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Material Matters: Iron ore, Lithium, Nickel, Coal, Gold & Rare Earths

Commodities | Dec 14 2021

This story features SOUTH32 LIMITED, and other companies. For more info SHARE ANALYSIS: S32

This story was initially published earlier today. It has now been republished to specify the reference to and relevance for Indonesia in the section about nickel.

A glance through the latest expert views and predictions about commodities: materials sector; iron ore, lithium, nickel, coal, gold and rare earths.

-Outlook for the materials sector
-Brokers latest iron ore stock preferences
-What are the results from Indonesia’s nickel ore export ban?
-Macquarie begins coverage of rare earths

 

By Mark Woodruff

Outlook for the materials sector

In a helicopter view of the Materials sector, Citi strategists expect energy and bulks to underperform from here, with base metals set to outperform. 

Morgan Stanley also continues to prefer base metals and nominates South32 ((S32)), Sandfire Resources ((SFR)) and 29Metals ((29M)) as its top three picks.

In China, after two decades of double-digit commodity-intensive GDP growth and another decade of high single digit growth, the new norm for GDP growth will likely be in the 4.7%-4.8% annual range, according to Citi. There could with be slippage to 3% next year depending on the timing of policy responses though supply chain bottlenecks are expected to slow down the price declines.

Citi argues that the commodity demand boom of the last supercycle period will not reoccur. Instead of tailwinds from urbanisation, demographics, and policies pushing income equality in emerging markets as well as advanced economies, there’s expected to be lower demand for fossil fuels soon after the pandemic-recovery period ends.

Iron ore 

Citi expects U-shape price moves for iron ore into 2022, as the recent Chinese credit easing will likely cause property starts and sales to bounce back during the second half of 2022, following major declines in the first half. 

Macquarie estimates iron ore prices will average US$88/t in the first half before bouncing to US$105/t in the second half. Over the longer term, prices should fall to US$60-$80/t due to major surpluses in the seaborne market. Estimates for 2023 are unchanged at US$80/t.

JP Morgan also recently made material reductions to China steel production assumptions and lowered its FY22 and FY23 iron ore price forecasts by -10% and -12% to US$92/t and US$90/t. It’s felt that current pricing is already incorporating an improvement in activity for China next year.

As a result, the broker downgraded both Rio Tinto’s ((RIO)) and Fortescue Metal Group’s ((FMG)) ratings to Neutral from Overweight. While valuation for Mineral Resources ((MIN)) is regarded as fairly full, the analyst likes the mining services and lithium exposures and maintains a Neutral rating. JP Morgan is currently research restricted for BHP Group ((BHP)).

Meanwhile, Macquarie notes that following China’s reserve requirement ratio cut, iron ore outperformed other metals and bulks. However, despite a visible improvement in steel construction sales over the past two weeks, the broker points out there are still no signs of an increase in hot metal production.

Over at Morgan Stanley, the preferred iron ore exposure, Rio Tinto, was upgraded to Overweight from Equal-weight, while the rating for Mineral Resources was lifted to Equal-weight from Underweight due to high iron ore price leverage.

Deterra Royalties ((DRR)) was kept at Overweight while Fortescue Metals Group remained with an Underweight rating from a lack of valuation support and ongoing Fortescue Future Industries (FFI) spending.

Lithium

Citi feels IGO Ltd’s ((IGO)) move into lithium is well timed and last week upgraded its rating to Buy from Neutral and raised its target price to $12.40 from $10.80.

While the company is a larger scale metals producer, its commodity exposure is heavily weighted towards lithium. 

Citi strategists have raised long term price forecasts for battery grade lithium carbonate to US$11,000/t from US$9,000/t, lithium hydroxide to US$12,500/t from US$10,000/t and benchmark spodumene to US$700/t from US$600/t. It’s believed the industry cost curve is going to shift higher due to higher feedstock prices, as well as inflation from energy, wages and logistics. 

While raising lithium earnings substantially for stocks under coverage in FY23 off the back of higher-for-longer lithium price assumptions, the strategists still expect a sharp pullback from today’s very high prices on a 12 month view.

After a great 2021 for electric vehicle metals, Morgan Stanley is also wary and suggests investors approach the sector with some caution. Allkem ((AKE)), formerly known as Orocobre, is held up as the preferred exposure and is rated Equal-weight, while IGO is kept at an Underweight rating.

Nickel

Last week, Morgan Stanley moved Western Areas ((WSA)) to an Underweight rating from Equal-weight as the stock is now pricing in a nickel price of around US$11/lb out to FY27, which is significantly above spot and the analyst’s base case forecasts. 

Only the soaring price of coal prevented nickel-related exports becoming the dominant earner for Indonesia in the year to September, according to Macquarie.

The upside for nickel export revenue for the country remains enormous as nickel production is set to double over the next few years and value-add opportunities should open up in the electric vehicle battery market, according to the broker. Moreover, there’s still believed to be significant growth potential in stainless steel as Chinese producers shift production to Indonesia.

A surge in nickel value-add derives is attributed to the country’s strategy to ban nickel ore exports. The booming Chinese battery industry is absorbing nickel pig iron, stainless steel and mixed hydroxide precipitate (from this year).

Overall, Indonesia has attained a large overall balance of payments surplus for 2021 from not only nickel and coal, but also copper and tin.

Coal and Gold

Citi trims its 2022 thermal coal estimates to $110/t from $120/t, while the 2023 forecast is unchanged at $75/t.

While the broker last week trimmed its target price for Whitehaven Coal ((WHC)) to $3.20 from $3.50 on the back of lower coal prices, there was still considered enough upside for an upgrade in its rating to Buy from Neutral.

The ramp-up of the open-cut black coal Maules Creek mine in NSW, combined with incremental growth from open-cut Vickery development, is expected by Citi to drive strong volume growth. 

In the Gold sector, Morgan Stanley sees value emerging though suggests selective exposure as there is a current lack of catalysts to prompt share price rises.

Newcrest Mining ((NCM)) is preferred for its long life and low cost of production.

Rare earths

Macquarie has introduced rare earths into its overall coverage with no less than 15 price forecasts for key rare earth elements. 

The main thematic for rare earths involves forecast growth for permanent rare earth magnets. Apart from electric vehicles, demand is being driven by offshore wind turbines, conventional automotive parts, inverter air conditioners, white goods and other electronic consumables.

To meet this demand, the broker believes additional supply will be needed of neodymium and praseodymium (NdPr), terbium (Tb) and dysprosium (Dy).

Unfortunately, some other rare metals (by-products) may then be in significant oversupply and suffer either flat or falling prices. Macquarie regards europium (Eu), gadolinium (Gd), lanthanum (La) and cerium (Ce) as being in this category.

China is the dominant player in the rare earths market, accounting for around 60% of supply of total rare earths oxides, so securing ex-China supply sources has become an increasing focus within the rare earths industry. 

ASX-listed Lynas Rare Earths ((LYC)) is a dominant ex-China producer, notes Macquarie, sourcing its rare earth production from the Mt Weld mine in Western Australia. 

Currently a rare earth concentrate is produced at Mt Weld and shipped to Malaysia for processing into rare earth oxides. The company is in the process of relocating the upstream cracking and leaching portion of this process from Malaysia to Australia, which will enable an increase in production rates to occur, explains the broker.

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29M AKE BHP DRR FMG IGO LYC MIN NCM RIO S32 SFR WHC WSA

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