Commodities | Jul 01 2020
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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.
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.
The analysts forecast oil production to increase in the second half, spurred by the expiry of OPEC-plus quotas in August.
On the other hand, demand has recovered by almost 50% in just two months from the lows seen during the first-half, they point out but remain conservative and assume a slowdown in recovery going forward.
On the whole, Longview forecasts the global supply balance to switch to a -2mbpd deficit in June from a 6mbpd surplus in May, expecting deficits to continue for the rest of 2020 and potentially leading to price gains.
This essentially means the rise in supply is expected to be less than the increase in demand. This is also supported by a fall expected in US oil production due to high stress levels in the shale industry.
Longview believes inventories may fall faster than expected notwithstanding downside risks like second wave-led disruptions.
Sector analysts at Macquarie have also pared down their crude oil price assumptions over the next 18 months through 2021. Even as they expect the oil rally to lead to more than US$50/bbl within the next year, Macquarie analysts expect less upside in 2021.
Impairments are expected to increase in the Australian energy sector in the second half, following large impairments announced by oil behemoths like BP and Occidental globally.
Chevron’s recent announcement concerning the sale of its stake in the North West Shelf (16.67%) bodes well for Woodside Petroleum ((WPL)), suggests Macquarie.
The North West Shelf is Australia’s largest LNG project and jointly owned by Chevron, Woodside Petroleum, Mitsubishi, BP, BHP Group ((BHP)) and Shell.
Woodside Petroleum may either acquire Chevron’s stake or re-engage the joint venture to agree on third party gas access terms for its Scarborough project.
The broker is Neutral on Santos ((STO)) led by the company’s higher financial leverage and a more gradual price recovery through 2021.
Oil Search ((OSH)) recently sold down its Alaska north slope oil interests, easing the forward funding burden and prompting Macquarie to maintain its Outperform rating.
With undemanding valuations and expected recovery in prices within the next year, the broker is overweight on the sector and prefers Oil Search ((OSH)) and Woodside Petroleum.
A long term price estimate of US$56/bbl remains unchanged.
Aussie miners feel the heat
A strengthening Australian dollar translates to headwinds for Australian miners, points out Macquarie’s strategy team. It has taken the shine off Australian gold producers, leading to earnings cuts, made worse by prospects of limited growth in FY21.
Macquarie has downgraded Newcrest Mining ((NCM)), Regis Resources ((RRL)), St Barbara ((SBM)), Resolute Mining ((RSG)), Capricorn Metals ((CMM)), West African Resources ((WAF)) and Dacian Gold ((DCN)) to Underperform while Saracen Mineral Holdings ((SAR)) and Alacer Gold ((AQG)) are rated Neutral.
There is upside risk to earnings led by buoyant iron ore prices, suggests Macquarie, which within the large-cap miners, prefers Fortescue Metals Group ((FMG)), Rio Tinto ((RIO)) and BHP Group over South32 ((S32)), because of South32’s exposure to alumina, nickel and thermal prices.
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