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Material Matters: Lithium, Copper And Iron Ore

Commodities | Feb 17 2022

A glance through the latest expert views and predictions about commodities suggests lithium and copper may be set to explode as electric vehicle production hits the S-curve, while iron-ore demand should remain firm near-term.

-Electric-vehicle production reaches the S-curve
-Critical shortage of lithium signaled
-Potential easing of credit in China could prove explosive for copper
-China steps in to curb iron-ore demand as outlook remains firm
-China to postpone decarbonisation restrictions to 2030 from 2025

By Sarah Mills

Critical Mass for EVs Equals Critical Shortage of Lithium

Electric Vehicle production has hit the S-curve, signaling a critical shortage of lithium and triggering higher prices for longer periods, says Citi.

EV production is approaching critical mass, driving a 30% year-on-year increase in lithium demand, and Citi doubts a rebalancing will occur before the second half of 2023.

The broker also doubts there is enough inventory to support its forecast 2022 -6% lithium deficit and predicts extreme lithium prices in the short to medium term before pricing defers demand.

Citi is pegging a target price of US$60k/t for battery grade lithium carbonate, which would squeeze margins on cheaper electric vehicles. 

A bull-case scenario takes spot prices to US$90k/t but any price rise above US$60 will hit EV production, says the broker. A bear case is for a fall in the spot price to US$15k/t in two years on a more aggressive supply scenario.

China Squeeze As Copper Enters Super Cycle

Citi believes the copper price could explode this year should China ease credit to relieve nationwide economic discontent in response to moral property hazard policy and lockdowns (China’s total social financing hit 26% in the December quarter supporting this thesis says the broker).

Accelerating demand and low inventories have already pushed the copper price back up above US$10,000/t – the price-point many analysts expect will start to slow the green transition.

But Citi expects the market will accommodate higher prices in the short to medium term and tips a near-term jump in the copper price to US$11,000/t and upgrades its 2022 average forecast price to US$10,500/t from US$9,500/t.

Citi’s bull scenario forecasts US$13,000/t should China ease credit and widen lockdowns. 

A rise in copper scrap recycling is likely to kick in at the higher levels, capping gains, says Citi, and pegs a bear-case scenario of US$8,500/t should China widen lockdowns (considered unlikely).

Goldman Sachs also believes the copper-price is building towards a breakout and warns of an “extreme scarcity” scenario by year-end, reports

Goldman says copper inventories of 200,000 tonnes are barely sufficient to cover three days of global consumption let alone feed the expected deficit of 197,000 tonnes this year, and that the longer prices remain elevated, the higher the risk of a price explosion by year end.

The broker also spies a series of problems with Chilean supply – citing poorer grades, taxes and potential state appropriation.

Iron-ore demand forecast to continue to rise

Analysts expect a forecast recovery in demand will continue to intersect with low inventories to support iron-ore prices despite attempts by the Chinese government to curb demand.

Macquarie reports steel inventories continued to rise in last week’s shipping data from key global ports; with mills’ and traders’ steel inventories rising 47% and 24.5% respectively.

But year-on-year mills inventories remain -20% lower, and trader inventories are down -3%.

While this suggests support near term, benchmark iron-ore prices fell -8% earlier in the week on news of Chinese government intervention.

The Chinese Government has postponed its steel-mill decarbonisation peak date to 2030 from 2025.

While this should ease pressure on iron-ore demand over the medium to long term, Macquarie expects it could result in more aggressive steel production short-term and prove a key near-term price trigger.

Macquarie has upgraded earnings for iron-ore miners accordingly.

Morgan Stanley agrees, expecting Chinese government efforts to curb prices will only prove a short-term negative, expecting robust supply-demand fundamentals in the second quarter to triumph.

Morgan Stanley believes the lifting of decarbonisation restrictions and the front-loading of infrastructure stimulus could improve steel output by roughly 20% in the June quarter.

The broker pegs a June-quarter target price of US$175/t. 

While signs of Chinese hoarding was evident in the December-quarter, the broker doubts it is sufficient to outweigh a forecast tightening in seaborne markets in the June quarter.

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