Commodities | 10:26 AM
While victory by Donald Trump in the US elections presents short-term headwinds for base metals, brokers remain upbeat on materials leveraged to the energy transition.
-Global energy transition is creating demand for a range of materials
-Aluminium poised for supply deficits
-Takeover potential for earlier-stage copper companies
-Is there a ceiling to lithium rallies?
-Wilsons' preferred aluminium exposure on the ASX
By Mark Woodruff
The Republican party's overnight win in the US elections will represent a short-term negative for base metals prices due to potential tariff hikes on China and the resultant negative impacts on global trade and industrial production, explains UBS, but medium-term impacts on base metal demand should be limited.
Political considerations aside, RBC Capital Markets sees an accelerating deficit for copper as demand from electrification continues to build while supply remains structurally challenged.
Rising electrification demand is largely resulting from electric vehicle (EV) penetration, renewable energy builds, grid investments and data centre requirements, explains the broker.
RBC forecasts average copper demand growth of 2.8% from 2022 through 2030, above the historical annual average of 2.5% over the last 40 years.
Growth in copper demand from electrification and demand from Asian countries outside China will overwhelm slowing demand growth in China as its economy transitions toward services and away from large infrastructure builds, suggest the analysts.
RBC estimates over $200bn in capital spending is required over the next decade to address an approximate -10mt copper deficit by 2035.
In a previous capex cycle from 2010 to 2012, which also involved a large investment surge, the analysts observed significant delays and cost overruns in projects due to limited availability of inputs and skilled labour.
This broker suggests similar challenges are likely this time, compounded by additional hurdles around permitting, securing adequate social licence, and project location.
Aluminium
Alongside copper, Wilsons highlights aluminium's critical role in the energy transition, due to its essential use in EVs, solar installations, and grid infrastructure upgrades.
Aluminium's demand profile strongly correlates with copper, leading to correlation as well in respective prices, according to the broker.
Driving aluminium demand significantly is a projected increase in EV sales, which could make up over 60% of new car sales by 2030.
EVs use around 30% more aluminium than traditional vehicles due to the need for weight reduction.
Aluminium is also crucial to the solar industry, which Wilsons forecasts will grow at a CAGR of 12%, reaching over US$450bn by 2030.
In addition, the exponential growth of data centres and ageing grid infrastructure are driving further aluminium demand for grid upgrades.
While higher prices could incentivise more supply, Wilsons points out global capacity growth is limited due to China's aluminium production cap of 45m tonnes per annum, introduced in 2017.
While this cap was implemented in 2022, production is now around this level and will restrict global aluminium supply growth, with only moderate capacity expansions expected outside China.
Wilsons concludes aluminium is currently in its strongest market position in over a decade.
With restocking anticipated in 2025, the broker expects the aluminium market to shift from oversupply to deficit.
To best take advantage of this swing, the analysts prefer South32 ((S32)) over Rio Tinto ((RIO)) on the ASX due to a greater exposure across the aluminium supply chain, including bauxite, alumina, and aluminium.
In recent years, in line with a strategy pivot towards future facing critical minerals, management at South32 has exited thermal and metallurgical coal operations.
Apart from production of zinc and manganese (two designated critical minerals used in batteries) at the company's Hermosa mine in Arizona and the 45% interest in the Sierra Gorda copper mine in Chile (acquired in February 2022), South32 expects to increase both aluminium and alumina production over the medium-term.
Aluminium production for South32 occurs via the Mozal Aluminium and the Alumar production facilities located in Mozambique and Brazil, respectively, while alumina production stems from Worsley Alumina (Australia) and Brazil Alumina.
By FY26, Wilsons forecasts South32's earnings (EBITDA) mix for aluminium, copper, manganese, and silver will be 50%, 19%, 15%, and 13%, respectively, with a 3% balance remaining for coal.
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