Material Matters: Oil, Lithium & Iron Ore

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A glance through the latest expert views and predictions about commodities. Oil; China oil/gas; lithium/cobalt; iron ore; and LaserBond

-Do oil reserves already exceed the sum of future consumption?
-China's oil/gas demand ramps up again
-Reasons to be more optimistic for the lithium outlook
-Iron ore price likely peaking
 

By Eva Brocklehurst

Oil

Is BP right about oil demand? If so, Morgan Stanley suggests this weakens arguments around the rates of decline in global oil demand. It may also change how OPEC manages the market.

BP has outlined long-term scenarios (to 2050) in which two of the three cases suggest oil reserves already exceed the sum of all future consumption. This is a softer outlook than Morgan Stanley itself had estimated.

The broker assesses, once demand recovers from the effects of the pandemic, the trend rate of growth will still be well below historical averages. Furthermore, when demand does recover, OPEC is likely to start increasing production in fear of losing market share.

The forecasts from BP amplify this prospect and, in Morgan Stanley's view, this would leave little room for non-OPEC, in particular US shale, to grow production. If these scenarios span the range of possible outcomes, the broker questions the need for oil prices to rise over the longer term.

In the BP "business as usual" scenario oil demand recovers to 2019 levels but then grows no more than 0-0.2mb/d per year until 2030 before declining, while the "rapid" and "net-zero" scenarios have demand declining exponentially from 2021.

China Oil/Gas

Macquarie observes the build up of crude oil inventory in China has slowed with the tapering of crude oil imports in August indicating healthier oil demand. The recovery has been solid, with July gasoline demand turning positive, up 8.0% compared with down -2.7% in June, and diesel demand up 21% year-on-year.

Meanwhile, demand for gas in China rebounded, as the impact of flooding subsided. However, Macquarie suspects over the year to date the 6.8% growth in apparent gas demand is largely on the back of more aggressive underground gas storage.

Hence, gas demand growth is likely to slow again in September/October before recovering in November/December once the heating season commences. LNG imports compared with total gas imports increased to an historical high of 86% in August which is likely in the broker's view the cause of Asian spot LNG prices more than doubling to US$4.55/MMBtu.

Lithium/Cobalt

The pandemic has exacerbated high inventory levels in lithium and the continuation of market surpluses, Canaccord Genuity observes. Sustained low prices have produced significant reductions to plant capacity additions but, with signs of a pick up in demand, the broker envisages the market will be entering its nadir and a recovery is possible into 2021.

Over 2020 to date, electric vehicle (EV) deliveries are annualising at down -3% compared with 2019 while strong sales volumes in Europe are offsetting weakness in China. Hence, Canaccord Genuity finds reasons to be optimistic. The broker models flat global sales in 2020 and a somewhat flatter adoption curve for EV. The 2025 forecast penetration rate remains at 13%. Chinese sales could also benefit from an extension to subsidies out to 2022.

The broker estimates more than 400,000tpa of lithium supply in existing and planned capacity has been shut, cancelled or deferred in response to the low pricing. However, based on revised supply/demand forecasts, Canaccord Genuity now expects smaller surpluses over 2020-23 and the oversupply condition should largely reverse by 2023. Upside risk is envisaged to prices from 2021 onwards.

The broker's long-term pricing (2027) is based on incentive levels of US$13-15,000/t. The slowly improving outlook should mean some positive sentiment returns to lithium equities although Canaccord Genuity is wary of the potential for "false starts".

The broker prefers those companies with low-cost operations such as Orocobre ((ORE)) and Galaxy Resources ((GXY)). The rating on Pilbara Minerals ((PLS)) is upgraded to Hold from Sell largely as a result of the updated lithium price deck.

Citi notes increased client interest in exposure to EV demand and remains bullish on lithium for a medium-term view. Demand for EVs is seen picking up, particularly in Europe where preliminary estimates suggest sales hit a 6.7% share in the first half of 2020, more than a year ahead of the broker's prior base case.

Pressure to build stocks and commit to cobalt tonnage is also expected to intensify, as many consumers are finding that much of the non-artisanal cobalt supply has been tied up in offtake deals. As more long-term deals are signed, the spot market in cobalt will become even smaller.

Chinese imports from the world's main supplier, the Democratic Republic of Congo, were down -50% in May/June and there is evident tightness upstream at Chinese smelters. Moreover, prices remain in the lower 20th percentile of an almost 30-year real price range and are unlikely to keep the market imbalances intact over the longer term, Citi observes.

The broker's long-term US$55,000/t cobalt price forecasts is around the long-term average. Citi also points out US dollar depreciation, the reflation trade and stimulus all apply to cobalt as this is a metal where diverse end uses still outweigh EV demand.

Iron Ore

Iron ore prices may have hit a peak for the short term, Citi notes, as falling blast furnace margins have started to drive steel mills away from mainstream fines into blended fines, lump and pellets. This is likely to mean iron ore benchmarks ease back below US$120/t. Moreover, the Chinese Iron and Steel Association has expressed concerns about elevated iron ore prices which appear to have left China as the largest importer at a strategic disadvantage.

Incremental easing of quarantine rules at Chinese ports should relieve the ongoing congestion, the broker suggests. Nevertheless, much of the strength in Chinese steel demand has been priced in ahead of the peak construction season and it is hard for Citi to envisage another big rally in steel prices that will push iron ore up further.

That said, the broker does not expect iron ore will fall below US$100/t over the rest of 2020 given a broadly balanced seaborne market. Citi lifts price forecasts for 2021-23 based on a more constructive outlook for Chinese steel demand and expects iron ore will drift to US$90/t in 2021, US$80/t in 2022 and US$75/t in 2023.

LaserBond

Canaccord Genuity initiates coverage of LaserBond Ltd ((LBL)), an Australian engineering technology business, with a Buy rating and $0.90 target. The board has established a revenue target of $40m for FY22 which would mean revenue nearly doubles over the next two years. The broker considers the growth outlook robust, as in addition to its current customer base there are options in international markets.

Expanding operations to those states rich in resources would open up new opportunities. The business has three segments, including services which offers surface treatments to machinery parts which are worn out from use, sale of products such as surface-treated components, and consumables.

Canaccord Genuity estimates the recent acquisition of United Service Technology should contribute around $4-5m to the FY22 revenue forecast.

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