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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.

China Housing

Morgan Stanley expects an acceleration in property completions in China will support a transition in demand to copper from steel. Most copper is installed in the form of wiring and pipes, closer to the end of the construction cycle, so demand correlates best with completions.

Beyond direct use, copper demand is also expected to benefit from the purchase of white goods after completion and grid extensions to connect new properties. Morgan Stanley forecasts China's copper demand to grow 2.5% in 2020 and, together with an outlook for muted mine supply growth, this underpins a 2020 copper price forecast of US$2.93/lb.

On the other hand, China's steel demand and property starts are closely correlated, since 40% of steel demand comes from property construction and is typically early on in the construction process. Housing starts are slowing and likely to drive a -1.6% decline in China's steel output in 2020, in the broker's calculation.

Commonwealth Bank GDP growth forecasts for China have been downgraded to 5.8% in 2020 from 6.1% previously. This reflects any impact from an escalating US/China trade war as well as the global economic slowdown.

The analysts suspect renewed commodity demand in China revolves around infrastructure investment. Support is expected for infrastructure expenditure for the remainder of 2019 but demand is expected to slow more aggressively in 2020.

The US has delayed the increase in tariffs on US$250bn in Chinese imports, positive for oil and base metals and negative for gold, although the analysts suspect the market will need confirmation of a deal to crystallise expectations and the meeting between Presidents Trump and Xi at the APEC summit on November 16-17 could provide critical progress on a US/China trade deal.

Coking Coal

Commonwealth Bank analysts expect supply growth in seaborne coking coal will weigh on prices in 2020. China accounts for around 20% of global coking coal imports so a policy to restrict imports has a significant impact on the seaborne market.

The policy has also changed, targeting imports exclusively. Previously, China's over-production and over-capacity of coal were also in the firing line. After curtailing capacity for several years, China's net coal capacity is now expected to increase.

Meanwhile, global exports of coking coal are expected to increase by 7% in 2020 with heightened supply from Australia. Seaborne supply is expected to grow only 1-1.5% in 2019 as increased exports from Australia and Canada are countered by reduced supply from the US.


Oil prices have now fallen below the levels which occurred before the attack on Saudi Arabia's infrastructure. Demand concerns have returned as the main driver, Commonwealth Bank analysts observe.

Saudi Arabia has claimed that oil production capacity has returned to normal and the kingdom can supply the market with the same amount of oil as prior to the attacks. This is one month earlier than previously flagged.

While doubts still linger, the analysts note the number of nations now joining the US in blaming Iran for the attacks has increased and, therefore, tension continues to rise in the Gulf. Iran has not ruled out military activity in response to an increasing US presence and the analysts believe it prudent to assume that Iran could significantly disrupt oil supplies.

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