Material Matters: Iron Ore, Agriculture, Molybdenum, Cobalt, Zinc And Lead

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-Gloomy iron ore outlook
-Tighter wheat with El Nino?
-Pressure on molybdenum price
-Demand rising for cobalt
-Zinc & lead bulls undermined
 

By Eva Brocklehurst

Iron Ore

The rally in iron ore has peaked. that’s Citi’s opinion. Spot prices reached US$62.50-63.00 per tonne last week and this likely marks the high point. Fundamentals are weakening and the broker reiterates a forecast for sub US$40/t prices in the second half of 2015. Citi observes a number of mines re-started production on the back of higher prices. Tonkolili, which at 20mtpa was the largest curtailment in the current cycle, has been bought by Shandong Iron & Steel with the intention of re-starting production. Citi notes a number of smaller mines in China have also resumed production.

Meanwhile, iron ore exports from Australia are rebounding. Shipments over the first two weeks of May were strong and increased tonnage from Rio Tinto ((RIO)) is expected in coming months. Chinese steel mill margins have narrowed and steel production, which had risen in April, is expected to fall back in May and June. Credit Suisse also suspects the ceiling for iron ore is around US$60/t. This is where Chinese mills cease buying and try to hold off procuring further stocks. The June quarter is the peak season for steel demand in China but the broker notes this year demand is feeble.

Still, Credit Suisse is not that gloomy about the June quarter. Port stocks are depleted and still falling and the mills will probably procure stocks through the remainder of the quarter, although they will be selective and do this at prices below US$60/t. For the second half the broker is gloomy. Steel production is expected to fade and as iron ore output is ramped up by the majors it is hard to envisage that prices will be steady. Credit Suisse estimates a fall to US$45/t is likely.

Agriculture

The majority of agricultural commodities under Macquarie’s coverage have underperformed in the first quarter. Large inventories are the prime cause but exchange rates have also aggravated the bearish price environment.

Macquarie finds it hard to justify any upside across the markets, with the exception being livestock, which may receive some support from seasonal demand through the US summer months. With an El Nino set to arrive vegetable oil prices are likely to benefit as yields underperform in such climatic conditions. Weakening producer currencies versus the US dollar have enabled non-US suppliers to offer more attractive prices to the market and US export competitiveness in agricultural commodities has ebbed as a result. Macquarie suspects that with the impending El Nino, US corn yields may benefit as such an event has historically delivered better pollination.

Wheat prices are expected to weaken further into mid year, before tighter fundamentals emerge because of lower crop production. The largest drop in output is expected to be in Russia, but the El Nino also threatens eastern Australian production as the crop reaches its crucial growth stages. Record stocks of soybeans are expected, provided weather is supportive in the US and Brazil.

Molybdenum And Cobalt

These minor players on the London Metal Exchange are interesting in terms of the physical market, where Macquarie believes the price paths are diverging. Molybdenum demand has suffered most from falling oil & gas capital expenditure and is now at levels that are 50% below last year. A massive surge in Chilean molybdenum production is cited as the main reason for price weakness last year. Macquarie estimates that production rose in that country by 26%. The market is now in surplus and Macquarie has downgraded price forecasts for 2015 to US$8.20/lb to reflect this supply overhang.

The wild card in the supply outlook is China. the Chinese government recently scrapped export quotas on molybdenum products but Macquarie assumes that over time, China will evolve into a regular and growing net importer of molybdenum.

For cobalt, supply disruptions have meant a recent price recovery, while consumption in the battery and aerospace markets supports medium term demand. With a steadily improving demand profile, Macquarie expects cobalt will receive increased attention over coming years. TESLA’s recent announcement of a push into consumer storage of power with its Powerwall system has provided a strong boost to the use of lithium-ion compounds. The company’s battery technology in cars has been a source of both excitement and disappointment for the cobalt market, Macquarie observes. With domestic and, potentially, industrial storage adding another angle, the excitement is likely to be renewed.

Cobalt remains plentiful and the ongoing ramp-up in the cobalt-rich Democratic Republic of Congo offers the vast majority of future supply. A lack of geographical diversity – the DRC is the source of just over 93% of cobalt units imported by China in 2014 – creates potential for supply shocks, but Macquarie observes in recent years these have proved transient. Nevertheless, news that Zambia’s Chambishi operation would halt cobalt output for three months because of feed problems produced a 10% price rally and highlights how crucial African supply is to this market.

Zinc And Lead

Zinc has long been a favoured metal for investors, Citi notes, because of expectations of an impending supply crunch. Large cancellations of warrants in the first quarter helped zinc become the second best price performer on the LME so far this year. Also, the slowing of domestic demand in China has been masked by strong galvanised steel exports but Citi suspects the slowdown will mean reduced zinc import requirements. Confirming a need for caution is the fact that zinc physical premia in the rest of the world have been in decline since late 2013. Citi downgrades the zinc price outlook for the second quarter to average US$2,200/t.

Lead became the star performer on the LME at the beginning of April, following an unprecedented cancellation of warrants. In Citi’s view neither zinc nor lead are fundamentally tight and corrections in the prices of both metals may have further to run. Lead has endured an equivalent seasonal slowdown in premia to zinc, marking a reduction in global consumption. Citi expects further downside is ahead for the lead price and expects pricing to average US$1,915/t over the second quarter.

Inventory is only part of the story, nonetheless. Buoyant supply undermines a bullish price outlook. The broker notes, despite the closure of the MMG Century operation in Australia, zinc supply is set to improve. Refurbishment work has started on resurrecting the Gorno mine in Italy, which had historical production of 6m tonnes. Further investment will also be made to refurbish the Skorpion refinery in Namibia. Global refined zinc production was in surplus by 1.14m tonnes in March. Citi suspects these factors have shaken off the short-term speculators in the market.

Similarly, lead is expected to remain in modest surplus as re-starts occur in South Korea, Kazakhstan and Bolivia, although secondary supply will be a key determinant of direction.
 

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