Commodities | Jul 12 2022
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A glance through the latest expert views and predictions about commodities: Recession scenarios for aluminium, copper and iron ore; preferred ASX lithium stocks and one small-cap bauxite stock.
-Copper to fare worst under Credit Suisse recession analysis
-Iron ore less exposed than industrial metals
-A material fall for lithium prices?
-Australian bauxite exports set to prosper
-Shaw and Partners identifies one small-cap bauxite stock
By Mark Woodruff
Recession scenarios for copper, aluminium and iron ore
After analysing the impact of a recession upon commodities, Credit Suisse concludes copper and aluminium prices would both feel the negative impact.
While aluminium prices may already be near lows and could find support from both constrained supply and higher energy/input costs, the broker sees potential for copper prices to fall for a longer period, due to a new wave of supply coming onboard.
The broker remains constructive on iron ore and is also positive on coal prices in the event of a recession, with elevated thermal coal prices from the ongoing global energy crises providing a floor.
In recessionary times, Morgan Stanley also notes that iron ore is less exposed compared to other industrial metals that are more susceptible to consumer-focused end-markets.
A positive view on coal prices means analysts at Credit Suisse see more resilience for BHP Group ((BHP)) compared to Rio Tinto ((RIO)); the latter would be weighed down by its aluminium exposure.
While Fortescue Metals Group ((FMG)) would benefit from its lack of base metals exposure, it would fare the worst by comparison to the major miners in a downside scenario for iron ore prices, explains the broker.
Stepping away from these scenarios, Credit Suisse cites China’s determination to accelerate infrastructure spending to reach its GDP goal as part support for a recovery in iron ore prices into 2023. Low iron ore port inventory levels are also expected to provide support.
For the second half of 2022, Morgan Stanley sees some downside risk for the iron ore price during the usually quiet summer months in China for steel end-use demand. There are already signs of a looser iron ore market, with Chinese port inventories building up last week for the first time since mid-February.
Also, current crude steel output in China is on-track to overshoot the National Development and Reform Commission’s (NDRC) objective to reduce the country’s full-year steel production, explains the broker. As a result, the NDRC is expected to pursue production curbs in the second half of the year, with the aim to prioritise quality over quantity.
However, Morgan Stanley expects a return of price support by autumn in China, due to a higher marginal cost of supply and a recovery in China's steel margins.
A material fall for lithium prices?
Credit Suisse sees a risk that the lithium market could return to balance (or even oversupply) in 2023 with the advent of new supply and the prospect of a global economic slowdown lowering electric vehicle demand. It’s thought this outcome could result in a material fall for lithium prices, with a potential overshoot to the downside.
As a result, the broker remains Neutral rated for Allkem ((AKE)) and Pilbara Minerals ((PLS)) and reduces their 12-month target prices.
It’s estimated Pilbara Minerals is most at risk in a downturn versus peers (as margins may migrate downstream) and the target falls to $2.40 from $3.00, though capital management upside may attract yield investors.
Allkem is preferred for a greater chemicals exposure. Allkem's target falls to $11.00 from $14.70. Target prices are also reduced because Credit Suisse adopts an increased weighted average cost of capital to better reflect rising interest rates and increased volatility.
The analysts remain positive on Outperform-rated Mineral Resources ((MIN)), which has iron ore and lithium exposure, due to numerous potentially positive catalysts over the next 12 months. It’s felt material volume growth from the Wodgina project, to be sold into a still buoyant lithium market, provides a solid hedge for prices.
Macquarie agrees and keeps Mineral Resources as one of its preferred stocks in the broader Resources sector, though disagrees on the outlook for Pilbara Minerals. Along with IGO Ltd ((IGO)), Pilbara Minerals is considered a preferred Australian producer of lithium, and both are assigned an Outperform rating.
The broker also likes Outperform-rated Allkem (price target $17.00) for its unique exposure to lithium brine in South America and spodumene production in Australia.
Macquarie’s overall positive view on lithium is underpinned by solid recent prices, which appear to be unaffected by market concerns around costs and downstream demand.
The bauxite market
Shaw and Partners believes Australian exporters of bauxite are well placed to benefit both in terms of volume and potentially higher prices.
While China was the world’s largest producer of bauxite in 2018, the country begun to exhaust its reserves of quality bauxite, much the same way as it did with iron ore in the 2000’s.
Bauxite is a naturally occurring material which is predominantly used as a feedstock for the manufacture of alumina, which in turn is predominantly used to produce aluminium.
There has been growth in alumina refining capacity in China and a decline in domestic production, explain the analysts, and the country has now emerged as the largest importer of bauxite (140Mt in 2022). There are three major exporters of bauxite to China; Guinea (around 85Mt), Indonesia (15Mt) and Australia (30Mt).
Over the next decade, the broker expects the bauxite market to tighten as Chinese imports increase and Guinea remains under a transitionary military-led government. In addition, it’s thought Indonesia will soon halt bauxite exports, as was the case for the period from January 2014 to January 2017.
While production continues in Guinea, Chinese money has paid for most of the country’s bauxite development, and additional investment is uncertain in the current political climate, suggest the analysts.
With this attractive demand/supply backdrop, Shaw and Partners draws attention to Buy-rated Metro Mining ((MMI)), which recently outlined a low-risk pathway to increase the capacity of its Bauxite Hills operation (in far North Queensland) to 7Mt from 4Mt.
Volumes are locked in (much at fixed pricing) and 90% of freight costs are fixed for the next two years at attractive rates, suggest the analysts. It’s felt the market is under-estimating how de-risked the company now is, following two difficult years.
At the close of trade yesterday (July 11), shares in Metro Mining were trading at 2.2cps. Shaw and Partners has a Buy rating for the company with a 12-month target price of 8cps.
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