Material Matters: Oil, Copper, Nickel And Electric Vehicles

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-Pace and scale of oil rebound at issue
-Two more years of copper surplus likely
-Can a lid be kept on nickel supply?
-China's steel mills still struggling
-Magnis Resources advances graphite project
 

By Eva Brocklehurst

Oil

Supply outages and firm demand are re-balancing the oil market quicker than RBC Capital Markets had assumed. The analysts suggest the pace of recovery is a quarter earlier than expected and the price outlook for the second half of 2016 now has a higher base.

The analysts expect West Texas Intermediate to average US$55.50/bbl in the second half and US$64/bbl in 2017. RBC Capital Markets remains constructive over the medium term, and factors such as the elasticity of US production, pent-up producer hedging and record inventories remain central in determining both the pace and scale of near-term upside.

Morgan Stanley has increased its long-term oil price assumption to US$80/bbl, upgrading Woodside Petroleum ((WPL)) to Overweight , Santos ((STO)) and Origin Energy ((ORG)) to Equal-weight in the process.

The broker expects the oil recovery to be volatile and, near term, expects the price will be lower compared with current levels. Morgan Stanley agrees markets are slowly re-balancing and there is a risk that oil moves higher if there are further supply disruptions.

Copper

Deutsche Bank observes not all is going well for the copper price at present. The market is on track to register one of the lowest disruption allowances for the past 10 years. Disruptions are running at just under 500,000 tonnes on an annualised basis which is below the average of 900,000 to 1m tonnes.

The Chinese grid represents around 20% of global demand and, while the broker suspects spending on the grid will be higher this year, the focus is on UHV transmission and rural distribution where there is a lower intensity of copper usage. As a result, Deutsche Bank estimates there to be two more years of significant copper surplus in the market, with prices under pressure.

Refined copper imports into China have swelled this year, ahead of reasonable demand growth rates, and appear to the broker to be an extended re-stocking cycle. The risk is the second half of the year may start a de-stocking cycle.

Nickel

A strong Chinese stainless steel market has pushed nickel into deficit, Macquarie contends. This follows supply curtailments and stronger demand from the shift in grade in stainless, and lower secondary availability.

The broker notes this is the first time in five years a significant deficit has emerged. Global nickel refined production fell 0.9% in the fist four months of the year while use has grown by an estimated 3.4%. Macquarie projects a deficit of 31,000t in the first half of 2016, amid a long process of returning market inventories to normality.

The shortage of secondary nickel is a key factor. The price of nickel in scrap has risen to 90% of the London Metal Exchange price from around 70-75% at the start of 2015, the broker observes. This reflects lower scrap supply and also big reductions in Chinese nickel pig iron production and the rise in Chinese imports of nickel.

Macquarie considers the outlook for nickel the rest of 2016 hinges on whether the pace of recovery in China can be sustained. The broker assumes some slowing in demand in the second half but still envisages good growth this year. The other factor affecting the price is whether a lid can be kept on nickel supply, following recent production cuts.

Steel

Sentiment in China's domestic steel industry remains negative, Macquarie maintains. Steel mill orders fell dramatically over the last month, falling for the first time since February. The broker observes the decline in orders came from all major steel consuming industries, except infrastructure, which managed to hold up.

Macquarie also notes from its proprietary survey that, somewhat surprisingly, export orders also declined in June after a rebound in April, despite the increased attractiveness of export markets with the slump in domestic steel prices.

Given the steel mills are struggling with profitability and looking for lower production rates, demand for raw materials is expected to be muted in the near term.

Electric Vehicles

Electric vehicles suggest a renaissance for some commodities and Morgan Stanley reviews which commodities are most exposed to some upside. The main opportunity is in the large-scale battery production, although the broker's analysts suggest the world's electric vehicle battery production rate already exceeds demand by 75%.

Lithium is the broker's top pick, primarily because near-term barriers to entry are high. China's high spot prices should spur new supply but the broker expects the response to be slow because a majority of lithium output is priced on annually negotiated terms. Greenfield developments are also frustrated by poor licence policies, environmental regulations and funding issues.

Graphite reserves abound and, while there is excess production capacity for naturally occurring graphite, the broker observes the portion that can actually deliver battery-grade spherical graphite is small. Most spherical graphite is produced in China with North American producers soon to develop reserves.

Cobalt consumption is also set to rise with the EV battery demand but, being a by-product of copper and nickel mining, supply is considered to be largely unresponsive. Morgan Stanley suspects that if copper and nickel remain at relatively low prices, supply growth for all these commodities will slow or even shrink, regardless of the improving outlook for cobalt.

Copper is the fourth on the list, required to connect battery charging infrastructure to global grids. Morgan Stanley's analysis suggests that for China, to meet its 2020 targets for charging stations, that an extra 3.4mt of the metal will be required.

Magnis Resources

Magnis Resources ((MNS)) is advancing a graphite project, Nachu, in Tanzania. Bell Potter observes the company has progressed with obtaining port shipping capacity and adjacent land for concentrate storage. The project is backed by a specific development agreement defining and protecting the fiscal terms for 10 years.

Bell Potter has further confidence in the company's processing plans after a visit to the testing laboratories in Gosford, NSW. Exceptional purity levels have been demonstrated and the broker considers this a further factor in de-risking the project. The broker retains a Speculative Buy rating on the stock with a $1.45 target, upwardly revised from 83c.
 

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