Commodities | Oct 20 2015
-Electric cars underpin lithium demand outlook
-Zinc, lead demand in China subdued
-Nickel supply remains stubborn
-Oil price likely slow to recover
By Eva Brocklehurst
Lithium
Demand from electric vehicles is expected to tighten the lithium market further. Citi notes lithium carbonate prices are likely to rise to US$7,000/t by mid 2017 before a string of projects start entering the market and dampen prices. Still, Citi expects prices of US$6,000/t will be maintained for the rest of this decade.
The broker suspects the mass adoption of vehicles such as the Tesla Model S or the Nissan Leaf would be a boon to the lithium market. Citi forecasts electric vehicle production of 1.04m in 2020 and hybrids at 7.6m.
This means the segment would have grown to 30% lithium carbonate equivalent consumption from near zero over 2010 to 2020. The ceramic, glass and polymer industries are the dominant consumers of lithium but also have the weakest growth prospects, although Citi still expects growth of 3.4-3.5%.
Consumer goods are supporting the consumption of lithium, with the rise in the power intensity of mobile phones and the adoption of smart phones. Lithium production is dominated by four major suppliers globally – Tianqi Lithium, Albermarle, SQM and FMC, which have over 90% of the market. ASX-listed Orocobre ((ORE)) is expected to join the group of producers next year.
Zinc & Lead
Reductions in zinc supply from Glencore's mines are expected to lead to large deficits in refined metal in 2016-17, Credit Suisse maintains. The broker now expects steady price rises to US$2150/t in 2016 as surplus metal is absorbed. Price forecasts are lifted by 10% for 2017 to a peak of US$2200/t. That said, the broker remains cautious about forecasting too great a surge in the price, given weak demand prevails.
China dominates the zinc market, comprising half the global demand. Credit Suisse argues that zinc, unlike other base metals, is more closely related to steel through galvanising. Therefore, the broker forecasts no growth in zinc demand in China. One of the many issue that has affected zinc demand is falling vehicle production in China, while the pull back in infrastructure construction is also likely to be negative for zinc.
Deutsche Bank's bull case on zinc has taken a battering over the last three months. The broker acknowledges a strong US dollar and fears over Chinese demand produced a build-up of short positions on the London Metal Exchange. Glencore's mine closures are likely to squeeze out these positions, the broker believes, and produce a deficit in 2016 of around 500,000t. Deutsche Bank expects the zinc price will recover to average US$2,275/t next year.
Lead production is estimated to fall by 100,000t per annum at Glencore's mines. Lead price upgrades are muted, with Credit Suisse expecting US$1800/t out to 2018. The effect of Glencore's curtailments is expected to be far more subdued when it comes to lead as around 50% of supply is recycled metal and production changes have a lesser impact. Lead's significant market – lead acid batteries – has a poor outlook in China, Credit Suisse maintains.
Weakness in construction may restrict demand for back-up power systems while vehicle production is at its lowest for this time of the year since 2012. Growing lead exports from China are expected too, as the country redirects its focus to consumption from manufacturing. China's refined lead output is expected to surge 7.0% in 2016 to meet demand in the rest of the world.
Nickel
The price of nickel has fallen to its lower level since March 2009, with subdued stainless steel demand and product de-stocking as well as a global excess of inventory. Morgan Stanley observes none of these features show any signs of improving before year end.
The broker cites Wood Mackenzie data which suggests around half of the global industry is exposed to losses. Despite this, it appears no substantial mine closures have been reported, with only four mines announcing supply reductions totaling 9,000tpa.
One of the factors behind the stickiness of supply in the past decade is the growth of pressure acid leach operations. Morgan Stanley observes this type of operation is highly capital intensive but can process low grade laterite ore at lower operating costs. Such assets are unlikely to be cut from the market, unless the price of nickel remains at low levels for some time, as the maintenance/re-start costs of these facilities are prohibitively high.
While much of the fall in the price has been blamed on de-stocking at mills in China, a renewed re-stocking could trigger a rebound in the nickel price early next year, the broker suspects.
Oil
Deutsche Bank believes the oil market is in tension between gradually lower expectations for US supply, uncertainty over Iranian volumes and lower forecasts regarding demand growth in 2016. The re-balancing process is expected to be lengthy, with potential for moves to the downside. The broker believes the exploitation of US tight oil reservoirs is the primary driver of the current low price environment, saturating world demand growth on its own count over 2009-11.
Meanwhile, OPEC (Organisation of Petroleum Exporting Countries) is playing pivotal role in the extent and duration of the decline since 2014. Deutsche Bank expects no action from OPEC and the recovery in prices will depend on a relative slower response from non-OPEC supply and global consumer demand.
Morgan Stanley also does not expect any major action from OPEC and a selection of non-OPEC producers after this week's meeting in Vienna. This is a rare gathering but, at best, the broker expects a reaffirmation of a desire for free and equitable guidance in terms of a pricing band will likely be announced. In Morgan Stanley's view such guidance would merely be a statement of the well-known fact – oil exporting nations need more stable and higher prices than the market is currently providing.
Production agreements are inherently ineffective if competing suppliers are growing. Supply cuts simply subsidise other producers that would likely ramp up output as prices recovered. The broker notes Russia and Mexico have repeatedly insisted they cannot cut production because of the age of their fields and limits on technology. This emphasises the problem with the OPEC cartel today, Morgan Stanley contends. It only controls 40% of the oil market.
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