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Material Matters: Iron Ore, Lithium, Coal and Critical Minerals

Commodities | Jan 25 2023

This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN

A glance through the latest expert views and predictions about commodities: broker outlooks for iron ore, lithium, coal and critical minerals.

-Upside for the iron ore price, before a pullback later
-Persistent deficits for lithium markets
-Thermal coal prices set for a long-term downtrend

By Mark Woodruff

While acknowledging the potential for short-lived pull backs in price, Morgan Stanley forecasts an average US$140/t iron price for the second quarter of 2023, which represents circa 12% upside to the current spot price.

The broker delves back into the history of iron ore spot pricing and points out the current price rally is not only one of the faster bull markets seen, but also, unlike the previous nine bull markets, the rally is being driven by optimism/sentiment, unsupported by tighter supply-demand fundamentals.

Despite this unique situation, the analysts expect a catch up in iron ore supply-demand fundamentals and thus a tightening of the market into the second quarter.

This view assumes property starts remain subdued in China and is based upon a seasonal improvement in China’s steel production by March/April, with increased output by mills to align with the government’s 5% GDP growth target. 

Additionally, there are early signs Brazil’s iron ore shipments to China may be disrupted by seasonal rain, though as shipments take around seven weeks to arrive, the impact on China's steel mills won’t be immediate, explains Morgan Stanley.

The broker forecasts an average iron ore price of US$90/t for the second half of 2023 in a more balanced market.

Lithium markets to remain in deficit

UBS expects lithium markets will remain in deficit for the near and medium term before moving to a long-term structural deficit, hereby contradicting some of the earlier forecasts this market might be facing some kind of a reality check later in 2023.

Previously, the market had expected supply would catch up to slower demand in Europe and China, but UBS now expects a sales rebound following Chinese New Year and a rapid reopening after covid strictures.

As forecast lithium prices should reflect demand rationing, the broker raises its lithium price forecasts by 50% across the forecast period.

Ratings for lithium stocks under UBS coverage mostly rise because of these forecast changes made in research released yesterday. 

While the rating for Allkem ((AKE)) was already set at Buy, the broker’s ratings for Mineral Resources ((MIN)) and IGO ((IGO)) rise to Buy from Neutral. Pilbara Minerals ((PLS)) is raised to Neutral from Sell.

Thermal Coal prices to trend lower over the longer term

An unseasonably warm European winter, demand rationing and a pickup in nuclear and renewables supply leads UBS to cut oil and gas forecasts.

Thermal coal prices are also not immune to broader weakness in energy markets, according to the analysts.

Coal price forecasts are left unchanged as the broker’s recent 2023 outlook already anticipated a pullback in thermal coal prices. For 2023 and 2024, average prices of US$300/t and US$188/t, respectively are expected before a trend down to a long-term REAL price of US$90/t.

The deflating prices evident in the above forecasts result from an expected normalisation in energy markets following the significant disruption caused by covid and the Russia/Ukraine war, explain the analysts.

Despite a lift in target price for Whitehaven Coal ((WHC)) to $9.80 from $9.20 following a strong recent 2Q production report, UBS lowers its rating to Neutral from Buy on its anticipated (down)trend for prices.

Overview of the critical minerals market

As there has been an increasing Western focus on the critical minerals market, which incorporates rare earth metals, Longview Economics has undertaken an overview of the market.

Most recently the Ukraine war has heightened concern in the West about minerals supply, though numerous other events since 2010 have also contributed, notes Longview. These include de-globalisation, growing reliance on clean energy, pandemic-related supply shortages and geopolitical tensions between China and the US.

Firstly, to definitions.

Rare is somewhat of a misnomer when applied to earth metals as the 17 elements of the periodic table are actually fairly abundant. They are rare due to a lack of economically exploitable reserves.

Critical minerals are a wider list of elements/compounds that have been identified as industrially significant, important for clean energy technologies, and/or of critical importance in the defence industry (definitions vary by country). 

The list includes the more commonly known aluminium, nickel, platinum and tin.

According to Longview, clean energy technologies will be the key drivers of minerals demand over the next decade or two, with the International Energy Agency (IEA) forecasting growth in consumption of between 2-6 times from the 2020 level.

As critical minerals are generally produced as by-products of larger metals deposits such as copper and iron ore, they tend to be found in countries with large existing mining industries such as China, Russia, the US, the Democratic Republic of Congo, Russia, Brazil and Australia.

While there is a wide distribution of existing mining developments across Europe, certain impediments remain, including environmental concerns and high labour costs. As a result, Longview points out upstream developments over the past year have been primarily focussed on ‘friendly countries’ with significant existing mining industries.

The West is keen on building upstream capacity outside of the core Western countries in places like South America and Africa. However, this is proving problematic as China has significant market share of mines in those regions. Rather than wresting control of these mines, the focus is on developing new mining capacity.

As China owns an almost universal majority share in the processing, components and assembly stages of critical mineral/clean energy technology industries, Longview points out the US is focusing upon the midstream/downstream portions of the critical minerals sector, resulting in the need to increase its domestic processing and manufacturing capabilities.

The top four critical minerals (and other minerals) ranked by the US according to vulnerability to supply risk are gallium, niobium, cobalt and neodymium. This ranking in effect hones in on those minerals for which the US is primarily import-dependent.

It seems clear the US is highly dependent on China, as it is the leading country producing gallium, cobalt and neodymium, while Brazil leads for niobium, which is used in steel and as part of superalloys used in aircraft engines.

Cobalt is used for rechargeable batteries and as part of superalloys used in gas turbines, space vehicles etc, while gallium is used in integrated circuits and for light-emitting diodes (LEDs). 

Lynas Rare Earths ((LYC)) mines Neodymium and Praseodymium (NdPr) which power the strongest types of rare earth magnets, which enable the conversion of electrical energy into motion via permanent-magnet motors. These motors power electric vehicles and countless industrial processes.

This week, Macquarie reviewed its rare earths coverage and kept its Neutral rating for Lynas Rare Earths and set a $9.20 target price, while Canaccord Genuity (last week), in a review of the electric vehicle sector, maintained its Buy rating and $11 target for the company.

Macquarie is Buy-rated on Iluka Resources ((ILU)), a large player in the relatively small zircon and titanium markets. Despite higher mineral sands prices (which offset a stronger currency), a change of analyst at Ord Minnett resulted in a cut to the rating of Iluka Resources to Hold from Buy late last week.

The average target price in the FNArena database for Lynas and Iluka are $8.03 and 10.82, respectively, which suggests downside of -9.8% to the latest Lynas share price and 0.5% upside for Iluka.

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