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Material Matters: Iron Ore, Copper, Coal, Lead & Nickel

Commodities | Nov 24 2021

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A glance through the latest expert views and predictions about commodities: iron ore, copper, coal, lead and nickel.

-Morningstar’s preferred iron ore exposure
-The US$1tr Infrastructure Bill’s effect upon copper demand
-Significant volatility for the thermal coal price
-Macquarie’s bullish stance on lead
-Nickel pig iron prices soften in China


By Mark Woodruff

Iron ore, copper and met coal

Following a significant softening in Chinese demand, Morningstar lowers 2021-24 assumptions for iron ore prices to US$116/tonne from US$133/tonne previously, and feels BHP Group ((BHP)) is the cheapest of the diversified majors.  However, investors are cautioned the current share price offers little margin of safety should the downturn persist for China’s economic activity and investment.

The iron ore impact is lessened for both BHP Group and Rio Tinto ((RIO)) by stronger near-term copper prices and for the former, higher metallurgical coal prices. Morningstar now assumes average copper prices for 2021-24 of US$4.44/lb up from US$3.70/lb, and an average US$205/tonne (US$155 previously) for met coal for the same period.

Morningstar makes a greater relative reduction to fair value for Fortescue Metals Group ((FMG)) due to a higher cost base and the discounts for lower-grade iron ore products that have widened.

Credit Suisse notes Australia’s iron ore exports to September rose marginally year-on-year. The steel industry in the rest of the world is supporting iron ore prices now, given that China’s demand has capitulated in the December half and is getting worse by the month, explains the broker.

In searching for a turnaround in pricing, the commodities team at Credit Suisse sees a December trough and anticipates China's 2022 budget may be a catalyst for a price recovery, when released next March.

Infrastructure stimulus will be needed to plug the growth gap from a crumbling property sector and to achieve the targeted 5% rise in GDP in the country’s five-year plan, according to the broker. It’s thought money allocated to Local Government Special Bonds for 2022 will far exceed that in either 2020 or 2021, and commodity prices should leap in response.

If the reader is looking for less exposure to the fluctuating iron ore price, Morningstar likes the quality of Deterra Royalties ((DRR)), which has a high moat and is essentially the equivalent of an iron ore toll road. The company’s earnings are underpinned by a long-life iron ore royalty over BHP Group’s Mining Area C, which is expanding to around 145m tonnes in 2023 from 60m tonnes in 2019. However, Morningstar notes the share price for Deterra Royalties is currently considered somewhat expensive.

Returning to copper, Credit Suisse estimates the additional demand impact from the US$1tr Infrastructure Bill in the US may be 50-250ktpa, which is almost 1% of global demand at the high end. On these figures, the broker feels the looming 2023-24 supply glut may turn out a lot less than feared by some.

Thermal coal

Macquarie notes thermal coal prices have experienced significant volatility over the past month.

The spot Newcastle price jumped to $254/t in mid-October, before falling to $150/t this week. The big change in price was primarily driven by an even more extreme move in China’s domestic thermal coal prices. 

While China doesn’t buy Australian coal, not at the moment anyway, Newcastle is tracking other comparable grades which are influenced by China’s moves, explains Credit Suisse.

China’s domestic thermal coal prices have experienced a free fall (spot port prices more than halving) since mid-October, due to growing government intervention in the coal market, explains the broker.

The Chinese government has instituted several price ceilings for thermal coal, with the aim of helping power plants reduce losses, so that they can lift power generation during the upcoming winter. Interventions aside, Macquarie estimates a fundamental shift in the domestic supply demand balance in favour of lower coal prices. 

Credit Suisse finds it difficult to weigh the effect of China’s intervention upon export markets as such an arbitrary setting of the spot price is unprecedented. Traditionally, the government has tried to drive the spot price by controlling supply.

The broker wonders if China, in a move not seen for around 20 years, will exit the import markets and become self-sufficient. While not sure if China is a large enough importer, Credit Suisse also ponders whether the seaborne price will be dragged down to match China’s domestic price.

Macquarie expects China’s domestic thermal coal price to be US$115/t on average for 2022, slightly lower than the broker’s previous forecast of US$123/t, with a year-end price of US$100/t expected. The broker explains the Chinese price cap had been anticipated, hence only a small downward adjustment is required to its price forecasts.


Macquarie has adopted a more bullish stance for lead demand over the next five years, based upon the broker’s global auto forecasts. 

As lead acid batteries will continue to be used for auxiliary functions in battery electric vehicles (BEVs), the broker thinks the global lead market should remain in a slight surplus, until the end of this decade.

Macquarie considers the future for lead is dependent on the overall fleet size, the speed of the transition to electric vehicles and the extent to which BEVs phase out lead batteries for auxiliary functions. 

Given the relative cost and reliability of lead batteries, the broker downplays a risk that they are gradually phased out altogether. 

It’s thought China will have sufficient capacity to deliver an increase in secondary refined output to match the broker’s stronger auto demand forecast. This will result in China becoming a net exporter of metal to the rest of the world unless new capacity is added elsewhere, notes Macquarie.

Lead demand is essentially battery driven, accounting for 85-90% of total demand. Autos account for around 55% of the total, of which replacement is normally around 40% and new vehicles are around 15%, points out the broker.


After trending upwards for over a month due to robust stainless steel demand, Credit Suisse notes nickel pig iron (NPI) prices in China have softened after price decreases for nickel on exchanges.

After pandemic disruptions, the global nickel market is expected to swing into surplus as production recovers. The Chinese research house Antiake reported recently that prices are expected to fall from this year’s multi-year highs.

Production next year is expected to rise in China and globally, though output of NPI (an input for stainless steel) will fall further, according to reports from Refinitiv, the provider of global financial data.

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