by their use as phosphors to make screens glow and in batteries for computers, phones and EVs.

Ord Minnett says the underlying forces in the market appear to be stabilising, and “prices should be supported over the long term by broader demand for electrification, plus environmental reforms in China.” 

Lynas mines rare earths at Mount Weld in Western Australia and separates them at Kuantan in Malaysia. With 15% of world supply, Lynas is the only significant non-Chinese producer. Ord Minnett rates Lynas a Buy with a price target of $5.00, compared to its recent price of $2.52 on 5 August.

Hastings is developing the Yangibana deposit in WA’s Gascoyne region and exploring at Brockman near Halls Creek. Ord Minnett rates the company a Speculative Buy with a price target of 30 cents a share. The stock peaked at 20c in February but has since fallen to about 14 cents. 

Ord Minnett calls Hastings its “top pick among the developers” due to its high value orebody, low technical risk path to production, offtake agreements with German industrial giants Thyssenkrupp and Schlaeffer AG, and the personal commitment of Executive Chairman Charles Lew, who owns 11.5% of the company and has self-funded most of its development.

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