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Material Matters: Lithium, Rare Earths, Coal & Steel

Commodities | Apr 12 2023

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

A glance through the latest expert views and predictions about commodities: realised lithium pricing, a rare earth opportunity, preferred coal exposures & steel spreads.

-Realised prices achieved by lithium miners in focus
-Are shares of Lynas Rare Earths mispriced?
-Credit Suisse’s preferred coal exposures
-Steel spreads widen in the US and East Asia

By Mark Woodruff

Realised prices the key for lithium miners in volatile times

Investors will likely shift their focus to realised lithium prices for miners given a volatile market and an opaque pricing system.

Macquarie reckons upon this outcome after observing divergent market pricing in the past three months. Higher quarter-on-quarter regional prices contrasted with falling China lithium carbonate equivalent (LCE) prices, lower lithium hydroxide (LiOH) prices, as well as reduced spodumene prices.

Headline LCE prices out of China can be at odds with realised lithium prices due to differing price mechanisms miners have with offtake partners, explains the analyst.

While UBS was encouraged last week by accelerating global new electric vehicle (NEV) sales (up to the beginning of April), stable near-term lithium prices require a draw-down of lithium chemical inventories at cathode makers.

At first glance, figures showing a recent faster rate of registrations for new internal combustion engines (ICE) over NEVs looks negative. On further consideration, the analysts noted this was partly due to purchase discounts ahead of tighter emission standards from July 1 this year.

One key takeaway for UBS after a recent meeting with ZE Consulting was China battery grade LCE prices should find near-term support at RMB200,000/t. However, it's also not considered unreasonable that prices could sink below that level.

Recent steep price falls are partly due to a 50% battery utilisation rate at original equipment manufacturers (OEM) in March, but a recovery to more than 90% utilisation is expected in June and July, explained UBS.

As a result of this greater utilisation rate, ZE Consulting expects a small rebound in lithium prices in the September quarter, though the news is less positive for 2024, when prices may fall to RMB100,000/t due to a growing surplus.

Despite some market negatives including an aggressive supply ramp-up, UBS remains structurally bullish, while Macquarie also remains constructive on the market outlook, notwithstanding slow EV sales and headwinds from higher inventories.

UBS maintains its Buy ratings for Allkem ((AKE)), Mineral Resources ((MIN)) and IGO ((IGO)).

This broker is also Neutral rated for Pilbara Minerals ((PLS)) and Liontown Resources ((LTR)).

Over at Macquarie, Mineral Resources ((MIN)) and Pilbara Minerals ((PLS)) are the preferred producers, while Patriot Battery Metals ((PMT)) and Global Lithium Resources ((GL1)) are the favoured exploration plays.

Are shares of Lynas Rare Earths mispriced?

Since recent January highs, the share price of Lynas Rare Earths ((LYC)) had fallen by -32% prompting UBS to upgrade its recommendation to Buy from Neutral.

The company’s share price on April 4 implied a long-term neodymium and praseodymium (NdPr) price of US$80/kg, according to the broker.

This pricing for two of the world’s most sought-after rare-earth elements is at odds with the broker’s unchanged long-term real forecast of US$95/kg.

NdPr oxide is used in the production of permanent NdFeB magnets, which in turn, are used in the production of electric motors in electric vehicles and for direct-drive wind turbines.

The main reason for current NdPr price weakness is a supposed build up in rare earth oxide (REO) concentrate supply within China, believe the analysts.

On top of this, China’s Ministry of Industry and Information Technology recently announced its first half 2023 quota at around 18% year-on-year, which according to UBS was more than the consensus expectation for 10%.

Despite these negative factors, the broker suggests current NdPr price weakness is temporary and sees potential for a recovery as early as the second half of 2023.

Long term fundamentals appeal to UBS, based upon robust growth markets for the electric vehicle and renewables markets, yet the macroeconomic backdrop prompts a lowering of demand forecasts by -3kt in 2023, compared to the broker’s prior estimate.

The analysts demand forecasts are largely unaffected by recent Tesla commentary on plans to remove rare earths from electric vehicle motors, as inelastic demand from other OEMs and industries will maintain strong fundamentals.

UBS lowers its 2023 NdPr price forecast by -11% to US$86/kg, which results in the 12-month target price for Lynas Rare Earths slipping to $8.80 from $9.00. It’s also conceded risks remain for FY24 production.

As Iluka Resources ((ILU)) is still around three years away from first production of NdPr, its valuation is not impacted by the broker’s near-term price forecast changes. The Neutral rating and $11.20 target are retained.

Credit Suisse’s preferred coal exposures

Rising demand for Australian-sourced thermal coal should continue to support elevated Newcastle coal (NEWC) prices, according to Credit Suisse, as traditional Indonesian customers remain committed to reducing Russian imports.

The broker recently raised its long-term NEWC price forecast to US$85/t from US$75/t though lowered its 2023-25 estimates by -49%, -47% and -25%, respectively, due partly to a mild winter in the Northern Hemisphere.

As a result of these new coal price forecasts, the broker’s 12-month target price for Whitehaven Coal ((WHC)) fell to $8.30 from $11.00, while the target for New Hope Corp ((NHC)) was reduced to $5.20 from $5.70.

Forecasts for metallurgical coal prices were largely left unchanged and the analysts expect prices will remain firm at around US$340/t through 2023 on rising demand out of China and firmer steel demand.

Credit Suisse’s top pick from stocks under its coverage of the coal sector is Coronado Global Resources ((CRN)). It’s felt the share price has so far lagged the underlying commodity price and met coal prices may end up averaging higher year-on-year in 2023.

Additionally, the end of La Nina should result in a better operational performance and the broker pointed out US domestic prices are stronger this year.

Regarding thermal coal exposures, the analysts prefer Outperform-rated Whitehaven Coal over New Hope on higher 2023 volumes, better coal quality and a larger growth pipeline. Growth for Whitehaven is expected via the Vickery project in NSW and the proposed Winchester South open-cut coal mine in Queensland’s Bowen Basin.

Credit Suisse also likes Whitehaven’s thermal-to-metallurgical switch optionality and flexible buyback program to safeguard an already pristine balance sheet.

The broker recently downgraded its rating for New Hope to Neutral from Outperform on valuation grounds. It’s felt a recent share price rally incorporates growth prospects from imminent production at Malabar Resources (15% stake) in the Hunter Valley and the prospects for the New Acland Coal stage 3 project in Queensland.

It’s also felt New Hope has lost some of its cost advantages at its Bengalla operations due to inflation and weather disruptions.

Steel spreads widen in the US and East Asia

The benchmark US steel spread has benefited from an increase in the spot hot rolled copper (HRC) price by US-based steelmaking company Cleveland Cliffs, as well as a -US$25/mt pullback in the prime scrap price, observed Jarden last week.

The US steel spread futures had risen to US$714/mt in early-May, up from US$640-600/mt in prior weeks, while the benchmark spot HRC price rallied to US$1,200/st after being unchanged at US$1,150/st in the preceding three weeks.

The broker gauged the East Asia steel spread had also improved largely as a result of a weaker coking coal price due to excess supply.

Spot coking coal prices have now dipped below US$300/mt, down around -19% from the recent peak in early March.

BlueScope Steel ((BSL)) guided to US$350/mt for the second half of FY23 and Jarden’s forecast spread for the company's US business North Star is US$455/mt. The average benchmark US steel spread so far to early May is tracking around US$430/mt, according to the broker.

The impact of a US$10/mt change, corresponds to an around $18-19m impact on second half underlying earnings (EBIT), according to BlueScope.

Jarden maintains its Overweight rating and $23.10 target price for BlueScope and a Neutral rating for Sims ((SGM)) with an unchanged $16.60 target.

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CHARTS

BSL CRN IGO ILU LTR LYC MIN NHC PLS SGM WHC

For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED

For more info SHARE ANALYSIS: CRN - CORONADO GLOBAL RESOURCES INC

For more info SHARE ANALYSIS: IGO - IGO LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: LTR - LIONTOWN 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: NHC - NEW HOPE CORPORATION LIMITED

For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED

For more info SHARE ANALYSIS: SGM - SIMS LIMITED

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED