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Material Matters: Oil, Aluminium, Zinc & Rare Earths 

Commodities | Feb 08 2022

This story features LYNAS RARE EARTHS LIMITED, and other companies. For more info SHARE ANALYSIS: LYC

A glance through the latest expert views and predictions about commodities: oil and aluminium's supply issues, zinc premiums & rare earths.

-Crude oil subject to supply issues and strong demand
-Below trend supply growth for aluminium?
-Zinc premiums have risen sharply in recent months
-Surging NdPr prices to buoy Lynas Rare Earths shares

By Mark Woodruff 

Oil price remains high on supply issues and strong demand

The WTI crude oil price has pushed through US$90/bbl as supply issues and strong demand continued to drain inventories, explains ANZ Bank commodity strategists.

While the currently high price has exceeded prior forecasts made by CIBC Capital Markets, it’s felt oil prices may moderate upon improved supply.

An easing of Russia-Ukraine tensions would lessen pressure on Russian energy exports, and Iran’s exports would increase over time should a nuclear deal be reached with the US.

Furthermore, OPEC countries may perceive that the current price for oil will be higher than future prices, in a world making progress on carbon emissions, notes CIBC.

For now, the investment bank retains its longer-term oil price targets and acknowledges that, should the above-mentioned political calls go the other way, oil could quickly crash up through US$100/bbl.

In the meantime, CIBC factors the current oil price into its very-near-term, and now increased, inflation forecast.

Aluminium may have below trend supply growth for years

Aluminium prices remain elevated amid fears of further supply disruptions and rising costs, as surging energy prices are forcing smelters around the world to suspend or close operations.

ANZ Bank points out energy costs make up nearly 35-40% of total aluminium production costs.

It is not just high energy prices that have been weighing on aluminium supply. Energy shortages have also prompted Chinese authorities to prioritise power for residential use.

Such issues are expected by ANZ to weigh on investment, resulting in below-trend supply growth over the next couple of years. Growth in China’s aluminium production is now expected to fall to 3.5% in 2022, compared to a growth rate of 5.4% in the five years prior to the pandemic.

All this supply turmoil is occurring amid a positive outlook for demand. The bank expects not only will the global economic recovery support demand, but also the emerging ‘green economy’ will provide opportunity for aluminium demand growth. For example, the electric vehicle sector is attracted to the metal’s light weight.

Consequently, the aluminium market is expected to push back into deficit in 2022, concludes ANZ.

Zinc premiums have risen sharply in recent months

Elevated power prices have forced zinc smelters in both China and Europe to curtail production. 

Already, zinc premiums have risen sharply in recent months. In the US, the Midwest premium has soared to US$485/t, while in Europe the premium has surged to a record US$325/t.

Should European smelter cuts escalate, Macquarie will be forced to increase its projections for a supply deficit. However, there is considered potential for continuing high zinc prices to encourage more near-term project approvals, resulting in a supply glut hitting the market in two to three years time.

On balance, and after adopting a medium-term view, Macquarie sees a fairly balanced zinc market, with demand moderating from the highs of last year, and sufficient tonnages coming on from new mines.

Speaking of moderating demand, Morgan Stanley makes the point that an increase in Chinese property price woes would pose more risk to the demand outlook for zinc, than for other base metals.

Surging NdPr prices to buoy Lycopodium

Spot neodymium and praseodymium (NdPr) prices have surged above Macquarie’s long-term assumptions and are trading at US$150/kg. This is expected to drive earnings upside momentum for Lynas Rare Earths ((LYC)), the largest rare earths producer outside of China with a full value chain.

In further rare earths industry news, China’s Ministry of Industry and Information Technology has announced mining and refining quotas that are 20% higher year-on-year.

Apart from Lynas, the broker likes Iluka Resources ((ILU)), as it is underpinned by strong zircon and pigment raw material demand ex China. 

Overall, Macquarie maintains a preference for Australian-based producers, of which Pilbara Resources ((PLS)) is the key pick, due to strong near-term production growth. 

If investors are looking for exposure to movements in iron ore, spodumene and lithium hydroxide prices in one entity, the broker likes Mineral Resources ((MIN)). Meanwhile, Allkem ((AKE)) is thought to offer unique exposure to both lithium brine in South America and spodumene production in Australia. 

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AKE ILU LYC MIN PLS

For more info SHARE ANALYSIS: AKE - ALLKEM LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: LYC - LYNAS RARE EARTHS LIMITED

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED