Material Matters: Bulks, Alumina And Lithium

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A glance through the latest expert views and predictions about commodities. Iron ore; coal; alumina; and lithium.

–Demand strength and supply shortfalls boosting iron ore prices
-Supply disruptions tighten coking coal market
-Strength in demand and weakening US dollar support thermal coal market
-Re-stocking comes early for alumina in China
-Lithium prices underpinned by continuing disappointment in supply
 

By Eva Brocklehurst

Iron Ore

Bulk commodities continue to be driven by demand in China, and a falling US dollar has also contributed significantly to a pick up in prices. Commonwealth Bank analysts upgrade iron ore prices for the short term as higher margins are encouraging Chinese steel mills to boost output.

As long as steel margins remained elevated the incentives continue for purchases of iron ore. The main constraint is spare capacity. Hence, the analysts upgrade iron ore prices for 2017 by 6% to US$70/t and 2018 by 5% to US$49/t.

They believe the northern winter could prove the catalyst for lower prices, as policy makers limit steel production, which will then translate to weaker demand for iron ore down the track.

Ord Minnett, too, observes ongoing broad-based strength in Chinese demand. Global steel production also grew 6.5% in the year to July, with China up 11% in the month. China's property, infrastructure and machinery sectors remain supportive.

The main area of risk, the broker observes, is with credit tightening, but this is not yet translated into a material drop in production activity. While port inventory has fallen it remains relatively high.

Exports from both Port Hedland and Brazil have trended lower over the last couple of months, while Chinese production has held relatively steady but should start to decline in the second half, in line with the usual seasonality.

Ord Minnett believes elevated prices could incentivise incremental supply and that may release the price tension. The broker upgrades price forecasts to US$74/t for the September quarter and to US$68/t for the December quarter.

Given the strength of prices there is incentive for marginal producers to re-start idled production and the broker expects prices will fall from the current spot level of US$79/t.

Coal

Supply disruptions have also tightened the market in coking coal. A number of Australian mines have suffered production losses in recent months and Chinese domestic supply from Shanxi has been curtailed.

Mongolian coking coal exports to China are also being hampered because of politics. The country is now tied with Australia as the most important source of China's coking coal imports. Meanwhile, floods in eastern Russia have reduced supplies.

The CBA analysts upgrade coking coal prices by 12% for 2017, to US$209/t, and by 22% next year. to US$123/t , and suggest a forecast surplus that was expected to bring prices materially below the long-term forecasts of US$115/t appears unlikely now.

Thermal coal markets have also lifted on a combination of supply disruptions, strength in demand and a weakening US dollar. The latter two factors are more pronounced in thermal coal markets than in coking coal, the CBA analysts observe.

The Chinese government's decision to ban coal imports from 10 tier-2 ports has helped boost prices. The resulting scramble by buyers to secure cargoes and the new rules will likely extend queues for import inspections at tier-1 ports. China's thermal coal imports fell by -19% in July.

Coal-fired power generation has also provided a support for prices. Coal power accounts for around 68% of China's generation mix. China's priority for economic growth has provided a solid boost to its commodity-intensive sectors and, in turn, this has led to stronger electricity generation.

Demand during a warm summer has meant seasonal electricity has lifted and hydro power has underperformed because flooding in south China forced dams to release water. The CBA analysts upgrade thermal coal price forecasts by 13% to US$87/t for 2017, 28% to US$78/t for 2018 and 21% to US$61/t for 2019.

Alumina

Credit Suisse observes spot alumina prices jumped to US$346/t in August,, earlier than expected, given the run-up for re-stocking ahead of winter outages was only expected in the December quarter.

The early re-stocking was caused by news reports of possible closures for Shanxi bauxite mines in early September because of environmental issues, as a national sporting event is being held in Tianjin. The 19th National Congress of the Communist Party of China will also be held in Beijing in October.

The alumina price rally is supported by a strong Chinese aluminium price, Credit Suisse notes. With the winter re-stocking still to come the broker envisages scope for the December quarter to witness the highest alumina prices since 2008.

Lithium

Citi expects demand for lithium to remain strong and supply to continue to disappoint. The broker makes material upgrades to price estimates, as high-cost supply enters to balance the market. Citi upgrades 2018 price forecasts by 24% to US$14,000/t and 2019 by 26% to US$12,000/t for lithium carbonate equivalent.

The challenge of supply matching a demand growth rate of 10% or more means price risk is to the upside. Overall, the broker expects the market to be balanced in 2018 before moving to a surplus beyond 2019. At least six new operators will commission operations over the next 12 months.

The main stocks to pick are those that are bringing projects to fruition and will generate strong cash flow even a prices significantly below current levels. These include Galaxy Resources ((GXY)), which is using cash flow from Mount Cattlin to fund its project pipeline, and Pilbara Minerals ((PLS)), which has a long-life, low-cost asset that is less than 12 months away from production.
 

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