Material Matters: 2021 Demand, Nickel & Copper

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Citi expects markets to shift focus towards world ex-China demand in 2021 while Morgan Stanley highlights risks to supply in base metals including zinc, copper and nickel.

-Rising construction-led demand in developed economies
-Nickel: It all boils down to demand and supply
-Copper: Labour-led disruptions pose a key supply risk

By Angelique Thakur

Rising commodities demand ex-China

China has shown a remarkable recovery in demand for commodities in a covid-afflicted world. But China’s not our story today. Today we turn the spotlight on all that is ex-China. 

A rise in ex-China led demand will be the centre of attention in 2021, believes Citi, especially since demand-supply dynamics for commodities (like copper) hinge on the degree and speed of this ex-China demand rise.

Metals consumption in developed nations was almost back to pre-covid levels by the December quarter, highlights the broker, led by changing consumer preferences that offset the impact of (covid-led) lower mobility on consumption patterns.

A case in point is Citi’s ex-China copper consumption tracker that was up 1.2% year on year in November with early December looking firm as well. This is a far cry from the lows of -27% witnessed in April 2020.

The changing consumer preferences mentioned above refer to a rise in metals consumption in areas such as construction, consumer appliances, and automotive sectors in developed markets, that are seeing “outright growth” with the pandemic leading to higher demand for new homes and home renovations.

With money supply increasing in the US, UK and European nations by more than $2.5tr in 2020, Citi suspects there is scope for this demand to continue.

The housing boom of the US will lead to home prices appreciating by circa 5% nationally, forecasts the broker, which will further act as a tailwind for the demand for construction-led commodities.

Nickel: Supply disruption prompts bullish views

Nickel, it would seem, is in for a double bonanza.

A report by Macquarie has the broker foreseeing a brighter future for the commodity, backed by a combination of stainless-steel demand in the near term and higher demand for battery technologies over the medium term.

Demand for nickel mostly comes from the production of stainless steel with the rest from recovery in China and ex-China demand. Combined, these factors have led to a surge in nickel prices in late 2020 and early 2021.

It looks like the party is expected to continue throughout 2021 with Morgan Stanley expecting stainless steel production to grow by 5.4% in 2021.

Western Areas ((WSA)) and Nickel Mines ((NIC)) are Macquarie’s preferred nickel stocks while Mincor Resources ((MCR)) and Chalice Mining ((CHN)) remain its preferred development and exploration plays.

On the supply side, Morgan Stanley highlights there has been a significant disruption to the supply of the commodity. Key suppliers like the Philippines have been facing issues partly due to seasonal factors (dip during the monsoon season) but also on account of protests and environmental issues.

A case in point is Vale’s decision to sell Vale Nouvelle Calédonie (VNC), the operator of the afflicted Goro nickel-cobalt mine in New Caledonia, to Prony Resources that sparked protests in December that have continued through to 2021.

The Philippines, also the world’s largest exporter of nickel, have been fraught with production issues with the 45ktpa Ambatovy operation in Madagascar due to resume production in February 2021 after a lengthy suspension.

The risk to nickel supply looks high and is likely to remain so in the near future, concludes Morgan Stanley. The broker, like Macquarie, has a bullish view on the commodity in 2021, driven by supply growth lagging the recovery in stainless steel demand.

Copper Supply: Choppy waters

Many miners have guided towards possible copper supply disruptions in 2021 across the world, a result of the slower return to full operations and a key fallout of a covid-ravaged world.

Copper production remained flat in Chile in 2020 and any hopes for a better 2021 look dashed with the new year bringing a new set of challenges including a resurgence in covid cases in both Peru and Chile.

Miners like BHP Group ((BHP)) have flagged additional precautionary measures, implying a slower return to full operations. In fact, BHP warned its operations at Escondida will likely be impacted in FY22 as well due to "reduced material movement in FY21".

China-owned Minerals and Metals Group ((MMG)) and UK based Antofagasta are also in a similar plight. But the problems don’t end here with 2021 featuring a high risk of labour-led disruption to copper operations.

Morgan Stanley highlights almost half of the Chilean mine supply is expected to be impacted by some form of contract negotiation in 2021, with the high copper price backdrop adding to strike risk as workers try to reap some of the upside.

Having said that, Morgan Stanley says in (what it believes is) a conciliatory tone, that the vast majority of labour negotiations will likely be resolved without any disruption.

Morgan Stanley expects copper supply disruption in 2021 to be disrupted by -5% or -1mt, implying a flat global copper supply. This, in turn, hints at a market that will remain in deficit, lending support to copper prices in 2021.

OZ Minerals ((OZL)) remains Macquarie’s preferred exposure to copper with the company boasting many organic catalysts including the update expected on the expansion of its Prominent Hill operations.

Zinc: Riding the supply disruption wave

Adding to the upbeat outlook on base metals prices, Morgan Stanley expects zinc supply disruptions in 2021 to increase to -3% from -2.5%.

This comes even as zinc appears to be on the path to recovery from the largest disruption in 2020 that had impacted the supply of the bluish-silver metal by about -5%.

The restart of critical mines including Gamsberg mine (South Africa) and Caribou mine (Canada) will help bring some relief to the zinc concentrates market, suggests Morgan Stanley, and help keep the metal market close to balance through 2021.

In general, supply risk for zinc remains elevated with miners possibly struggling to ramp up to meet recovering demand through the second and third quarters of 2021, Morgan Stanley concludes.

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