Material Matters: Iron Ore, Coal & Battery Elements

Commodities | Jul 14 2021

A glance through the latest expert views and predictions about commodities: iron ore; coal; palladium; and lithium

-Iron ore teetering at fresh highs, expected to move to a downtrend
-A hot northern summer signals strong demand for thermal coal
-Higher prices for alternative seaborne coking coal boosting Australian product
-Palladium price likely to have hit a peak, major loser from energy transition
-Demand for EV battery materials showing no sign of ebbing

By Eva Brocklehurst

Iron Ore

Credit Suisse expects the iron ore price to fall over the second half of 2021 as a record price is incentivising supply. Moreover, the increased supply is coming from China, with the broker noting statistics show only 10mt of seaborne iron ore was required to produce an additional 63mt of steel in the first five months of the year.

Rio Tinto's ((RIO)) shipments were particularly weak in April and May and as a consequence, Credit Suisse notes the Pilbara Blend hit eight-year lows at China's ports, which supported prices despite the steel price declining.

The shortfall should be corrected in the second half and rising port stocks are then likely to cause prices to unwind. Furthermore, Chinese authorities are unhappy with iron ore pricing and appear to be seeking to stem demand for steel. Infrastructure expenditure has started to decline and property construction may also be easing, although the broker notes manufacturing remains buoyant.

In its iron ore coverage, Credit Suisse upgrades estimates for earnings by more than 20% for 2021/22 based on the latest bulk update. The broker retains a preference for Rio Tinto over BHP Group ((BHP)) based on its larger exposure to iron ore as well as aluminium for which an upcoming structural deficit is anticipated.

Despite China's efforts to curb steel production, Credit Suisse believes its crude steel production in 2021 will exceed 2020 levels and, into 2022, the global iron ore market will remain reasonably tight, anticipating US$179/t in 2021 and then US$144/t in 2022. From there a downward trajectory is assumed.

Morgan Stanley also considers iron ore will track lower, noting China's port stocks have declined -12mt since late April down to just 28 days of consumption. Restocking could support the iron ore price during the quieter summer period but the broker is aware of a reversal in low-margin, scrap-based electric arc furnace output, with utilisation rates down to 66% compared with 77% back in May.

This is cushioning the impact of easing steel output on iron ore demand. Healthier margins could drive some short-term upside to iron ore before the seaborne iron ore market becomes more liquid and prices decline.

Meanwhile, Australia shipments improved in June albeit still below last year's levels because of Rio Tinto's interruptions. Shipments from BHP and Fortescue Metals ((FMG)) increased over the quarter and the broker notes Brazil's Vale is continuing to fare better compared with the June quarter 2020.

Coal

On the coal front, despite moves to eliminate its use, particularly thermal coal, prices remain resilient. Credit Suisse points out a perverse result of the activism regarding coal is the tightness of supply and strong prices, because of a lack of investment in production.

Despite decarbonisation initiatives, replacing power plants takes time and green steel is still in the experimental stage. The broker expects coal will remain in high demand over the next five years. Soaring spot LNG prices are also helping demand for thermal coal.

Continued support for thermal coal should also come from soaring energy demand in China as the economy emerges from the pandemic. Macquarie is witnessing an increasing number of media reports regarding the peak-load shifting in China as well as rationing because of shortages.

Moreover a hot summer in the northern hemisphere could also offer additional upside to thermal coal as the broker notes, while most analysts look to China for clues on the price, it could be the rest of the world that shifts the market balance.

A higher thermal coal demand induced by elevated energy requirements could support thermal prices in the short to medium term while longer term a shift to an alternative remains the key risk.

Meanwhile, Credit Suisse points out Australia's coking (metallurgical) coal is experiencing an "updraft" from the extreme prices that China is offering for non-Australian seaborne material.

Macquarie agrees a reshuffling is taking place in the seaborne market for coking coal as Canadian exports to China hit multi-year highs in May. The broker notes coal has been the best performing commodity over the year to date with prices up by 93% and 62% for metallurgical and thermal coal, respectively.

Palladium

Macquarie is increasingly confident that high prices for palladium are now a signal to the current bull market. Beyond the supply/demand disruptions of the pandemic and the loss of 400,000 ounces because of flooding at Norilsk's mine, the broker believes the market is on a path back to balance.


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