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Material Matters: Energy, Aluminium & Nickel

Commodities | Dec 04 2019

A glance through the latest expert views and predictions about commodities. Oil; LNG; aluminium; and nickel.

-Calls grow for greater reductions in oil production
-Near-term headwinds for LNG producers
-Rising volumes of low-cost capacity thwart aluminium pricing
-Drop in the nickel price increases near-term risk for key miners


By Eva Brocklehurst


The upcoming OPEC (Organisation of Petroleum Exporting Countries) meeting may be another defining moment for the oil market, ANZ analysts suggest. They believe OPEC has three options, either to roll over the current production agreement, extend the agreement and pursue compliance for those over-producing, or deepen production cuts.

Calls for greater reductions in production are growing, although with considerable uncertainty regarding supply the analysts suspect OPEC would be unlikely to take that option.

The most likely outcome is simply to roll over the current agreement and increase the pressure on non-compliant countries. The analysts suspect, while market will be initially disappointed, this should ultimately support Brent crude at above US$60/bbl in 2020.


Citi envisages some headwinds for those companies with LNG in their portfolios, given upcoming price reviews for existing contracts that were signed at the top of the price cycle.

The broker forecasts subdued spot prices before physical gas markets tighten in 2023. Woodside Petroleum ((WPL)) is considered the most exposed, with over 80% of its LNG portfolio today at legacy prices. This will reduce to under 40% in 2020 on the broker's estimates and to around 10% by the mid 2020s.

Accordingly, Citi estimates the slope of contract pricing will decline by -100 basis points over the next two years and suspects buyers of LNG will wait for existing arbitration cases to be finalised before considering whether to purchase arbitration in their own right.

However, with a backlog of cases globally, buyers may miss the opportunity. Moreover, independent arbitrators do not necessarily have the power to determine the price and are often only afforded the ability to define the terms for determining the prevailing market price.

Citi has neutral ratings across its coverage and believes the sector is fairly priced. The implied oil price across the large cap stocks is US$55-63/bbl, which compares to Citi's US$55/bbl long-term forecast. Over a long-term investment horizon growth prospects and robust balance sheets mean Santos ((STO)) and Beach Energy ((BPT)) are the broker's preferred stocks.

Meanwhile, global LNG production increased in October amid supply growth from US exports. JP Morgan estimates LNG production was up 3% in October and 5% above the prior corresponding period. Production in the Americas was up 10% on the previous month and up 24% on the prior corresponding October.

This supply growth coincided with increases in spot prices despite reports of the supply glut developing in Europe. JPMorgan expects spot LNG prices will weaken now, particularly as no commercial cargoes have been observed from Freeport LNG and Elba Island.

The broker also points out incremental volumes are likely to enter the market at a period when east Asian LNG demand growth could decline. Any import growth is largely dependent on these countries and their uncontracted winter demand requirements. Flat demand growth over 2019 would follow two consecutive years of double-digit growth.


There is a problem facing the aluminium industry – rising volumes of low-cost smelting capacity. Morgan Stanley notes, together with weak demand and rising inventory, this is keeping the price firmly in the US$1700/t region and putting downward pressure on premia.

This scenario is further illustrated by the formal opening of the sixth line at Alba's 1.5mtpa smelter in Bahrain. In the absence of higher-cost smelter closures, and with a likely return to supply growth in China, the broker envisages the price risk is to the downside.

In terms of demand, the automotive sector accounts for 38% of demand for aluminium in the US, 31% for Europe and 48% for Japan. These three markets have all contracted in 2019 and there is potential for more downside in 2020.

Moreover, excess scrap availability and consequent low scrap prices outside of China have meant that, even where end-use is growing, the impact on primary demand has been limited. While China's stimulus efforts have targeted construction/infrastructure, new smelters and Chinese exports of aluminium semis suggest there will be plenty of supply to meet any uptick in demand.

The trend in inventory levels has reversed, Morgan Stanley points out, and the London Metal Exchange is back above 1.2mt with new warehousing rules likely to bring more inventory to light in 2020, weighing on the price.


Macquarie observes a -20% drop in the nickel price has increased the risk for base metal miners. Spot nickel prices are now trading -14% below the broker's FY20 and FY21 forecasts.

The larger nickel miners, Independence Group ((IGO)) and Western Areas ((WSA)) have closely tracked the nickel price over 2019. The broker acknowledges this is somewhat surprising, given the former's heavy exposure to gold.

Incorporating a spot price scenario translates to a -13% and -32% downside risk to earnings forecasts for Independence Group and Western Areas, respectively, in FY20. For the higher-cost miners, Panoramic Resources ((PAN)) and Metals X ((MLX)), the downside is more material, reflecting marginal earnings at spot prices.

Over the past couple of months copper and tin prices have been relatively flat while nickel has declined. Macquarie reiterates a preference for Independence Group and OZ Minerals ((OZL)) in base metal stocks as these offer some near-term downside protection to weaker prices through lower-cost operations and exposure to gold. Meanwhile Western Areas offers greater exposure to a bullish outlook for nickel in the medium term.

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