Material Matters: Base Metals, Met Coal & Oil

Commodities | Oct 16 2019

A glance through the latest expert views and predictions about commodities. Base metals; nickel; copper; housing China; coking coal; and oil.

-Decelerating global growth signals caution for base metals sector
-Can the nickel market sustain such high prices?
-Transition in Chinese housing demand to copper from steel
-Growth in seaborne coking coal supply to pressure prices
-Demand returns as the main driver of the oil price


By Eva Brocklehurst

Base Metals

JPMorgan notes the latest forward curve shows downgrades of -6-14% across base metals, with the exception of nickel which is up 36%. The broker has a neutral view on the sector, preferring large diversified miners, gold and, over the longer term, the winners from the lithium fall-out.

Decelerating global growth provides a cautionary signal. The broker downgrades base metal prices, reducing copper, aluminium and alumina by -6%, -6% and -14% respectively. The exception is nickel, where the bringing forward of the Indonesian ore export ban has pushed the price up sharply.

Despite the run-up in nickel, JPMorgan finds value is limited and has recently downgraded nickel stocks Independence Group ((IGO)) to Underweight and Western Areas ((WSA)) to Neutral. Alumina Ltd ((AWC)) is also downgraded to Underweight and Sandfire Resources ((SFR)) to Neutral, because of lower prices and lack of valuation support. The broker advocates gold exposure to hedge against any macro shocks.

Goldman Sachs has downgraded Independence Group to Sell, believing the cash being harvested from Nova is as good as it gets. Western Areas is upgraded to Neutral following the recent price rally in nickel. Changes are largely driven by valuation as well as the relative performance of the stocks.


Goldman Sachs expects the nickel price to reach US$20,000/t in three months time as Indonesia's ban would remove an estimated -10% of global supply. Following this, the price is expected to pull back to US$18,000/t in six months and US$16,000/t in 12 months as supply responds.

Commonwealth Bank analysts also estimate around 10% of global nickel supply is at risk but, given the forces that will likely respond to higher nickel prices, the net impact on a nickel deficit could be as low as -2.5%.

They also note speculation of the Indonesian ban help nickel prices higher before the announcement and they remain supported as consumers and traders stockpile refined nickel. Global growth concerns, however, are expected to weigh on spot nickel over the remainder of 2019.

Citi observes nickel is presenting similar features to those which occurred in the copper market nearly 25 years ago. There is a current disconnect between physical market weakness and tightness at exchanges. This signals major downside risk for nickel prices, exacerbated by the slowing in global growth.

Citi notes London Metal Exchange nickel short-dated spreads have recently become the most backwardated (where the spot price exceeds the futures) in 22 years. At the same time, bonded premiums for nickel in China have dropped into negative, the first time ever this has occurred in China and a rare occurrence across the metals complex.

When a similar situation occurred in mid 1995 with copper, called the "Sumitomo copper affair" it took a long time, the broker points out, but eventually the relative physical market weakness won out and LME copper prices collapsed.

The current situation is unlike what occurred in the first half of 2014, the last time Indonesia implemented a nickel ore ban. In 2014 rising premiums were providing the same fundamental signal as a tightening of LME spreads.


In line with poor activity data in China and a deepening industrial recession and several large economies, Goldman Sachs observes physical demand for copper has weakened further. In addition China's copper demand has been constrained by the poor performance of the grid, property and transport sectors.

Nevertheless, the broker still envisages completions and grid investment will pick up strongly, although the impact on demand may not be felt before the first quarter of 2020.

Copper consumption is expected to contract in 2019 and increase mildly in 2020. Mine supply is expected to remain weak in 2020 and a significant deficit close to -300,000t should propel the copper price higher.

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