Material Matters: Nickel, Aluminium & Iron Ore

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A glance through the latest expert views and predictions about commodities: nickel, aluminium and iron ore

-Nickel expected to turn to surplus in the second half of 2021
-Aluminium vulnerable to constraints in the automotive industry
-Traditional price setting in iron ore products could be disrupted
 

By Eva Brocklehurst

Base Metals

Nickel is in deficit and Macquarie expects this situation will continue in the June quarter. Nickel production in the March quarter was below expectations and the shortfall between planned and actual production appeared to be around -30,000t. Macquarie assesses the deficit would have been larger but for a surprisingly strong performance of Chinese nickel pig iron production.

Yet global production of briquettes was the lowest since 2012 because of disruptions at several mines. The broker points out this product is used extensively to make nickel sulphate for the electric vehicle battery market and premiums for briquettes are rising.

As a result of the Indonesian nickel ore ban in January 2020 supplies fell well below China's reported nickel pig iron production, which suggested a large drawdown occurred. Port stocks appear to have fallen sharply.

A large surplus should follow in the second half of 2021 as Indonesian production increases. The broker notes recent nickel industry presentations have highlighted potential for nickel pig iron producers to take advantage of lower costs by converting to nickel matte and from there to nickel sulphate to meet rising demand for nickel in batteries.

Another issue the broker refers to is that Indonesian nickel pig iron is selling at a significant discount to Chinese nickel pig iron because of higher average nickel content and thus lower free iron content. Buyers appear willing to pay a premium for material with a higher iron content.

Macquarie points out there are already projects totalling 500,000tpa of nickel, and almost 20,000tpa of cobalt, planned for fulfilling battery demand by 2025. This is well in excess of expected demand growth. Moreover, beyond 2025 there are a large number of potential laterite projects and at least one known deep-sea mining project.

Still, the broker suspects, at most, half of the sulphide projects intended for meeting battery demand will get off the ground and this could mean 15% or less of the 2020-30 growth in battery demand will actually be met.

Macquarie believes Western Areas ((WSA)) offers the greatest leverage to nickel prices while Sandfire Resources ((SFR)) has the greatest leverage to copper prices over the next three years. Among those base metal miners that also generate gold output, OZ Minerals ((OZL)) provides the greatest leverage to stronger gold prices.

The broker notes the Sandfire Resources project in Botswana is underway and the A4 deposit could underpin a substantial expansion. Realised prices for Nickel Mines ((NIC)) were weaker than Macquarie expected in the March quarter and while price forecasts are cut by -4% to better reflect trends, the broker leaves production assumptions unchanged.

IGO Ltd ((IGO)) also had solid production at Nova in the March quarter and the mine is on track to push the upper end of FY21 guidance.

Meanwhile, Chalice Mining ((CHN)) is now planning for a larger-scale open pit at Julimar and Macquarie assumes in 8mtpa operation will be developed. Mine life has been extended to 12 years. Savannah has been formally approved by Panoramic Resources ((PAN)) for a restart, with mining to commence in August and first concentrate in December.

The automotive industry has been suffering a shortfall of semiconductors which has constrained light vehicle production, yet with very little impact on demand from the sector, Morgan Stanley notes.

Larger vehicles, electric vehicles and restocking all helped mitigate the impact but the constraints are worsening. The broker assesses there is increasing risk of semiconductor shortages extending into next year.

Ford has announced a -50% cut to second quarter production, Honda is halting output in Japan and BMW reducing volumes in Europe. Electronic shipments are also affected, with Apple and Samsung warning of shortfalls sparking production cuts that could impact battery commodities.

Morgan Stanley's analysts envisage a worst-case scenario would be the potential loss of up to -5-6m vehicles in the June quarter, with growing risk of an impact on commodity demand.

Aluminium is particularly exposed to the automotive sector and the potential loss of this number of vehicles could represent around 5% of second quarter demand for the metal. There are also reports of reduced demand for secondary materials, leading to falling prices for scrap. Kaiser Aluminium has warned that revenue would be affected if outages extend into the second half.

The broker suspects any impact on demand is likely to be delayed to later in the year, while the rising intensity of use from a greater share of large vehicle sales provides some offset.

Iron Ore

Citi expects iron ore prices will set new highs of US$200/t over the next few weeks before consolidating to an average of US$185/t, and US$160/t by the fourth quarter of 2021. Despite upgrading expected earnings, the broker downgrades Mineral Resources ((MIN)) to Neutral from Buy and Champion Iron ((CIA)) to Sell from Neutral.

Near-term cash flow may be appealing but concerns regarding the impact of a retracement in iron ore prices are weighing on the sector. Citi retains a Buy/High Risk rating on Mt Gibson Iron ((MGX)), the cheapest in its coverage in terms of discounted cash flow.

Citi expects China's blast furnace steel output will be firm in the next two quarters and elevated margins should boost operating rates at mills outside curtailment regions. Mills are also front-loading production ahead of possible nationwide curtailments towards the end of the year.

The broker expects rising steel prices will prevent iron ore from backtracking too much, even if the market shifts into surplus. Morgan Stanley assesses elevated iron ore product premiums will prevail if environmental curbs are a lasting feature of China's steel industry.

This could mean a structural change to end-use demand for high-grade fines, pellets and lump ore, disrupting traditional price setting mechanisms. The broker suspects further upside is likely to be limited from here although premiums could stay close to current levels.

Morgan Stanley explains pellets are the greenest form of iron ore, reducing both particulates and carbon dioxide emissions. The sintering of iron ore fines is responsible for most of the direct pollution in the form of particulates in the steel marking process. Pellets also benefit from a significant reduction in metallurgical coal consumption and carbon dioxide emissions.

Hence, Morgan Stanley can envisage further upside compared with the current US$66/t Atlantic pellet premium, as the highest-cost pellet manufacturers are only just in the money. The lump premium, meanwhile, is at a record high of US$36/t.

This is almost three times the typical cost of sintering and, as the use of lump ore does not reduce carbon dioxide emissions, the broker suspects lump is increasingly overpriced compared with pellets.

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