Material Matters: Copper Bull, Gold & Nickel Bear

This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL

A glance through the latest expert views and predictions about commodities: assessments and predictions for copper, nickel, gold, iron ore, and met coal.

-Forecasts for copper price increasing as deficit looms
-Did China’s Tsingshan kill the nickel bull?
-Gold bullion price cheer likely to remain capped for now
-China reiterates aims to further trim its steelmaking capacity substantially
-Russia looking to increase coal exports to Asia by up to 30%.

By Mark Story

Copper: Electric shock

Macquarie has reworked its copper model, revising its 2021 balance forecast to a -226kt deficit from 247kt surplus and now also projects tighter long-run balances, with the likelihood that structural deficits will emerge from 2025.

Macquarie’s short-term revisions reflect a stronger than previously anticipated rebound in global manufacturing demand into late 2020, with 2021 global refined consumption still seen expanding by around 3%, but from a higher base of effectively flat year-on-year global demand in 2020.

Further out, Macquarie has revised its ex-China demand forecasts to account for rising intensity of use in energy transition. The net effect is what the broker regards as an “electric shock”.

Macquarie has therefore increased 2021 average prices to US$8,438/t, expecting a 2Q average peak of US$9,000/t.

The broker’s copper price forecasts rise 20-26% for 2021-2023, and 32-33% for 2024-2025, with the long-term copper price in real terms lifting 13% to US$3.15/lb.

The material increases to Macquarie’s copper price forecasts have triggered a significant increase in forecast earnings for miners with copper exposure.

Recent upgrades have transformed the earnings outlook for copper specialists OZ Minerals ((OZL)) and Sandfire Resources Ltd ((SFR)), enhancing Macquarie’s bull case for both names.

Major copper producers BHP Group ((BHP)) and Rio Tinto ((RIO)) both see solid upgrades, with their price targets rising by 10% to $55.00, and by 5% to $142.00 respectively.

Higher by-product credits also enhance the outlook for nickel miner Panoramic Resources ((PAN)) and gold miner Newcrest Mining ((NCM)), which it has upgraded to Outperform.

Macquarie has also lifted its long-run (copper) real price to US$6,950/t, noting that the market needs to incentivise a combination of new mine projects, increased scrap supply and marginal demand destruction – via thrifting and substitution – to avoid post-2025 deficits blowing out well beyond -1Mtpa.

Against the backdrop of ‘elevated investor length’ (aka investor bullishness), now present across the LME (UK), CME (US) and SHFE (China) exchanges, and with visible inventories so thin, Macquarie believes there is scope for a period of extremely elevated prices and steep backwardations this summer.

Beyond that, the broker believes a distinction needs to be made between positive, but incremental, structural trends and the likelihood global growth eases from its currently supercharged rebound.

Macquarie is therefore anticipating a period of softer, albeit still historically elevated, prices between 2022 and 2024. But after this round of supply growth, the broker sees the market facing sustained tightness.

In light of the super-cycle for copper, Citi recommends investors to keep ‘buying the dip’ and has raised its 0-3 month copper point price forecast to US$10,500/t (from US$9,000/t), an all-time record high.

Citi’s incremental near term bullishness reflects its new and proprietary work showing that there is an all-time record ‘call on scrap’ copper supply (similar to the oil market’s ‘call on OPEC’), pointing to equilibrium prices above US$10k in the short run and reflecting a more bullish crude market.

The broker believes the tightening in refined copper spreads and increase in net speculative copper positioning has been correlated with the massive increase in its call on scrap indicator, which suggests scrap has not been able to respond quickly enough to date.

With the call on scrap even higher than during 2011, and with two years less to respond relative to the 2009-2011 bull market, Citi suspects at least US$10k/t prices will be needed to incentivise more scrap than during 2011.

Citi believe deficits in copper and oil are likely to dominate the impact of a potentially stronger US dollar, at least until the Federal Reserve actually turns hawkish (perhaps in late 2021/early 2022), and sees near-term China tightening related fears, as temporary and as dips to buy.

Nickel collapse

The price of nickel collapsed -11% as news that Chinese firm Tsingshan, the world’s top stainless steel producer, was throwing its resources into class 2-to-class 1 conversion, triggering a positioning exodus.

Credit Suisse believes Tsingshan’s plan to lift contained nickel output by about 700kt to 1.1 million tonne per annum (Mtpa) by 2023 looks likely to oversupply nickel and undermine prices.

Given that 1.1Mtpa is 40% of global consumption on the broker’s estimates, the broker suspects that following Tsingshan’s expansion, nickel may be in surplus by over 300kt until mid-decade. 

With the battery cathode market remaining small, accounting for 100-110kt in 2021, Credit Suisse expects most of Tsingshan’s output to end up as ferronickel for the stainless market.

Credit Suisse notes that if Tsingshan wants to run at full capacity, it may need to force the top 260kt of the cost curve to curtail, perhaps needing a price of US$5.50/lb or lower for a sustained period.

The broker cites Sorowako – Vale’s nickel matte producer in Indonesia with C1-plus capex costs of US$5.10 – as its best estimate for Tsingshan’s cost of nickel matte production, with this price possibly being the lower limit to prices where Tsingshan might reduce supply.

In light of Tsingshan’s puzzling strategy to oversupply nickel, Credit Suisse suggests investors look for clues to two key questions: Does Tsingshan intend to lift output to match capacity, and secondly does Tsingshan have ore supply confirmed? The broker suspects the latter point will be the greatest constraint to Tsingshan’s plans.

News of Tsingshan’s plans to substantially lift contained nickel output coincide with signed agreements to provide nickel matte, which is used to make batteries for electric vehicles (EVs), to Huayou Cobalt and battery materials maker CNGR Advanced Material.

Citi notes matte projects, a major act of cost deflation, are likely to destroy its medium-term bull case for nickel.

The broker has lowered its 0-3m price target to US$18k/t (from US$20k/t) owing only to a likely cyclical uptick in market sentiment, with medium term underperformance likely.

Gold: Downward pressure

Despite equity index levels being broadly off their record peaks, the S&P 500/spot gold price ratio hit 2.25x last week, resulting in large cap US stocks trading at their highest levels since April 2019 (in gold terms).

The price ratio is now above the 20-year (2000-2019) average of 2.12x and has been trending steadily higher since October.

While this outcome is difficult to unravel, Citi believes a significant amount of geopolitical risk premium and tail risk holdings for gold were structurally unwound following the decisive November US presidential vote tally – some of which can be observed via the gold options market.             

Citi also suspects that inflows into oil, copper, value equities, and Bitcoin have taken some notional investment away from gold as well.

While Citi remains sympathetic to gold bulls, given the current inflation and fiscal outlook, it thinks bullion price cheer will be capped for now given Fed funds rate probabilities at the short-end, broadly higher US nominal and real yield trends, and a rebounding US dollar headwind.

Citi previously thought the 2020/2021 gold price outlook could mirror 2011/2012, at least through the middle of this year.

But the prospects of Fed tightening materialising a bit sooner, with little pushback from Chair Powell last week, has put downward pressure on the broker’s 2021 and 2022 base case average gold price forecasts of US$1,800/oz and US$1,700/oz, respectively.

Citi believes its bear case scenario, calling for a US$1,500/oz average gold price next year at 20% indicative probability, looks increasingly viable given the accelerating pace of ETF redemptions in the first week of March, following a steep month of outflows in February totalling some -83 tonnes.

Iron Ore: China Caution

While China’s steel mill margins are turning profitable as steel prices surge to nine-year highs, iron ore offtake from ports –a proxy for iron ore consumption– is relatively weak in comparison, having barely lifted from 2019 and 2020 levels.

However, now that mills are profitable, Credit Suisse expect this will soon change, making raw materials affordable. The broker maintains its iron ore forecast of US$170/t for the first half of 2021.

Credit Suisse notes the key risk for steel demand going forward is China acting to cool the steel market. So far, there is no negative news from the National Congress, but the broker remains cautious for the second half of the year when it expects demand to soften and iron ore prices to ease.

Xiao Yaqing, head of China’s Ministry of Industry and Technology reiterated that China aims to further trim its steelmaking capacity “substantially” as well as to curtail steel output so as to reduce power consumption and carbon emission in the long term.

China’s iron ore imports rose 2.8% for the first two months of 2021 from a year earlier, customs data showed on Sunday, as demand for the steelmaking ingredient was supported by a firm consumption outlook.

The world’s top steelmaking nation brought in 181.5m tonnes of iron ore in January and February, up from 176.6m tonnes for the same period a year earlier, according to data released by the General Administration of Customs.

While the rise was within analysts’ expectations, the industry ministry has repeatedly urged companies to cut China’s crude steel output this year in line with President Xi Jinping’s goal of carbon neutrality by 2060.

Closer to home, Rio Tinto launched an investigation after its West Australian iron ore ports were hit by a third fire in the space of 26 months. The latest fire occurred on Friday within a section of the sprawling port complex the miner operates near the town of Dampier.

Fortescue Metals Group ((FMG)) has begun cancelling major construction contracts at its troubled Iron Bridge magnetite project in the Pilbara as it grapples with cost blowouts at the project.

It is understood the iron ore major wrote to contractors late last week cancelling remaining work being conducted under existing contracts, and ordering them to prepare to demobilise equipment and redeploy staff assigned to work at Iron Bridge.

Met coal: Russia has plans

Russia is gearing up to take advantage of Canberra’s poor relationship with China to expand the country’s coal exports, as Chinese authorities allow some of the millions of tonnes of Australian coal stranded off its coast on dozens of ships to be offloaded.

Russian President Vladimir Putin last week met industry executives and government officials to plan ways to increase Russian coal exports to Asia by up to 30% over the next three years, suggesting an increase to output of 34m tonnes a year by 2024, according to a recent Wood Mackenzie report.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms