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Material Matters: Rare Earths, Lithium & Tin

Commodities | Nov 24 2022

This story features ILUKA RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: ILU

A glance through the latest expert views and predictions about commodities: rare earths exposure, the recent lithium price decline and a lower tin price forecast.

-Broker suggestions for rare earths exposure
-Reasons for the recent drop in lithium prices
-Citi lowers its price forecast for tin

By Mark Woodruff

Brokers suggest buying Lynas Rare Earths

A 50% retracement in the neodymium/praseodymium (NdPr) price from 2022 highs offers a good buying opportunity, suggests UBS.

While the broker concentrates on the NdPr price, rare earths in general are expected to benefit from the broader electrification thematic, which includes a rise in demand for electric vehicles.

NdPr is a crucial ingredient in the induction motor for EVs, explain the analysts, and a key ingredient for wind turbines, in particular direct-drive wind turbines which are preferred for offshore wind farms.

Wilsons also points out NdPr has a range of ‘traditional’ uses such as appliances, air conditioning, elevators and electronics, which suggests an inherent degree of cyclicality to broader macroeconomic conditions, despite a strong structural demand story.

This broker also believes the current period of soft demand presents an opportunity to buy into weakness.

The current NdPr spot price is around US$80/kg though some industry estimates reach as high as US$140/kg.

The long-run NdPr price forecast by UBS is US$95/kg, which still offers upside should geopolitical risks increase and/or supply chains get tested. This forecast price is well-below the majority of published ex-China incentive prices.

The analysts recommend established Australian producer Lynas Rare Earths ((LYC), which is looking to build market share in a growing market.

The company owns the Mt Weld mine in Western Australia, which is acknowledged as a Tier 1 rare earths deposit and is the largest rare earths mine outside China.

Supply and refining capacity in this market are dominated by China, explains Wilsons, though bipartisan government support in both the US and Australia is emerging to expand the market.

In a further vote of confidence, Wilsons also decides to add Lynas Rare Earths to its Focus Portfolio (comprised of preferred companies by the strategies team) with a 2% weighting.

A Neutral rating is applied to Iluka Resources ((ILU)) by UBS, as rare earths production is a few years away and there’s potential for weakness in the company’s mineral sands business.

Reasons for the recent drop in lithium prices, after a huge rally

Lithium is the most exposed of all metals to the EV theme and Citi believes EV sales will be resilient to any global down-cycle and should bounce back relatively quickly.

Spot prices had fallen in the past week on concerns of weakening demand in China, following a circa 1,300% rally that began in the latter part of 2020.

While the pullback in price may have been partly due to global macroeconomic concerns, the analysts feel it was largely the result of reports of a cut in production forecast by a major cathode producer. There’s also an expectation that subsidies for purchasing electric vehicles in China will expire at the end of this year.

In China, the Wuxi lithium futures price fell on November 22 by -3.6% intraday, which UBS attributed to trader panic after the government announced a further investigation into hoarding of lithium chemical products. This is the third time since February the government has expressed an intention to intervene in the price of lithium.

This broker also felt the market is more generally concerned over a weakening in demand in the next two to four months.

Citi raises its 0-3-month point price for lithium carbonate to US$72,000/t from US$65,000/t, while the 6-12 month forecast for US$50,000/t remains unchanged. At current spot prices, a supply response is anticipated, yet will take time, and will therefore struggle to match demand growth.

EV sales will be underpinned by an increasing driving range and falling manufacturing costs over the coming years, suggests the broker, as well as receiving support from global government subsidies.

In the shorter term, Citi acknowledges the impact on EV sales from supply-chain disruptions due to the ongoing Russia/Ukraine conflict, as well as higher electricity prices and recession concerns. As a result, the broker’s EV sales forecasts are lowered.

A near-term catalyst could arise from the rollout of a 1,000km-range battery by Chinese manufacturer CATL in early 2023, suggests Citi. This could help overcome range anxiety, particularly in the SUV and truck markets and in Western developed markets.

Over at Morgan Stanley, the dominating view is that more supply is waiting to enter the market, but it won't happen until the June quarter, if not the second half of next year. And even then, the prediction is for lithium prices to only gradually weaken.

Within this framework, Morgan Stanley analysts went through their numbers to dig up what is already implied in current share prices of lithium producers on the ASX.

The broker recently downgraded Mineral Resources ((MIN)) to Equal-weight. It is the analysts' view the share price is running in line with their base case assumptions and projections. Adding 10% to the lithium spot price would lift their valuation to $101.80, or an extra 17% in upside, starting from a share price of around $87.

Pure play Allkem ((AKE)) seems a better proposition as things stand at the moment. Morgan Stanley sees 25% upside if spot lithium gains an extra 10% from here (share price circa $14.50).

The maths look more troublesome for IGO ((IGO)) with the exercise pointing at -15% downside, even with a 10% higher price for lithium (share price a smidgen below $16).

Citi lowers its price forecast for tin

Tin cannot avoid the hit to global growth and broader metals demand that Citi anticipates in early 2023, and there will be no return to record high prices.

The drivers of tin’s record run were largely unique to the pandemic (covid supply disruptions and heightened consumer spending) and are unlikely to be repeated, suggests the broker. The cash price is down over -55% from the record high of US$50,000/t in March.

Headwinds now include the hangover from the increased household appliances spending during the pandemic and a shift back to spending on services from goods, explain the analysts. Tin production has also strongly recovered.

Citi also points out tin demand and prices are especially exposed to an expected slowdown in developed market consumer goods and electronics demand, due to an increase in cost-of-living and interest rates.

Building construction is also important for tin chemicals, where production of PVC plastic and insulation are key applications, though the analysts anticipate falling property prices and construction activity in the US and Europe, while China’s property sector remains in a downturn.

The broker forecasts the tin price will fall to US$18,000/t (from around US$22,500/t currently) by the first quarter of 2023 though steps taken by producers to lower production at these levels should help avoid a steeper price decline.

Citi expects tin prices will recover to US$25,000/t by the end of 2023, which is a view aligned with the broker’s broader base metal outlook, predicated on an easing of covid restrictions in China and a less hawkish stance by the US central bank.

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