Material Matters: Iron Ore, Copper & Nickel

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A glance through the latest expert views and predictions about commodities: iron ore; copper; nickel; lithium; and contractors

-Iron ore prices are dropping as market tightness eases
-Manufacturing and mobility underpinning copper prices
-Nickel demand still elevated amid mine disruptions
-Elevated EV battery demand keeps lithium miners on a roll
-Resources strength and broader construction supporting contractors
 

By Eva Brocklehurst

Iron Ore

Morgan Stanley believes market tightness that built in iron ore during the first half of 2021 will fully unwind in the second half. The iron ore price is dropping, reaching US$181/t from a high of US$222/t in early July.

Further pressure to the downside is expected as market tightness was driven by seasonal supply disruptions. Stronger second half supply and slowing steel production in China are expected to return the seaborne market to a balance more akin to a year ago, the broker asserts.

Yet the price is not expected to fall as far as the US$134/t that was averaged in the June quarter of 2020. While China's steel production is slowing the impact on iron ore demand is likely to be a little protected as lower-margin scrap electric arc furnace production is cutting back output more so than blast furnaces.

China's government is also ramping up action to cool the property market. The broker's China materials analysts are expecting -21mt of reductions to steel output in the second half.

Morgan Stanley concludes that gradual policy changes to create disincentives for steel exports are more likely to eventuate than a sharp curb to production. Moreover, beyond China, the recovery in seaborne demand from Europe, Japan and South Korea has mostly run its course.

Copper

Citi forecasts another 10-12% rally in copper prices, to US$5/lb over the next three months. Copper's balance is tightening and speculative positioning is starting to kick off. All of the bearish factors are now largely priced in or in the process of unwinding, the broker observes, such as speculative and state-sanctioned Chinese selling and de-stocking of supply chains.

Meanwhile, global manufacturing and mobility remain robust, which underpins growth-exposed commodity prices that are trading at elevated levels. US CME prices have been driven up relative to UK LME prices, reflecting fundamental tightness.

Citi expects US imports will rise by around 80-90,000t/month. In China, refined copper demand picked up in July as de-stocking was reduced and there was a moderation in scrap supply. End-use consumption in China is expected to remain firm on improving export orders and state grid tenders.

Nickel

Demand for nickel is exceptionally strong, Morgan Stanley notes, as output of stainless steel rises globally to meet demand from the construction, manufacturing and oil & gas sectors. Stainless steel prices are at 14-year highs, underpinned by container shortages and higher raw material costs.

Even as chip shortages emerge, electric vehicle (EV) battery demand is also elevated and this will help to lift the nickel price to the mid US$19,000/t region. While a recovery in supply could ease some of this tightness into the second half, the broker notes fresh disruptions and the strength of demand looks set to keep prices higher for longer.

Norilsk is operating at 85% of normal levels and has guided to a probable full-year loss of -30,000t of nickel. There are also disruptions to Vale's Sudbury mine in Canada which has tightened the US market.

Further, protests in New Caledonia have meant the suspension of Glencore's operation and bad weather is disrupting shipments from the Philippines to China. Indonesia's lockdown has extended and potentially affected labour supply for expansions.

Also, the Indonesian government policy is restricting expansion of capacity to produce intermediate products if there is no investment in value-added products. As a result nickel pig iron prices have gained 10% since July 1 and nickel sulphate is up 7%.

Ultimately, any drop in China's stainless steel output is likely to be balanced by a rise in Indonesian production but, as Morgan Stanley points out, in the meantime the outlook is bullish for nickel. The broker expects the market will remain tight through the second half and there is upside risk to its forecast of US$16,700/t.

Lithium

in assessing the latest updates on developments for lithium miners, Macquarie highlights the first sale on the Pilbara Minerals ((PLS)) BMX platform, which delivered 10,000dmt at 5.5% spodumene concentrate for US$1250/dmt.

IGO Ltd ((IGO)) had a strong result in the June quarter, having completed its lithium transaction and formed a joint venture. The main risk to forecasts for Orocobre ((ORE)) is movements in lithium prices that vary against Macquarie's estimates.

The completion of Orecobre's planned merger with Galaxy Resources ((GXY)) remains a key catalyst and the broker believes it will enable some integration of Sal de Vida with the Olaroz project.

Mineral Resources ((MIN)) is on track for completing Kemerton in 2021 which should mean it adds lithium hydroxide production in 2022. Meanwhile, Liontown Resources ((LTR)) expects to deliver its definitive feasibility study on the Kathleen Valley spodumene project by the end of the year.

Underpinning the sector, Macquarie notes passenger electric vehicle sales rose globally by 153% in June and assesses 2021 should be well above 5mt in sales. The broker retains a preference for IGO and Pilbara Minerals over Orocobre/Galaxy Resources while Mineral Resources is also a key sector choice.

Contractors

Seven Group ((SVW)) is the top performer among contractors, with its share price having risen 34%. Macquarie expects the core business of WesTrac/Coates will meet or beat guidance at the results on August 25.

The strength of the resources sector and broader construction/infrastructure work should support the outlook, tempered by the impact of the pandemic across various states.

Volumes are also strong for Downer EDI ((DOW)) and its services business should be less affected by the lockdowns because of work exemptions. The broker expects strong cash flow will be reported for FY21, noting $605m in asset sales have been announced and the Open Cut East is still to be sold. Downer EDI will report on August 12.

Macquarie expects a recovery in earnings margins for Monadelphous ((MND)), which is currently completing major iron ore works, with staff numbers peaking at 7000. Macquarie the broker forecasts net profit for FY21 to be up 49% when the company reports on August 24.

Last, but not least, Worley ((WOR)) is on track for improved earnings in the second half with assistance from incremental cost savings. Macquarie expects work and staff numbers will grow, given contract wins and the post-pandemic recovery. Worley will report its results on August 25.

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