Material Matters: Nickel, Oil, Silver, Iron ore, Copper

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A glance through the latest expert views and predictions about commodities: Nickel, Oil, Platinum, Silver, Iron Ore, Copper

-Iron ore has mark of the value trap
-Nickel to fall by up to 15%
-Increased availability put downward pressure on sliver
-Brent oil to break US$75 in Q3

By Mark Story

Nickel

With Tsingshan’s move into ‘class 2’ conversion significantly undermining the medium-term bull thematic, Citi has trimmed nickel prices between -6% and -15% with the biggest impact to 2023. The broker’s revised forecast nickel prices are US$7.61/lb (-10%) for 2021; US$6.58/lb (-6%) for 2022; and US$6.35/lb (-15%) for 2023.

As a result, Citi has substantially lowered earnings FY22 estimates (EBITDA) for pure-play nickel stocks Western Areas ((WSA)) and Nickel Mines Ltd ((NIC)) by -20% and-13% respectively. IGO Ltd’s ((IGO)) FY22 earnings (EBITDA) reduction of -9% is also impacted by lower gold price expectations.

Citi’s long term (real) nickel price is US$17k/t (US$7.71/lb) due to the incentive price for high pressure acid leach (HPAL) processing. While the lift to long term expectations impacts Citi’s Nickel Mines and Western Areas net present value (NPV) by around 5% given their long production profile, the broker notes that IGO’s sensitivity to long term pricing is limited with Nova production expected into 2027.

While Citi sees the damage done to the medium-term case for nickel from the Tsingshan news as significant, the broker believes there are still cyclical reasons over the next two quarters to expect nickel to trade higher, including strong stainless and battery demand. As a result, Citi is targeting US$8.17/lb (+9% versus spot) to be hit over the next three months.

When the brunt of the surplus hits in 2022 and beyond, Citi expects it to be firmly across both class-1 and 2 nickel pig iron (NPI) markets. Within this environment, with a base case for prices to slide to around $6.35/lb by 2H22 (-15% versus spot), Citi favours Nickel Mines, which the broker believes is well positioned through the cycle with both production and earnings growth.

Citi has a Neutral/High Risk rating on Nickel Mines and a target price of $1.50 down from $1.70. The broker also has a Neutral rating on IGO and Western Areas with price targets of $6.90 (down from $7.10) and $2.40 9 (down from A$2.65) respectively.

Oil

Crude oil prices continued on their rollercoaster ride following last week’s announcement that OPEC will be gradually increasing output in coming months. OPEC agreed to increase quotas by more than 1.1mb/d from May-July in three equal monthly instalments. Over the same period, Saudi Arabia will wind back its additional 1m barrel per day cut below its official quota.

Overall, that has seen ANZ Bank analysts raise their estimate of supply by only 400kb/d in Q2 2021. Even with the additional supply, the bank’s analysts still expect further drawdowns in global inventories. ANZ expects this to induce more OPEC supply back into the market in H2 2021.

Brent crude initially rallied on the news, with the market viewing the move as a vote of confidence on the state of the market. Saudi Arabia even raised prices for customers in Asia for shipments in May.

However, futures have subsequently fallen amid the spectre of another 2mb/d hitting the market between now and July. ANZ notes that rising virus cases in countries such as India and the European Union are keeping traders cautious, with any renewed restrictions likely to weigh on demand.

Also raising some concerns are reports of an increasing amount of Iranian oil hitting the market, with one consultant stating that exports of crude and oil products could reach as much as 1.5-2mb/d over coming months.

ANZ expects bullish balances, and sequential draws in the second and third quarters to firm up prices, with a more positive macro backdrop likely to attract further investor interest in the sector. The bank’s analysts maintain their positive view on prices in the short term, with Brent crude breaking through US$70/bbl to hit fresh highs of US$75/bbl in Q3.

Gold

Despite ongoing selling from gold exchange traded funds (ETFs) in March, UBS reiterates that individual strategic weights should be maintained given gold's importance as a portfolio diversifier. However, the broker also continues to advise protecting against further downside in prices into 2H21.

UBS modeling indicates gold is currently trading at a premium to its fair value of US$1,700/oz. If UBS incorporates the house view on US government yields and the US dollar, the broker’s model predicts a base case of around US$1,600/oz by year end, with a risk case of circa US$1,500/oz.

UBS has lowered its gold forecast to US$1,650/oz by the end of June and to US$1,600/oz by the end of March 2022.

While ANZ agree that gold’s upside looks limited by rising yields and buoyant risk assets, the bank’s analysts expect a weaker US dollar, stimulus expectations and rising inflation to be supportive for prices in H2 2020.

ANZ notes that gold prices hit their highest level in more than a week as a weaker US dollar lured more investors back into the market.

Platinum

In light of the recent supply disruptions at Nornickel's Oktyabrsky and Taimyrsky mines in Russia, UBS has reduced its mine supply estimate for 2021 by about -140,000 ounces. This translates to a small platinum market deficit of about 185,000 ounces (2.3% of 2021 demand), which the broker notes would mark the third consecutive year the platinum market is under-supplied.

UBS thinks supply risks could result in an even larger deficit, especially if South African production rebounds are slower than expected from last year’s disruptions and/or those mines in Russia take longer to reopen.

Based on improving demand amid supply disruptions, UBS reiterates a constructive outlook and expects the metal to rise to US$1,300/oz over the next 12 months. The broker recommends risk-seeking investors sell platinum’s downside price risks or add exposure upon price setbacks.

Silver

Higher real rate expectations in the US, with Treasury Inflation Protected Securities (TIPS) yields narrowing another 30–40bps, don’t bode well for precious metal prices overall.  While silver prices have stayed around the 200-day moving average lately, like gold, they are still strongly influenced by US real rates and US dollar moves.

Despite improving industrial application demand, especially in renewable energy, UBS believes investment outflows remain a near-term burden for the silver price overall.

The broker notes the bulk of the almost 190m ounces of outflows over the last two months came from non-commercial accounts in the futures market. With adverse investment flows likely to remain a headwind for silver prices into the second half of the year, UBS have lowered their silver forecasts over the next 12 months to US$24/oz (from US$ 25/oz).

UBS have lowered silver forecasts only slightly in the expectation that weak US dollar expectations will act as a price-supportive factor.

While silver can count on stronger industrial application demand this year, UBS believe it is unlikely to be enough to offset the increased availability of silver, which is putting downward pressure on prices.

On the Investment side, UBS suggests avoiding selling the price downside risks in silver for yield until there are signs of less negative real yield dynamics. Alternatively, the brokers suggests investors with existing silver positions could sell price upside risks for yield (7% p.a.) at US$28/oz over the next three months.

Iron ore

A pause in the rally of steel prices failed to scupper iron ore’s recent rebound. The steel making raw material suffered a sharp correction in early May amid concerns of Chinese stimulus measures being removed; however, it has rebounded strongly amid a tight spot market.

With China setting tough carbon-neutral targets and environmental policies, the steel industry is likely to demand more high-grade iron ore, which can allow steel mills to produce more steel despite lower overall capacity.

ANZ Bank analysts believe strong China steel export orders and decent profit margins will keep steel production strong in H1. However, the analysts note that Vale continues to struggle to raise iron ore production, while risks of weather disruptions in Australia remain high in Q1.

Overall, the bank’s outlook is for a weaker for H2, as China’s steel production growth slows and supply issues ease.

Morgan Stanley notes that the elevated spot price of US$169/t has not shaken the market’s expectation of a declining iron ore price, in line with the broker’s view of 4Q21 US$100/t, and 2022 US$89/t.

Morgan Stanley finds strong upside to implied prices among iron ore miners and favours higher grade producers like BHP Group ((BHP)), rated Overweight and Rio Tinto ((RIO)), rated Equal-weight. The broker is Underweight low grade producers like Fortescue Metals Group ((FMG)) and Mineral Resources ((MIN)).

Echoing similar concerns about iron ore, Morgan Stanley believes what’s shaping up to be a value trap is largely already understood by the market. While an average -30% below current spot prices would typically indicate value for iron ore miners, Morgan Stanley is finding the space (especially pure-plays) overvalued.

Copper

Copper has rallied amid growing optimism around a post-pandemic recovery in the US, The industrial metal rose nearly 3% on the London Metal Exchange (LME), after a jobs report showed US employers added the most jobs in seven months as rising vaccinations and fewer restrictions boosted confidence across most industries.

This follows on from US President Biden’s proposed US$2.25bn infrastructure plan. This has seen prospects of stronger growth rise, with the International Monetary Fund (IMF) raising its forecast for US growth to 6.4% in 2021 (previously 5.1%).

The IMF’s expectation of global growth now hitting 6% helped shrug off the concerns of weaker growth in Europe amid rising coronavirus cases and renewed lockdowns. While traders are closely watching the impact of Chile closing its borders (as it tries to contain the coronavirus) the country’s Energy and Mining Ministry doesn’t expect it to affect the normal operations of the mining industry.

After starting the years strongly, copper prices have failed to hold above US$9,000/t over the past few weeks. ANZ analyst’s suspects much of this has been driven by rising concerns of weaker economic growth amid renewed lockdowns in Europe and Asia.

However, the high prices have also induced additional material onto the spot market, with stockpiles in LME warehouses up 100% in March. ANZ remain bullish on copper, but suggests further inflows could temper gains in the short.

Morgan Stanley notes that copper pure-play OZ Minerals ((OZL)) implies prices around 9% higher than spot. The brokers also notes that Sandfire Resources ((SFR)) continues to trade on a discount given its short mine life, with the stock implying a copper price -26% below current spot at US$3.02/lb (Spot: US$4.10/lb).

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