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

Commodities | Dec 14 2021

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. 


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