Material Matters: Palladium Positives And An Update On Rare Earth Elements

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By Chris Shaw

Stronger gold prices have attracted most of the attention given to precious metal markets in recent weeks, but as Barclays Capital notes there are some positives for palladium in recent data releases.

As Barclays points out, the pace of light vehicle sales in the US stayed above 12 million units in November, a level seen as psychologically important. If the cash for clunkers months were excluded, the November data would be the second highest monthly selling rate, so confirming customers are returning to the market.

For Barclays the November data bode well for the outlook for 2011 and this should be a positive for platinum group metal demand. Given a current bias towards gasoline, Barclays suggests palladium in particular should benefit.

Citi has looked closely at Chinese trade data for October, the numbers showing a decline in overall metals imports. For example, October imports of refined copper of 169,900 tonnes were down nearly 18% in month-on-month terms. Lead and zinc imports were also weaker, while both aluminium and nickel imports rose in month-on-month terms.

Imports for bulk commodities were also down in October, but Citi sees little of concern in the data as in the broker's view China has been aggressively de-stocking since metals imports hit record highs in March. At the same time, underlying demand is still strong, as copper semis production in year-on-year terms for January to October was up 11%.

As inventories are depleted, Citi sees scope for a significant rise in Chinese commodity imports in coming months, especially as the new year should see new environmental targets and limits and as utilisation rates at steel plants increase. At the same time, the outlook is for ongoing supply constraints, so commodity markets should remain well bid in Citi's view.

Deutsche Bank has also looked at the impact of China on metals, with a particular focus on zinc given a near 20% fall in the price of the metal since the end of October. Further falls are possible in the broker's view as fundamentals for the next 12 months or so are expected to remain quite soft.

On Deutsche's estimates the zinc market is likely to be in surplus of around 730,000 tonnes this year, followed by a surplus of about 330,000 tonnes in 2011. This implies the catalysts of the current correction should remain in place for the balance of this year, or possibly intensify.

Chinese zinc consumption should remain strong however, and this should offer some support to the market in the second half of 2011 in Deutsche's view. If ETFs or Exchange Traded Funds for the industrial metals are created this is another possible source of support according to Deutsche.

At present, just over 50% of China's zinc demand comes from the galvanised steel industry. An official clamping down on excessive power consumption has seen utilisation rates fall among steel producers, while measures to curb property markets are also having some impact.

Deutsche sees this as being at least partially offset going forward by growing demand from the infrastructure sector, while demand growth potential from consumer products and green energy projects also exists.

This offers scope for zinc consumption intensity to increase, notes Deutsche, from current levels of around 3.3kg to as much as 4.5kg in the future. As Chinese automobile production should also continue to grow, Deutsche suggests there is potential for a significant increase in Chinese zinc demand in coming years.

This has the potential to see the global zinc market move from a surplus to a modest deficit in 2012, which supports Deutsche's forecasts for price growth in coming years. Deutsche Bank is forecasting average annual zinc prices of US$2,124 per tonne this year, rising to US$2,535 per tonne in 2011 and US$2,866 per tonne in 2012.

Still in China, UBS notes export quota for rare earth materials were cut by more than 70% in year-on-year terms as part of a twice yearly review. This has significance as China accounts for more than 90% of global supply of rare earth materials and a number of alternative sources of supply remain some time away.

As China has cut its exports Japan has moved to lock up supply, an example being an off-take, distribution and financing deal with Lynas Corporation ((LYC)) in Australia. The deal means Lynas has now allocated about 70% of its annual output from the Mt Weld project.

Looking to coming years, UBS suggests the greatest concern appears to be related to the supply of heavy rare earth materials, as lighter rare earths supply should be sufficient. Whether this plays out as expected remains uncertain, as UBS points out the two types of rare earths cannot be mined selectively, making overproduction a potential issue. The other concern is the potential for China to remove its export restrictions, which UBS suggests would likely see a correction in prices.

Rare earth elements are used as catalysts, in glass, magnets, polishing, ceramics, electronic equipment and as metal alloys. Lynas, Arafura Resources ((ARU)) and Greenland Minerals and Energy ((GGG)) are among the Australia-listed rare earth plays, with Lynas the most advanced.

The FNArena database shows Lynas is rated as Buy once and Neutral once, while neither Arafura or Greenland Minerals receive any coverage from the brokers in the database.

Goldman Sachs has the final say on metals today, noting a visit to China has not changed the stockbroker's expectation of 8.5% growth in Chinese copper consumption in 2011. Driving the growth should be fixed asset investment, the broker noting some of its sources are taking the view this forecast is likely to prove too conservative, with double-digit growth a more likely outcome.

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