Material Matters: Lithium, Copper And Oil

Commodities | Jul 01 2020

Lithium supply expected to increase by 2025; Copper mines in Latin America resuming operations; future uncertain for the North West Shelf

-Lithium prices are low and unsustainable
-Copper production beginning to ramp up, but risks remain
-Global oil supply balance expected to shift to a deficit in June

By Angelique Thakur

Lithium low prices expected to improve

JP Morgan expects demand for lithium hydroxide to soon outstrip that for lithium carbonate. This will be driven by demand for electric vehicle batteries and will also increase demand for the source mineral spodumene.

On the supply side, the current price of US$400/t for spodumene is considered unsustainably low by JP Morgan analysts. This becomes clearer when the current price is compared to the US$1,000/t levels seen in 2018.

While JP Morgan does not expect a material rebound, it does expect the price to increase to US$550/t in the longer term, noting industry experts also expect a rise between US$500-650/t.

The Australian lithium sector is still in its infancy with operations at Wodgina and Pilgangoora yet to ramp up. JP Morgan suggests costs will be defined by concentrate quality and plant recoveries.

The market, already oversupplied in 2019 with demand falling, was expected to improve in the second half of 2020, but it seems any improvement has been pushed out due to the pandemic-led disruptions.

Galaxy Resources ((GXY)) Mt Cattlin mine and Pilbara Minerals ((PLS)) Pilgangoora are operating well below capacity. Mineral Resources ((MIN)) Wodgina also remains on care and maintenance and the broker notes a number of projects are at their final investment decision stage (FID).

JP Morgan expects more than 5mpta of spodumene supply by 2025, driven by a ramp-up in production by mines including Greenbushes ((LIT)), Pilbara Stage 1 and 2 and Wodgina. The broker feels it is too early to be bullish on the metal.

JP Morgan rates Pilbara Minerals as Underweight while being Neutral on Galaxy Resources, Orocobre ((ORE)) and Mineral Resources.

Copper Supply worries easing gradually but risks remain

Morgan Stanley pegs the loss of copper supply through March-June (led by the lockdowns) at -565kt, with Peru accounting for one-third of this (-200kt).

Many of the mines are ramping up to full capacity now, with the recovery centred on Peru. Morgan Stanley notes the majority of the industry there is expected to operate at 100% by July-end.

One major operation that remains offline is the 350ktpa Cobre Panama mine (Panama), where operations have been suspended for almost three months now, with no potential date set for resuming production. The analysts expect a full year production of just 200kt.

Chile has avoided suspensions till now and is trying to maintain its output. However, the risk to mining is growing with Codelco announcing the suspension of its 300ktpa Chuquicamata smelter operations, following the death of a worker due to the virus.

Morgan Stanley feels, given the continued spread of the virus, operations will not return to normal until later in the quarter third which will negatively impact the fourth quarter.

This may not necessarily hit supply as there is sufficient spare smelting capacity globally, with the broker forecasting Chilean production to fall -250kt to 5.6mt in 2020.

Continued risks to copper supply include the pandemic continuing to engulf Latin America along with the fear of a second wave cropping up in other places, which could suspend operations again.

Morgan Stanley expects supply to remain impacted beyond the second quarter of FY20 as mines catch up on maintenance activities and predicts volumes will remain impacted till 2021.

Project development has also been hit; potentially derailing supply growth forecast till 2023.

Joining their peers at Morgan Stanley, analysts at Macquarie see near term upside risk for copper prices owing to these supply concerns.

Macquarie prefers OZ Minerals ((OZL)) which has the longest mine life and Sandfire Resources ((SFR)) over Turquoise Hill Resources ((TRQ)).

Oil: Upside risk

The research team at Longview Economics notes WTI and Brent crudes are ranging between US$35-US$40/bbl, which is high enough to encourage additional production.

However, a question around the global demand outlook remains, especially with a second wave of covid-19 infections emerging in many parts of the world.

Longview tries to assess how the demand-supply scenario will play out over the coming months and suggests global oil inventories peaked in May and will likely fall sharply over the next six months, falling by around -100m barrels by the end of 2020.

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