Commodities | Oct 22 2020
A glance through the latest expert views and predictions about commodities. Commodity hierarchy; batteries; platinum group; and coal.
-Demand for industrial metals growing strongly
-Nickel likely the biggest beneficiary of battery demand
-Silver highly leveraged to a global recovery
-Platinum surplus expected to continue
-Talk of coal "ban" creates volatility
By Eva Brocklehurst
A weak US dollar, better views on global growth and stimulus fuelling Chinese demand are all playing an important role in broadening the recovery for commodities. Hence Morgans is encouraged for the resources industry beyond just precious metals and iron ore.
Most base metals are now performing and some energy resources are showing signs of recovery. The broker prefers copper as prices have quickly rebounded to pre-pandemic levels. The second choice is oil as the supply response has now reached a point where the market is back in balance and should recover to a more typical trading range of US$50-70/bbl. In third place is gold, which is retaining its position as a safe haven purchase, aided by low bond yields and a weaker US dollar.
In terms of stocks, Morgans retains BHP Group ((BHP)) as a top choice, given its favourable mix of commodity exposures. The broker, noting South32 ((S32)) appears undervalued, continues to believe patience is required. Morgans has an Add rating for all three large oil & gas producers with Santos ((STO)) the top pick.
ANZ Bank strategists expect industrial metals will continue to perform as fiscal stimulus is fuelling investor appetite and the market is tightening. Moreover, increased focus on renewable investments is boosting sentiment for metals as a shift towards a low-carbon world is more metals intensive.
Disruptions to mine supply have played a role in offsetting the weakness in demand resulting from subdued economic activity. The strategists note iron ore prices are once again reflecting changes in underlying industrial demand, which has rebounded strongly throughout the second half of 2020. This is providing a strong signal for the direction of the Australian dollar.
The strategists point out, for the first time since 2018, the commodity complex (a composite of iron ore, oil, gold and copper) is approaching the top of the Australian dollar correlation structure.
Chinese steel production has risen during the pandemic, filling a hole left by other countries. Hence, demand for raw materials is showing up in Australia's trade numbers which signals that total iron ore exports are expanding.
Moreover, manufacturing, rather than services, has been at the centre of the recovery, as goods trade and construction have rebounded much faster than household-facing industries. Hence industrial commodities have rallied strongly compared with their “soft” counterparts.
Morgan Stanley lifts forecast for electric vehicle sales, expecting penetration rates of 13.2% globally by 2025 and 31% by 2030. This takes into account EU proposals for a -50% reduction in average fleet emissions of carbon dioxide by 2030, China's target of a 25% penetration rate for new electric vehicles by 2025 and California's ban on internal combustion engine sales by 2035.
This is bullish for battery commodities but the mix of technology has broadened and, hence, Morgan Stanley finds it less certain which cathode types will dominate the market by the end of the decade. Cobalt will continue to be thrifted from nickel/cadmium/manganese batteries in favour of higher nickel use.
Lithium/iron/phosphate batteries are gaining share at the lower cost end of the market, particularly in China, and their quality, safety and energy density are improving. Lithium/nickel oxide batteries are also being developed while Tesla's new lithium/manganese/nickel oxide technology has been unveiled and could be commercialised as early as 2022/23.
Morgan Stanley expects nickel will be the biggest beneficiary of battery demand while strong supply growth means the lithium market will be well supplied. Electric vehicles already account for 41% of global demand for lithium.
Infrastructure requirements are expected to further boost copper demand in the sector as well. Lastly, manganese, often overlooked, could grow significantly with development of the Tesla technology.
Despite the higher demand, Morgan Stanley still expects major lithium providers will not outperform without a meaningful improvement in prices. A price recovery will eventually materialise, but it is likely to be limited. Lithium is an abundant material and several experienced operators are already investing in capacity expansion and reducing costs.
Silver remains highly leveraged to a global recovery and Citi forecasts prices will rise another 70% to US$40/oz over the next 12 months. Sustained investor demand and a recovery in industrial consumption during 2021 should underpin silver.
If there is significant easing of policy and a relatively rapid global recovery amid sharply declining US real rates than the broker considers silver may rise to US$50/oz by mid 2021. Conversely, if growth remains weak and there is a lack of policy easing, prices are likely to decline to around US$20/oz.