Material Matters: Coal, Nickel And Aluminium

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A glance through the latest expert views and predictions about commodities: coal; nickel; lithium; and aluminium

-China's import ban on Australian coal could last for some time
-Indonesia storming ahead with nickel production
-Upside potential in lithium carbonate prices
-Citi becomes bullish about aluminium
 

By Eva Brocklehurst

Coal

Australian coal companies suspect the Chinese import ban on Australian coal could last for some time. This is the view Goldman Sachs has formed after meeting with coal companies to discuss the outlook for the industry.

China has increased its thermal coal imports from Indonesia, Russia and Colombia and replaced Australian metallurgical (coking) coal by taking a hit to quality and increasing imports from Russia, the US, Canada and Mongolia.

Producers have signalled thermal demand is robust until at least August, based on order books, utility demand and no sign of any new 6000cal supply in the market. Spot prices are expected to stay above US$90/t for most of 2021.

Over the longer term demand remains robust with over 200GW in new coal power plants in the planning stages globally. The only new supply coming from Australia is the 5500cal 10mtpa Carmichael coal mine in the Galilee Basin, expected to produce its first coal in October.

Most producers believe the prospect of a new greenfield thermal mine in Australia is now very challenging to imagine, citing delays and legal challenges to government approvals. Goldman Sachs lifts 2022 estimates for 6000cal thermal coal pricing to US$80/t.

In metallurgical coal, producers are also upbeat about the fundamentals for 2021. Premium coal has typically been sold to China yet China has not revealed Australian coal import figures since November 2020. Goldman Sachs also highlights the fact it is currently cheaper for the European steel mills to buy coal from Australia rather than the US, based on freight rates and differentials.

The benchmark metallurgical coal price has rallied to US$155/t in recent weeks, with the broker noting major drivers include the Indian and Japanese markets as well as a particularly tight lower-ranked PCI market.

The coal producers suspect current benchmark methodology could change as it is inefficient and set by a small number of producers, and several customers would like to switch back to quarterly pricing.

Nickel

Indonesia has announced a very large new project for nickel/cobalt production to supply the rapidly growing battery market. PT Huayou Nickel Cobalt will build a high-pressure acid leach project at the Weda Bay Industrial Park to make 120,000tpa of nickel and 15,000tpa of cobalt.

No details were provided on the final product or timing. Macquarie assesses this is a massive project and "incredibly cheap" in terms of a capital cost at just US$2.08bn. The project will be a joint venture with a number of Chinese companies. This is in addition to planned additions to nickel pig iron capacity.

On review, the data suggests to Macquarie there is a major shift in production to value-added products and away from nickel ore. Indonesia has banned nickel ore exports since January 2020 in order to incentivise investment in value added production.

The broker notes the first ban in 2014 sparked minimal investment because of a downturn in global demand but the reinstated ban has had a profound impact amid major Chinese investment in nickel pig iron and stainless steel production in Indonesia.

Macquarie sounds a warning bell for nickel fundamentals for the second half, projecting output will reach around 935,000t and maybe even breach 1mt and calculating that, by 2028, Indonesian nickel production will exceed total 2020 production.

The broker emphasises such a high level of production is necessary, as global demand for nickel is set to rise by 2mt above 2020 levels by 2030 and more than half of that demand will come from the battery sector.

Lithium

Lithium carbonate prices have been relatively stable in the June quarter of 2021, Macquarie observes, and are expected to stay that way for the remainder of the quarter. Yet there is upside potential in the third quarter because of an increase in smelter activity in China and rising hydroxide prices, which have now pushed above carbonate prices.

The broker notes the raw material gap for downstream producers is significant with some buyers reportedly paying premiums to index prices in order to secure product prior to the expansions slated for the second half of the year.

Macquarie notes battery swaps are starting to be offered as well, yet finds it hard to believe that electric vehicle manufacturers will share the same swap stations given variabilities in battery/car design, and does not believe this will become a mainstream service.

The advantage in battery swaps is time and cheaper costs for the customer if cars are sold without the battery. Yet the ultimate goal for electric vehicle charging is to reduce the time to fuel up for a 500km range to less than 10 minutes. The broker suspects this could be achieved in 10 years with upgrades to charging standards/battery chemistry.

Macquarie evaluates the merger of Orecobre ((ORE)) and Galaxy Resources ((GXY)) will provide synergies for the Argentinian operations and a stronger base from which to fund downstream projects. Yet the broker prefers Pilbara Minerals ((PLS)) wich is assessing the potential to process spodumene into a mid-stream lithium product in a joint venture with Calix.

The broker's sector pick remains Mineral Resources ((MIN)) because of its diversified revenue stream.

Aluminium

Citi analysts are particularly bullish about aluminium even though, as they point out, there has been no supply constraints in this market, which means aluminium never provides leverage to global cycles in the way other commodities do.

China has become a driving force behind global smelting capacity additions and has brought enough supply along in a timely manner with low costs, adding to an oversupply issue.

Yet the outlook suggests to the broker a structural change is looming which could ultimately lead to higher incentive prices to obtain new aluminium project sanctions. China is now adding much less supply and, based on current project views, demand will overtake eventually.

In 2021 supply growth is projected at 5% while 2022 the pace is expected to drop back to 3%, and 2% thereafter. The broker points out structural change in the country's approach to energy intensive sectors will mean that growth in aluminium will be limited. Citi expects aluminium prices will rise to an average of around US$2750 in 2022.

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