Commodities | Apr 12 2021
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
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.
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.
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.
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.
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.
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.