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Material Matters: Iron Ore, Oil, Aluminium, Nickel & Copper

Commodities | Sep 28 2022

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A glance through the latest expert views and predictions about commodities: Lower iron ore price forecasts; oil prices may collapse; economic slowdown to weigh on aluminium and forecasts for nickel and copper prices.

-JP Morgan lowers iron ore price forecasts 
-Is the oil price set to collapse?
-Economic slowdown to weigh on aluminium prices
-Forecasts for nickel and copper prices

By Mark Woodruff

JP Morgan lowers iron ore price estimates

JP Morgan lowers iron ore price estimates after forecasting flat 2023 global steel production and ore supply growth from the major producers.

The broker’s 2022 and 2023 price forecasts fall by -11% to US$121/t and US$94/t, respectively. 

The 2022 forecast is impacted by lower second half estimates due to a mixed news flow. While China’s second largest property developer Evergrande has removed project freezes, the analysts highlight covid lockdowns have spread and inventory levels at ports have risen.

The greatest risks to JP Morgan’s weaker price forecasts are better steel production in China and/or seaborne iron ore supply falls short of expectations.

The broker expects 2022 Chinese steel output will be flat against 2021, following a recovery in August/September in the wake of sharp falls in July. 

JP Morgan acknowledges Chinese steel demand may take alternative paths. Demand could either be bolstered by unexpected government stimulus measures or fall due to greater-than-expected property sector weakness.

China’s August steel production improved by 3% on July, and year-to-date production has been stronger than JP Morgan anticipated. As a result, forecasts are raised to flat this year, up from a previous forecast for a fall of -2%, while 2023 output is now expected to fall by -1%.

The analysts also note rest-of-the-world (RoW) steel production remained at low levels in August, and they trim world ex-China steel forecasts due to an expected downturn in European and Commonwealth of Independent States (CIS) output. 

This declining output is expected to lead to a fall in RoW steel output of -5% in 2022, followed by only a partial recovery of 1.6% in 2023.

Both Rio Tinto ((RIO)) and South American mining house Vale should deliver sequential iron ore volume increase in 2023 and 2024, while Fortescue Metals’ ((FMG)) Iron Bridge project ramps-up next year, explain the analysts. After including BHP Group’s ((BHP)) production, the four companies are expected to provide over 100Mt of new supply over 2023/24.

Longview Economics takes a contrary view and notes total capital expenditure growth for these big four iron ore miners is growing at a slow rate. Even if this growth rate speeds up, several years are expected to lapse before any meaningful supply expansion occurs, as new mines take between three and five years before commencing production.

Based on this poor supply outlook and a growing number of Chinese stimulus measures for the economy, Longview sees an increasingly encouraging outlook for iron ore prices, with one main caveat: China’s attachment to zero covid policies.

JP Morgan reduces its FY23 earnings forecasts for BHP Group, Rio Tinto and Fortescue Metals by -15-20% as a result of its lower iron ore price forecasts.

The 12-month target price for BHP Group, the broker’s most preferred ASX-listed iron ore exposure, falls to $42 from $43, while next-preferred Rio Tinto’s target falls to $100 from $102. Including Fortescue Metals (target $17.50, down from $19.00) all companies are rated Neutral.

The broker’s valuations are little changed, in line with its modest forecast amendments beyond FY23.

Longview Economics predicts US$50/barrel oil

Longview Economics expects oil prices will collapse in a similar style to what occurred in both 2008 and 2014, and reach around US$50/barrel.

A better supply outcome and recent rising concerns about a US/global recession, explains Longview, has resulted in a fall of -35% for oil prices since June highs.

US oil production has grown by 2.4mb per day since pandemic lows. Added to this, Russian oil supply has been reasonably stable since the Ukraine war escalated in June, notes Longview, and OPEC supply has trended higher.

While aggregated financial data for the 60 largest public US shale companies show total cash flows are at their highest on record, Longview observes the historic direct relationship between oil prices and shale dynamics.

Rig counts currently show US shale producers are slowing activity.

The rate at which US shale supply falls will be a deciding factor in determining when, and where, oil prices find a floor, according to Longview.

Reasons behind the price fall for aluminium 

Longview Economics attributes the -45% fall in aluminium price since March 7 this year to rising economic growth concerns, which are increasingly expected to outpace global supply cuts.

Citi agrees and points to Europe-led recession fears amid high power prices, tighter liquidity conditions and China’s ongoing zero-covid policy. Supply-chain destocking is also thought to be weighing upon demand.

Another swing factor for pricing is the possibility of near-term Russian metals deliveries to London Metals Exchange (LME)-registered warehouses. 

On the one hand, Citi expects lower prices if the deliveries come to fruition and higher prices if the LME de-lists Russian metal beforehand.

Global production figures imply to Longview a cut of around -6% to global refined aluminium production, yet the aluminium price has continued to fall sharply in recent weeks, last trading at US$2,191/tonne.

Following production cuts by several European aluminium smelters in recent months, Longview Economics explains various Chinese smelters (in Yunnan province) have now cut production due to rising energy costs.

Citi notes low water reservoir levels in Yunnan could result in further production cuts. The broker believes any sizable power-related curbs over the next few months in Yunnan, China, or Europe will potentially result in transitory aluminium price spikes.

Longview estimates around 27.4% (1.23m tonnes) of total European aluminium smelting annual production capacity is (or soon will be) offline, while cuts in North America will likely total -0.39m tonnes. Further data suggest Chinese smelters have so far cut capacity by -2.33m tonnes.

Morgan Stanley expects these recent European and Chinese production cuts will lead to higher aluminium prices, with a tighter market as the northern winter approaches.

However, recent data show the aluminium cost curve has fallen, after a recent rise caused by rising energy and alumina costs. Lower cost support could potentially lower the broker’s previously expected nadir for the price of aluminium.

Citi's nickel and copper price forecasts

In the early weeks of September, Citi notes, the LME nickel price has jumped by over 25%, driven by recent gains on the Shanghai Futures Exchange.

Despite this price rally, the broker remains bearish and expects a Europe-led demand slowdown will outweigh near-term refined nickel inventory pressures. 

Average prices for the fourth quarter of 2022 and the first quarter of 2023 are expected to be US$22,000/t and US$20,000/t, respectively (which is pretty much where nickel is trading currently).

Other potential reasons for the recent price rally include optimism relating to China stainless steel demand as stimulus support kicks in, and the possibility of near-term purchases to replenish China’s strategic stockpiles, explain the analysts.

No such rally is anticipated for copper prices, which have remained fairly flat in early September, trading between US$7,400/t and US$8,000/t.

Citi forecasts a looming recession in Europe will remain the dominant theme for copper over the next six months and forecasts US$6,600/t for the first quarter of 2023.

While forward copper pricing suggests worries about near-term copper availability, the broker feels any shortages will be temporary.

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