Material Matters: Iron Ore, Copper, Lithium & Nickel

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A glance through the latest expert views and predictions about commodities: iron ore price forecast under pressure, bearish copper price outlook, Chinese lithium spot prices rally & upcoming surplus for nickel.

-Iron ore price forecasts coming under pressure
-Citi grows bearish on the copper price
-Chinese lithium spot prices stage a rally
-A large surplus anticipated for nickel

By Mark Woodruff

Price forecasts by brokers for iron ore coming under pressure

Property-related steel demand is a key pillar of China's steel industry, yet headwinds remain despite improving property sales.

Unfortunately, new property starts measured by square metres have remained weak, and Morgan Stanley anticipates further downside for the iron ore price through the second half of 2023.

Steel production is catching up with the reality of sluggish underlying demand, suggests the broker.

While the recent US$106 spot iron ore price remains above cost support, there is room for additional downside to Morgan Stanley’s third and fourth quarter forecasts for 2023 of US$110/t and US$90/t, respectively.

Also under threat is Credit Suisse’s iron ore price forecast of US$120/t in 2023, which was originally based on a gradual improvement in steel demand, led by property restarts. Now, this broker points to a worrying decline in China’s April manufacturing Purchasing Managers Index (PMI), which showed weakness in both exports and domestic demand.

Moreover, UBS is predicting the iron ore market will fall back into surplus this month, based on the broker’s high-frequency global iron ore shipment data, which is pointing to rising global supply.

The UBS iron ore price forecasst for 2023-25 are US$111/t, US$91/t and US$76/t, respectively.

This broker has Sell ratings for BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals Group ((FMG)), and a Neutral rating for Mineral Resources ((MIN)).

China has applied the steel production handbrakes, and the first (voluntary) cuts are coming through, ending China's peak steel output season about a month earlier than during the last two years, observes Morgan Stanley. 

These curbs won’t be sufficient to offset demand weakness, in the broker’s opinion, as falling Chinese steel prices means these recent cuts haven't provided any relief so far for steel margins.

On top of this, the analysts expect a seasonal supply uptick from the four global iron ore majors in the second half of 2023, along with first ore at Fortescue’s Iron Bridge magnetite mine, though this is expected to ramp up slowly.

Optimists in the market point out that ore inventories at China's mills remain precariously low, yet Morgan Stanley questions why a large restock would be needed when production cuts are on the horizon.

Providing some hope, economists at Credit Suisse believe Beijing may intervene with policies to accelerate a demand recovery.

China’s steel sector and iron ore prices would be assisted if the government mandates steel output cuts, suggests the broker, which cites a media report suggesting restrictions are already being discussed.

Citi grows bearish on the copper price

Base metal prices are highly sensitive to China growth expectations and sentiment surrounding the US Federal Reserve monetary policy, notes Citi.

In the wake of softer recent global PMI readings, the broker forecasts metal consumption growth rates will decelerate in the near-term. 

In particular, the analysts are bearish on copper and expect consumption in China, which accounts for around 40% of global copper consumption, will fall year-on-year in April. 

Another 35% of total copper consumption occurs in the US and Europe, where central bankers are hiking interest rates, with resultant negative impacts for business investment and consumption, observes Citi.

Finished goods inventories are reported to be high and rising in the US and Europe, likely resulting in lower metals offtake, explain the analysts. Meanwhile, new orders continue to disappoint in both regions with no signs of abatement owing to the lagged impact of high interest rates on the construction sector and business investment.

Citi expects the Fed will raise rates by 25bp in May, June and July to a terminal policy range of 5.5- 5.75%. 

After incorporating these negatives into forecasts, the broker lowers its 0–3-month copper estimate to US$8,000/t from US$8,500/t.

While Citi considers more policy support is likely in China if weakness persists, this may not come until US/European weakness plays out.

Chinese lithium spot prices rally 

Sentiment is improving in lithium markets, according to Morgan Stanley, as midstream inventories have fallen, and actual supply growth has disappointed in 2023.

Spot prices for lithium chemicals in China are rallying, with carbonate and hydroxide rallying from their respective lows by 30% and 20%, though the spodumene concentrate price (SC6) continues its downward trajectory.

Canaccord Genuity anticipates a powerful catalyst for a recovery in ASX-listed lithium shares due to lithium price rises in the second half of 2023, driven by a rebound in China.

Despite global macroeconomic risks, March quarter electric vehicle deliveries and implied 40% year-on-year growth supports the broker’s near-term demand view. Moreover, growth in planned battery factory capacity is thought to underpin the longer-term outlook.

While cathode and battery cell producers in China are still not fully back buying in the spot market, Morgan Stanley suggests sentiment is clearly improving and the lithium inventories of these producers appear to have eroded.

On average, ASX lithium miner share prices have fallen by -25-30% since highs attained in 2022, in a period when Chinese “spot” prices have declined by over -65% to around US$23,000/t. 

However, the market is not as weak as Chinese price and market sentiment suggests, according to Canaccord. For example, South American export/European import prices remain at greater than US$50,000/t.

Additionally, the broker feels a baseline has been set for implied asset/strategic values in the Lithium sector following recent M&A activity.

Canaccord’s medium to longer term forecasts allow for structural market deficits and elevated pricing. Longer-term risks to supply are noted, given 50% of the broker’s estimate is related to greenfield projects that typically carry high permitting, financial and technical risks.

While Canaccord lowers its FY23 lithium price estimates, chemical and concentrate pricing estimates rise by 40% over FY24-27. 

The broker’s long term price forecasts for chemicals and spodumene concentrate (SC6) remain at US$22,500/t and US$1,500/t, respectively. 

Meanwhile, Morgan Stanley still models a full-year lithium market deficit for 2023 and expects the recently oversupplied lithium market will become tighter again for the remainder of 2023. 

This broker sees some upside risk to its second half 2023 base case forecast of an average China lithium carbonate price of US$25/kg.

The higher lithium price forecasts by Canaccord result in a lift for its 12-month target prices across all stocks under its coverage in Australia. Please refer to the FNArena Broker Call Extra Report for individual target price changes.

From among the lithium producers the analysts prefer Allkem ((AKE)) and Pilbara Minerals ((PLS)), as well as the developers ioneer ((INR)) and Leo Lithium ((LLL)).

For early-stage businesses that are developing or completing studies on resources, Canaccord likes Global Lithium Resources ((GL1)), Green Technology Metals ((GT1)) and Delta Lithium ((DL1)).

Macquarie’s preferred producers are Mineral Resources and Pilbara Minerals, while Patriot Battery Metals ((PMT)) and Global Lithium Resources are the key exploration picks.

This broker also believes Liontown Resources ((LTR)) and Allkem ((AKE)) represent value, with the latter offering unique exposure to both lithium brine in South America and spodumene production in Australia. 

Macquarie believes there is valuation upside for all lithium shares it researches.

A large surplus anticipated for nickel

China is the world’s largest nickel sulphate and stainless-steel producer and its imports of metals/powders have plunged this year.

The resilience of LME nickel prices during April was in stark contrast to the trend in prices for nickel pig iron and nickel sulphate, observes Macquarie, which traded at growing discounts to the LME price average.

At a meeting of the International Nickel Study Group recently, the broker notes consensus was for a large surplus of global nickel production, equating to around 7.6% of usage.

The sub-markets of nickel pig iron and ferronickel (both used exclusively to make stainless steel) are clearly in over supply, explains the analyst.

The April price average for Chinese nickel pig iron dipped below 60% of the LME price average for the first time ever, amid ongoing weakness in global stainless-steel production and surging nickel pig iron production.

China accounts for around 85% of global production of nickel sulphate and ternary precursor production, and is a big exporter of precursors, which is used to produce ternary materials (composed of three or more elements) for power and digital batteries.

The widening discount of spot nickel sulphate prices to LME prices followed an acceleration in Chinese nickel sulphate production in the fourth quarter of last year, explains Macquarie. This was then followed by a -25% quarter-on-quarter fall in demand for nickel sulphate in making ternary precursors in the first quarter of 2023, as electric vehicle sales fell globally.

While Macquarie anticipates a rebound in global stainless-steel markets in the second half of 2023, orders have recently weakened in Europe, China and the US, dashing hopes of an immediate recovery.

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