Material Matters: Oil, Lithium, Magnesium, Coal

Commodities | Oct 28 2021

A glance through the latest expert views and predictions about commodities: oil & gas, lithium, nickel, magnesium, steel, and coal

-Current tight market suggests support for oil and gas stocks
-Lithium sector a hive of activity as UN climate change conference looms
-Tightness in the nickel market likely to persist
-Acute shortage of magnesium to have significant implications
-Jarden anticipates heightened demand for US steel as China curbs production
-China's coal market expected to become more balanced

By Eva Brocklehurst

Energy

Morningstar suspects the market is underestimating the demand for oil over the medium term. Tight supply and high prices should underpin oil because of an underperformance of the OPEC alliance compared with stated targets, combined with a recovery in demand as economies normalise.

A mid-cycle oil price forecast of US$55/bbl for West Texas Intermediate and US$60/bbl for Brent is maintained. Over time, the analysts believe the upward pressure on oil prices will ease.

This will occur as sanctions on Iranin exports are modified or lifted, while OPEC should be able to build production levels up over time. US producers also plan to grow at low single-digit rates, which will be enough to bring new supply onto the market and keep it balanced after 2022.

Meanwhile, natural gas prices in Europe are extremely high, which is the result of a combination of factors. Inventory in Europe had been replenished over the summer, although production remains affected by the pandemic.

Electricity producers are trying to purchase natural gas in order to make up a power deficit before winter arrives and, on the supply side, there is not a lot of excess natural gas available. Europe has to compete with Asian buyers such as China, which is making its first steps to rely less on coal for electricity generation and more on natural gas.

The analysts believe the transition in the electricity market to renewables is likely to lead to greater variability in power generation and, as intermittency remains an issue for renewables, generators are resorting to natural gas.

In summary, while there is a lot of negative sentiment around investing in oil companies, many oil stocks have surged and, based on long-term forecast for prices and demand, the analysts believe these are undervalued.

Lithium

Activity is heating up in the lithium sector and Bell Potter runs the ruler over the major transactions that have occurred since the start of 2021. The broker expects heightened news flow for the sector, given the UN climate change conference will be held shortly.

Specifically, in just over the last two months, there have been purchases of stakes such as the Lilac Solutions earn-in to 25% of the Kachi lithium brine project, owned by Lake Resources ((LKE)), Sayona Mining's ((SYA)) acquisition of 60% of Moblan lithium project and the Zijin Mining takeover of Neo Lithium.

Pilbara Minerals ((PLS)) and POSCO have firmed the joint venture to develop a 43,000tpa lithium hydroxide plant in South Korea while Mineral Resources ((MIN)) and Albemarle will re-start the Wodgina lithium mine by the September quarter of 2022.

In other news, Suzhou CATH Energy has an agreement with AVZ Minerals ((AVZ)) to earn a 24% equity interest in the Manono lithium and tin project. And Ioneer ((INR)) has a 50-50 joint venture with Sibanye-Stillwater to progress the Rhyolite Ridge project.

Nickel

Morgan Stanley envisages persistent tightness in the nickel market. China may be curbing its stainless steel production yet supply disruptions and strong demand for electric vehicle batteries are overriding factors in determining the outlook for nickel.

The broker observes the current draw on nickel exchange inventory, at an average rate of 1000t/day since early September, has tightened the market and pushed the price to test a 10-year high of $21,000/t (last US$19985).

There has been a net reduction of -225,000t in nickel demand on an annualised basis from China, or 9% of global primary refined supply, the broker observes. Yet, these energy-driven cuts to stainless production are likely to be more temporary than the environmentally-related restrictions on carbon steel.

A healthy rebound in China's stainless output is also likely as power shortages ease after the winter. On the supply side, refined nickel supply is expected to improve once the rainy season in the Philippines has passed. Norilsk has also indicated its output was up 55% in the September quarter.

Morgan Stanley does not expect the nickel price will follow the lead of iron ore given a much tighter market. The broker also disregards the potential bearish view of Tesla's confirmation it will switch to nickel-free LFP battery chemistry in its standard-range models.

Magnesium

An acute shortage of magnesium has challenged several industries and Morgan Stanley suspects, without much of a buffer in the system, China's output restrictions are likely to weigh.


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