Commodities | Mar 22 2023
A glance through the latest expert views and predictions about commodities: outlooks for iron ore, steel and copper.
-Some analysts are suggesting investors should sell into the iron ore rally
-A surprise price recovery in US steel doesn’t look to last as demand outstrips real need
-Investments in new copper projects insufficient to avoid looming shortfall later this decade
-But could copper first build to a surplus in 2024?
By Danielle Austin
Rallying Iron Ore Prices Meet Analyst Resistance
Iron ore has ceased to be Citi’s preferred exposure to the China reopening trade, with the broker anticipating what it describes as a “patchy” recovery between sectors.
Citi considers the current price rally unsustainable, noting while it expects the commodity to continue to demand a tight price range of US$120-130 a tonne over coming weeks, it is more pessimistic on the remainder of the year and continues to predict a six to twelve month price of US$105 a tonne. In particular, the broker expects the absence of meaningful credit stimulus for the Chinese property sector could prove a headwind for steel demand in the country.
In a similar vein, Morgan Stanley does continue to see some near-term headroom for China steel production, and subsequently iron ore prices, but does not expect this strength to carry into the second half.
This broker expects a surplus market to emerge by the second half, driven by a likely levelling off in China’s steel production, increased recovery in scrap metal use, and a seasonally stronger supply. While warmer weather is currently driving ongoing resumptions of construction activity, Morgan Stanley highlights the Chinese government aims to curb steel production after the peak construction season in April and May.
Considering these factors, Morgan Stanley thinks the price of iron ore might well surge to US$140 per tonne in the second quarter, but investors are advised to prepare for weaker pricing later in the year.
Strength In US Steel Prices Unlikely To Last
Macquarie warns the current jump in US hot rolled coil prices is unlikely to last, despite spot prices reaching US$1,142 a tonne this month. US HRC was fetching a price of just US$730 a tonne as recently as November, after declining more than -60% in the year last. Macquarie does acknowledge the current rally is driven primarily by a tight market.
Lead times for US hot rolled coil are currently closing in on 2021 peaks, reaching 8.7 weeks in mid-March from 4.7 weeks in January, though the broker postulates apparent demand is currently outperforming real end demand. Macquarie expects these long lead times can sustain pricing near-term as supply-demand balances correct, but also that it takes only one or two months until the current rally runs out of steam.
Longer-term, the broker continues to see recessions to hit Europe and the US from the second and third quarters of 2023, respectively. Hence why the steel market, excluding China, will see a negative demand trend emerging that will likely squeeze margins heading into 2024.
While upside risk is that demand could prove resilient, Macquarie sees prices reaching US$1,300 a tonne in the second quarter, before declining to US$800 a tonne in the third quarter, and US$740 a tonne in the closing quarter of the running year.
More Copper Projects Are Needed
Copper supply could fail to meet demand as soon as 2025 according to UBS, with the broker calculating US$100bn in copper project capital expenditure is required by the end of the decade to boost supply.
Having previously felt a shift in capital allocation priorities by miners in recent years towards growth and future facing commodities, such as copper, would sustain supply, the latest insight has triggered somewhat of a shift in the broker's outlook. UBS now warns of increased risk of a marked slowing in copper supply growth over 2025 and 2026.
The broker estimates demand for the commodity growing at a compound annual rate of 3% through the remainder of the decade. Without requisite project capital expenditure, it extrapolates that supply will peak by 2025 and a subsequent decline could leave a -5m tonne supply-demand gap by 2030.
While UBS does not anticipate this scenario playing out, the broker's recent update on the matter highlights it will take cumulative new project spend in excess of US$100bn by 2027 to address the looming shortfall. Accordingly, the sector analysts at UBS anticipate an increase in project approvals to US$10bn in 2024 and to US$30bn in 2027.
But the bottom line remains the same: as things stand right now, there's insufficient deployment of capital expenditure to avoid a copper shortfall in a few years' time.
Copper Heading For Surplus Next Year?
Macquarie has updated and re-run all the numbers on future copper supply on the basis of fourth quarter production results. The outcome is the broker has lowered its growth expectations by an equivalent -580,000 tonnes.
Where the broker had previously anticipated 5.6% copper mine supply growth in the current year, and 5.4% growth in the next, Macquarie is now guiding to a more modest 2.8% supply increase for 2023, and 6.4% for 2024.
Production guidance updates across the sector globally have been to the downside, which Macquarie interprets may reflect a more cautious approach from producers following disappointing performances last year.
For 2023, Macquarie notes the most significant growth in supply looks to come from Escondida, where output should increase by over 200,000 tonnes, alongside a potential 80,000 tonne increase at Salobo, a 56,000 tonne increase at Tenke Fungurume, and a 55,000 tonne increase at Los Pelambres.
In addition, Quebrada Blanca, Udokan and Kisanfu are all expected to start up, adding a combined 268,000 tonnes. Ongoing ramp up of Quellaveco and Kamoa-Kakula should add 228,000 tonnes and 77,000 tonnes, respectively.
Offsetting these prospective increases are the removal of the expected restart of Lepadaungtaung and Monywa, lower grades at Los Bronces and Kansanshi, lower than expected guidance at KGHM’s Polish operations, issues impacting on Las Bambas, and delays at both Chalcobamba and Codelco’s Salvador operations.
Overall, Macquarie sees a tighter market in 2023 before the significant increase in mine supply growth in 2024 results in large surpluses that could drive the copper price lower.
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