Material Matters: Nickel, Alumina & Lithium

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A glance through the latest expert views and predictions about commodities. Nickel; alumina; thermal coal; iron ore; lithium; and Kirkland Lake.

-Battery demand could eventually segment nickel market based on purity
-Credit Suisse suspects alumina buying panic will be short lived
-Higher CV coal could outperform if China reduces low-quality imports
-Discounts for low-grade iron ore start to narrow
-Canaccord Genuity envisages lithium oversupply unlikely until 2020
 

By Eva Brocklehurst

Nickel

Nickel inventory held at both the London and Shanghai exchanges has declined -14% this year. CBA analysts note this is at odds with other industrial metals such as aluminium, zinc and copper, for which stockpiles have generally increased.

Nickel prices have also lifted since the US began sanctions against Russian companies and officials. Yet unlike aluminium, there has been no explicit sanctions against nickel producers.

Markets remain concerned that Norilsk Nickel, linked to both Rusal and sanctioned oligarch Oleg Deripaska, could eventually face sanctions. Norilsk Nickel accounts for around 9% of global nickel supply.

Nickel prices have also found support after Vale reported a -18% fall in production in the first quarter. Vale accounts for around 10% of global nickel production.

The analysts recently upgraded the nickel price outlook to reflect growing concerns of a deficit. Prices are still expected to slip over the next 12-18 months, as rising supply of nickel ore and nickel pig iron weigh on prices.

Indonesia's government has now approved over 32mt of low-grade nickel ore exports, which could add up to around 14% of global nickel supply in 2018.

CBA analysts expect nickel to average US$6.19/lb in 2018 and US$5.75/lb in 2019. The main upside risk for higher-quality nickel is expected to be battery demand. The analysts note a higher quality nickel is produced predominantly through the sulphide route although laterite ores are also an option.

While nickel sulphate demand will lift in response to advances in battery demand and technology, timing is considered critical. Markets currently discount the impact of batteries on nickel markets, citing the fact that batteries only account for around 4% of global nickel demand.

However, the analysts point out that high-purity nickel production is a better gauge of the supply that is available for battery consumption. On this measure, batteries account for around 9% of the relevant supply, expected to rise to around 30% by 2030. The analysts suspect battery demand will eventually segment the nickel market by purity.

Meanwhile, stainless steel, accounting for two thirds of nickel demand should continue to drive prices in the short to medium term. If China's stainless steel output maintains its current pace, the analysts expect nickel prices to track higher than current forecasts.

Alumina

The alumina price index jumped US$160 to US$710 on April 18 amid reports a 30,000t Brazilian cargo changed hands at US$800/t. Credit Suisse suggests such an absurd price was based on fear.

The Alunorte refinery has been curtailed by 50% and there are fears other refineries could also be cut back. The broker expects the panic will be short-lived and alumina could be in oversupply before the end of the year.

With shipments to Russia being sanctioned, this will free up alumina for the seaborne market and Chinese traders are likely to seize the arbitrage and export, increasing supply.

Thermal Coal

Australian thermal coal producers are still in negotiations with Japanese power utilities for the annual contracts that run from April 1 2018 to March 31 2019. UBS suspects buyers have been reluctant to settle on a price amid expectations that China's thermal coal market will ease back after the winter.

Chinese authorities have moved to ban coal imports at a number of ports in the south of the country. While it's too early to determine the full impact on seaborne thermal coal, if imports are discriminated on quality, the broker suspects high CV prices may outperform low CV/higher ash coal.

On the supply side, tight volumes are expected to keep prices supported. UBS believes demand will remain firm for higher CV coal if China reduces lower quality imports. The broker forecasts thermal coal prices to trade between US$79-95/t throughout 2018-20.

Iron Ore

Discounts for low-grade iron ore have started to narrow and are now less than 40% versus the peak of 50%, UBS observes. Meanwhile, Chinese port inventory fell from its peak of 162mt to around 160mt a week or so ago.

The broker believes this reflects a ramping up of iron ore demand, as blast furnaces are re-fired post the winter reductions. Crude steel output is expected to rise this month and, elsewhere, Chinese domestic iron ore supply has begun to lift.

UBS suggests the balance between accelerating steel demand in the June quarter, a return of supply and a drawdown of inventory will be critical for iron ore benchmark prices and the discounts/premia over coming months.

The broker forecasts benchmark iron ore at US$65/t in the June quarter and Fortescue Metals ((FMG)) should benefit from narrower low-great discounts.

Lithium

Amid fears of oversupply, prices of lithium producers have slumped. Canaccord Genuity believes the down move is overstated and remains much more positive for the near term.

Recent headlines have been dominated by plans for major expansions to mines in the Atacama Desert. In the broker's estimates, mined production does not equal lithium carbonate supply. While converter capacity could increase around six times by 2025, mine output could significantly outpace this and act as a bottleneck in the supply chain.

Updating market balance estimates means the broker suspects oversupply will not be an issue until 2020, offset by larger surpluses from 2021-24 before a return to deficit in 2025. Moreover, given the poor track records from producers, the risks are to the downside.

Despite modest downward revisions to valuations, Canaccord Genuity remains bullish on equities and expects a near-term re-rating on the back of stronger pricing over 2018. The broker estimates that ASX/TSX lithium equities are implying an average price of US$7,763/t versus its 2018 forecasts of US$14,650/t and a long-term price forecast of US$10,950/t.

Kirkland Lake

Gold and silver have gained recently because of geopolitical concerns which is likely to continue to underpin precious metal prices, Macquarie believes. The broker has initiated coverage of Canadian gold miner, Kirkland Lake ((KLA)), which recently listed on the ASX, with an Outperform rating and $25 target.

Macquarie believes Kirkland Lake can organically grow production to around 900,000 ounces per annum based on Fosterville and Macassa, its two key assets. Fosterville is expected to upgrade reserves at the Swan ore body after down-plunge exploration.

Meanwhile, Macquarie envisages potential for Macassa to double production to 400,000 ounces per annum as additional hoisting capacity provides access to a greater mine area.

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