Material Matters: Potential WA Supply Shock, Oil, Natural Gas, Copper & Nickel

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-Commodity supply shock looming in WA?
-Forecast prices for oil, natural gas and metals
-Macquarie's preferred ASX commodity plays
 

By Mark Woodruff

Winners and losers from potential commodity supply shock in WA

Should there be a spread of an omicron variant breakout, identified at the Kemerton lithium hydroxide refinery near Bunbury in Western Australia, there may be significant ramifications for an array of commodity producers and suppliers in the state.

UBS points out the greatest supply risk pertains to iron ore and lithium, given almost 60% of global supply is sourced in WA for both commodities. The state also makes significant global supply contributions to zircon (40%), manganese (15%), alumina (10%), titanium feedstock (15%), nickel (5-10%) and gold (11%).

If disruptions were to occur across the state, the benefits of supply-induced higher prices may only go towards compensation for lower volumes, assesses the broker. However, if only individual sites or companies are impacted, peers would be expected to benefit from commodity price increases.

The list of companies under the broker’s coverage with operations in WA includes Rio Tinto ((RIO)), BHP Group ((BHP)), Fortescue Metals Group ((FMG)), South32 ((S32)), Mineral Resources ((MIN)), Allkem ((AKE)), Northern Star Resources ((NST)), Evolution Mining ((EVN)) and Sandfire Resources ((SFR)).

2022 forecasts for oil, gas and metals

Commodity strategists at Oxford Economics forecast reduced oil prices by the end of 2022 and a pullback for metal prices during the year. In contrast, natural gas markets will see a year of further tightness.

Drilling down further into the oil forecast, the strategists feel that demand growth, while still above trend due to a pandemic-induced catch-up, will decelerate this year. At the same time, oil production is set to accelerate in the absence of the maintenance-related shutdowns that occurred in 2021 due to postponements in 2020.

Moreover, OPEC has been gradually returning to the market the 10m barrels it removed during the pandemic, and Oxford Economics expects the organisation’s production growth to outpace the global average. US production has also been rising at a rapid pace and the latest rig counts suggest further increases.

Meanwhile, tailwinds behind a record breaking 2021 for the natural gas sector are still in place, according to the strategists. These include shortages of Russian supply (for political reasons or otherwise) and global competition for limited LNG supplies between Europe, Asia and Latin America.

Finally, European domestic producers are also still behind on North Sea gas production in the wake of covid, and gas reserves globally are starting from a weakened position due to the overly cold winter of 2020-21.

Regarding metals, Oxford Economics expects industrial activity will outpace its longer-term trend in 2022 as supply chain bottlenecks ease and demand remains firm. Additionally, there’s expected to be robust credit growth in China, from increased liquidity provided by policymakers, resulting in improved sentiment for commodities. However, this liquidity-induced commodity support, is expected to be offset by monetary tightening in the US.

Overall, the commodity strategists forecast that metal supply will improve in 2022. This is due to the windfall profits received by miners over the previous 18 months. Already, new supply, particularly for copper, is coming online.

Australian iron ore production is also projected to rise this year, while Indonesia and the Philippines are increasing nickel production. Furthermore, higher metals prices are enabling mothballed mines to come back online, explains Oxford Economics.

Macquarie’s preferred ASX-listed commodity exposures

Analysts at Macquarie have just updated their preferences in the commodity space.

For copper exposure, the broker recommends 29Metals ((29M)), which boasts a strong production growth profile, which is largely driven by grade. The company also provides a unique exposure to zinc within the broker’s coverage.

The analyst estimates a 10% increase in copper price translates to 22% and 33% earnings upside for FY22 and FY23, respectively.

Macquarie strategists note copper mine forecasts globally suggest a supply deficit is imminent, due to strong demand, depleting mines and a lack of new projects coming online [notably in contrast to Oxford Economics' suggestion].

The energy transition is expected to provide a boost in demand for copper, and while in theory there is sufficient copper in the pipeline to meet demand this decade, getting project approvals through can be difficult. Wider community sentiment and environmental concerns are just some of the hurdles.

Meanwhile, both Nickel Mines ((NIC)) and Panoramic Resources ((PAN)) are suggested as a way for investors to benefit from any nickel upside. The latter for a development play at the Savannah North orebody in WA, while Nickel Mines is receiving a material production boost from its Oracle project in Indonesia.

Panoramic Resources offers the greatest leverage to nickel prices in FY23, according to Macquarie, while Nickel Mines offers near-term leverage in FY22.

Chalice Mining ((CHN)) is the broker’s preferred exploration play via its still-to-be-defined Gonneville discovery. This is part of the company’s wider nickel-copper and platinum group element project in WA. Ongoing drilling results are expected to provide positive catalysts in the near term.

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