Material Matters: Lithium, Coal & Zinc

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A glance through the latest expert views and predictions about commodities: long-term lithium demand, met coal pricing, Indian thermal coal demand & the annual zinc benchmark.

-Brokers remain bullish on long-term lithium demand
-Preferred lithium exposures
-Macquarie on metallurgical coal pricing
-Thermal coal demand out of India
-Annual benchmark set for the zinc treatment charge

By Mark Woodruff

Brokers remain bullish on long-term lithium demand

UBS simultaneously increases its long-term lithium price forecasts by around 20% and lowers its estimates by -10-30% for 2023 and 2024.

Morgan Stanley also remained cautious last week on the short term demand and battery inventory de-stocking, which is putting downward pressure on prices.

Despite these near-term headwinds, UBS remains bullish on the long-term demand outlook as the global car fleet decarbonises. It’s predicted demand for lithium will double by 2025 and quadruple by 2030, largely due to electric vehicle (EV) requirements.

The analysts also point to strategic value evident from takeover interest in the sector and the tailwind provided for lithium by the Inflation Reduction Act (IRA) in the US, along with similar policies being legislated by the EU and other governments around the globe.

Citi's recent sector update concurs with UBS, declaring the bull thesis for the lithium market remains intact. This view holds despite the recent free fall in spot prices as the supply chain de-stocks accumulated inventory.

This broker noted the market is approaching the top-end of the cost curve, while strong demand is underpinning supply growth, while also referring to tailwinds from the IRA. It’s thought near-term pricing weakness will prove temporary with potential for restocking in the second half of 2023.

While lithium prices have dominated market headlines, Citi noted around 90% of volume in the market is tied to long term contracts with many market participants focusing on the contract price of 6% spodumene.

UBS has upgraded its long-term forecasts for (the 6%) spodumene concentrate 6 (SC6) CIF China to US$1,300/t, battery grade lithium carbonate to US$18,000/t and battery grade lithium hydroxide to US$19,000/t.

These upgrades by UBS largely offset the impact of lower near-term pricing forecasts for stocks under the broker’s coverage of the sector, and target prices based on net present values (NPV) remain relatively unchanged.

The lower short-term forecasts by UBS take into account the views of the broker's Global Autos team, which has lowered near-term electric vehicle (EV) forecasts on weak current sentiment. In addition, the forecast factors-in a halving of headline spodumene and some Chinese spot chemical prices on weaker China demand due to excess inventory.

The broker’s annual EV consumer survey reported its first sequential decline in EV popularity, due to affordability concerns in European markets. As a result, UBS reduced its short-term lithium demand by -5-15%, and now considers the lithium market more closely balanced.

Preferred lithium exposures

As a result of falling near-term prices, Morgan Stanley last week expressed a preference for fully integrated producers, while also focusing on volume growth and valuation to prioritise picks from among its coverage of the Lithium sector.

This broker prefers Overweight-rated Allkem ((AKE)) due to an undemanding valuation with 20% upside (at the time) to its new $13.75 target price, up from $13.30. In addition, the implied lithium price from the latest share price was the closest to the broker’s long-term price forecast.

Underweight-rated IGO Ltd ((IGO)) and Pilbara Minerals ((PLS)) implied the highest spodumene prices and were trading at the time around 2-2.5 times above the broker’s long-term price estimate.

Diversified miner Mineral Resources ((MIN)) was rated Equal-weight, placing the company ahead of both IGO and Pilbara Minerals in Morgan Stanley’s pecking order.

By comparison, the UBS order of preference is: IGO, Pilbara Minerals, Allkem and Mineral Resources, which are all Buy-rated. Liontown Resources ((LTR)) is next with a Neutral rating.

Yesterday, the broker upgraded Pilbara Resources to Buy from Neutral, noting it should outperform during a sector rebound.

For all changes to 12-month target prices made by both UBS and Morgan Stanley for the above mentioned stocks, please refer to the Broker Call Report (or Stock Analysis) on the FNArena website.

Macquarie on metallurgical coal pricing

Recovering Australian exports of metallurgical coal over the past month along with low demand in the seaborne market from China have halted the 2023 rally in prices, according to Macquarie.

Since reaching US$390/t in February, the price of premium low volume hard coking coal (HCC) FOB Australia has fallen back to US$282.50/t last week.

This price is less than half of the record $670/t achieved a year ago, noted the broker, before prices later fell over in 2022 due to fading Russian supply concerns and production cuts in key met coal importing hubs like Europe.

After a very weak January and February, Australian supply has normalised and some volumes may have switched back to the met coal market, believes Macquarie, as HCC is back at a price premium to thermal.

While these factors may keep the near-term price around the current level, the commodities team at Macquarie remains positive on the outlook for the remainder of 2023, with an average third and fourth quarter HHC price forecast of US$315/t.

The broker suggested limited supply growth from Australia and elsewhere should keep the 2023 global balance in deficit. Because of a lack of new mine capacity and ongoing labour supply issues, Australian met coal exports are considered unlikely to return to pre-covid levels.

In term of demand, Macquarie expects ongoing improvement from Southeast Asia, India and Indonesia after the sharp price rally seen in Europe and the US, and the restart of blast furnaces in those regions.

Thermal coal demand out of India

Turning to thermal coal, India’s government is pushing for increased coal imports in order to minimise power cuts.

Macquarie reminded investors last week of India’s insatiable power needs, and noted the onset of summer is set to drive the demand for thermal coal imports higher.

Thermal (largely coal) accounts for a dominant 75% market share of power generation in India, despite the rise of both solar and wind power generation, explained the broker.

Solar generation rose by 35% year-on-year in 2022 and has increased by the same percentage in 2023, while wind power is up 25%, but overall renewable power generation is only taking incremental market share.

Should domestic coal production in India maintain 9% growth, the broker forecast Indian coal imports will rise by 6% year-on-year in 2023. 

However, should Coal India Ltd miss its annual production target of 780Mt, it’s thought import demand might increase even further before settling at high levels in subsequent years.

Last week Macquarie maintained its Outperform rating and $8.50 target for Whitehaven Coal ((WHC)) after run-of-mine (ROM) production in the March quarter was softer-than-anticipated due to labour shortages and operating challenges at the Maules Creek.

Management at the coal miner lowered FY23 production guidance, the second downgrade in the current financial year.  Maules Creek in northwest NSW produces some of the highest quality high energy thermal coal in Australia.

The annual zinc treatment charge benchmark

The annual benchmark zinc treatment charge (TC) has been settled between Canadian-based miner Teck Resources and Korea Zinc at US$274/dmt concentrate, a 19% improvement on last year’s price.

This outcome is in line with spot TC’s, which averaged US$266/dmt over December 2022 to March 2023, when negotiations normally take place, according to Macquarie.

Spot TC’s are high, observed the broker, given the good availability of concentrates in the market following last year’s large surplus, which has allowed both spot and contract TC’s to push higher.

The increase in the benchmark TC further improves the margins of European smelters, which the broker feels will now be well into positive territory, considering the latest power prices and 2023 contract premiums.

All else being equal, the increase in the TC suggested to the analysts an increase in zinc smelter revenues of US$86/t refined metal.

While absolute smelter revenue has reached a new peak, Macquarie noted revenue share is relatively subdued.

Macquarie forecasts mine supply will grow by just 1% in 2023 but refined supply will grow by 4.6% year-on-year, which should result in a fairly balanced concentrate market.

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