Material Matters: Silver, Lithium And Copper

Commodities | Jul 03 2020

Rebound in silver price led by investment demand; Electric vehicle battery demand to push up lithium prices; Copper markets to be in deficit by 2021.

-Strong investment demand to continue for both gold and silver
-Lithium supply glut a temporary blip
-Current iron ore prices may be unsustainable
-Favourable long-term outlook for copper

By Angelique Thakur

All that glitters is not gold (some of it is silver too)

TD Securities points to an increase in silver prices since the sell-off in March, driven by a rebound in industrial demand and central bank stimulus measures.

The analysts forecast the precious metal’s price to shoot to peak at US$22/oz before stabilising at US$20/oz in 2024.

Pandemic-disrupted production in Mexico and Peru forms about 35-40% of global production of silver and TD Securities estimates the lost supply at circa -40moz to-date.

Even as the mines resume functioning, many are yet to attain full capacity.

With Purchasing Managers' Indices (PMIs) on the rise globally, the broker forecasts industrial demand for silver to rebound by 6% in 2021, at a level similar to 2019.

Contrary to the relatively gradual increase in industrial demand, ETF holdings have increased by 25% year to date, to a record level of 765moz.

TD Securities predicts investment demand will remain strong for the next several years driven by the Fed’s quantitative easing measures (among other factors).

For investors worried about a resurgence of coronavirus cases, gold remains a key safe-haven investment.

ANZ Bank expects this to remain the case, with the uncertain macroeconomic outlook and stimulus measures helping gold’s cause.

UBS’s preferred pick in gold is Saracen Mineral Holdings ((SAR)) with its strong growth prospects in production, followed by Newcrest Mining ((NCM)) which is still seen as attractively valued.

The broker advocates a move away from Northern Star Resources ((NST)) and Evolution Mining ((EVN)), both rated Sell.


 

Lithium: Only a matter of time

Citi analysts are bearish on lithium in the short term and expect demand to drop -6% this year, led by a supply glut which is expected to last till 2024.

This situation, however, is considered unsustainable and Citi forecasts prices to improve, driven by the rising electric vehicle battery demand.

Over the medium-term, Citi forecasts a compounded annual growth in demand of 19% till 2025 while admitting there will be no re-run of the euphoria witnessed during 2016-18.

Even so, the broker believes It is only a question of when and not if for lithium demand to hit 1mtpa.

While this is expected to happen by around 2027, Citi highlights a price increase to US$9,000/t is needed in the long run to help achieve this level of supply.

Citi prefers Orocobre ((ORE)) and suggests a move away from Pilbara Minerals ((PLS)).

Base metals: Supply issues to remain for now

Contrary to UBS’s expectations, the second quarter did not see a decline in metal demand. Rather, the faster than expected recovery in China and production disruptions around the world kept the supply of metals tight.

This can be seen from the MSCI World Metals & Mining Index which was up 25% over the second quarter against the MSCI World Equity Index's 19%.

The ASX300 Metals & Mining Index was also up 27% in the second quarter (to June 24) versus the ASX 300, which was up just 18%.

For now, UBS prefers iron ore, although it does consider current prices (around US$100/t) unsustainable and forecasts a drop to below US$90/t before this calendar year is over.

This is corroborated by commodity analysts at ANZ Bank who feel that while iron ore supply remains vulnerable, the market may be overpricing the risk of supply disruptions.

UBS’s top picks are BHP Group ((BHP)) which is considered attractively valued with a diversified portfolio (will also be paying dividends), along with Alumina Ltd ((AWC)) and South32 ((S32)), both of which offer exposure to alumina.


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