Material Matters: Steel, Copper And Batteries

Commodities | Jun 16 2021

A glance through the latest expert views and predictions about commodities: steel, scrap, copper, battery materials; lithium miners

-Steel fundamentals likely to remain tight over next few months
-As China imports more scrap a shift in market dynamics could occur
-Copper destocking in the face of higher prices unlikely to last
-Lithium carbonate recovering, nickel sulphate tight, cobalt supply improving

 

By Eva Brocklehurst

Steel

Goldman Sachs has feedback from steel mills in China that signal no sign of output controls easing, yet demand remains strong. High-grade iron ore continues to be favoured and, in the short term, prices are supportive, with steel margins bottoming for marginal producers and iron ore inventory at below-normal levels at mills.

All mills surveyed believe positive fundamentals have driven the rise in steel prices, although the sharp spikes since May have been difficult to comprehend. Export rebates on some qualities of steel have been removed and raw material import taxes have been imposed in order to prioritise domestic demand.

China's steel exports declined -33.9% in May month on month and with steel prices still well below international prices, UBS assesses the government could continue to target exports to further cool the domestic market.

Meanwhile, US steel prices are the highest globally, driven by demand and the potential of President Biden's infrastructure plans. Supply capacity may have room to grow but fundamentals are expected to remain tight over the next couple of quarters. UBS expects the US steel market will rebalance in the first half of 2022 and emphasises the current market deficit seems driven by supply and not demand.

Scrap

Having removed its export ban on ferrous scrap imports at the start of 2021, China's scrap steel imports have not escalated materially. Despite a deficit of ferrous units domestically, uncertainty surrounding quality was the main reason for the modest volumes, with UBS pointing out traders were not willing to risk larger consignments.

A return to scrap imports has had a minimal impact on the global trade balance so far. Yet, the broker notes that once China becomes a more regular importer of scrap a fundamental shift could occur in the market.

Copper

Global copper consumption remain strong and Citi notes the "call on scrap", which is the difference between end-use consumption and mine supply, remains well above 2011/12 levels, which required prices of US$12,000/t to rebalance markets.

Refined copper market spreads and prices have weakened over the past month which the broker believes stems from strong demand and the resulting boom in industrial commodity prices.

The supply chain is destocking in the face of higher prices and this has resulted in hedges being lifted. The broker is convinced this destocking cannot last and the rebound will be swift in the third quarter of 2021.

At the end user level, new US and European manufacturing orders are around all-time highs and China is expected to step in and aid the destocking. While the refined market is weak and speculative positioning is falling sharply, refined copper prices are still clearing all-time nominal highs of around US$10,000/t.

The reason, Citi ascertains, is that the marginal buyer is also the destocking copper fabricator and a willingness to pay such prices is indicative of the underlying strength of demand. Hence, weakness in refined markets reflects unsustainable destocking.

Just as the scaled-up development of copper in Chile in the 1970s contributed to the end of a super cycle, the broker suspects the implementation of a copper tax could conversely add upside to the current cycle.

Changes to the Chilean tax regime are envisaged and although this will take time to implement the main issue centres on just how much tax will be levied. On the broker's estimates, the current proposals mean more than US$6/lb is required for a 10% return for a standard 2000tpa greenfield copper project with a capital intensity of US$20,000/t of copper.

If higher returns are required, miners will need to rethink their projects. Citi believes there is another 3-6 months before a scrap response could fill the gap between supply and end-use consumption, and to incentivise supply US$12,200/t is warranted.

This is around 25% ahead of spot prices. The broker also expects a large drawdown of refined copper in the third quarter will signal phase 2 of the bull cycle in copper. Citi also notes China's State Reserve Board is reported to be selling copper, aluminum and zinc.

These sales are considered "state secret" and therefore the broker warns caution should prevail. Still, the government could be trying to stem price strength by deterring speculation or simply "jawboning".

Citi ascertains sales of aluminium and zinc are more likely than copper as China is short on copper and the refined market is not yet tight. The broker remains bullish on copper for the next 3-4 months, to US $12,200/t and aluminium for the next 6-12 months, to US$2,800/t.

Battery Materials

The major recovery in global sales of electric vehicles since mid 2022 has had a positive impact on demand for materials such as lithium, nickel and cobalt. Macquarie is projecting growth for the whole of 2021 of 52%, to 4.8m vehicles.


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