Material Matters: Lithium, Oil & Outlook For Tin

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A glance through the latest expert views and predictions about commodities: preferred lithium shares, oil price forecasts and the outlook for tin.

-Brokers’ preferred lithium exposures
-OPEC production cut points to weakening demand
-Challenging times ahead for tin

By Mark Woodruff 

Price Of lithium Under Pressure

Lithium prices are down -50% since the start of 2023 and ASX-listed equities in the sector should remain volatile in the near term, observes Macquarie.

Hedge fund managers are adding to share price swings by deploying long/short strategies depending on the varied impacts of lithium price movements on miners, developers and explorers, explain the analysts.

China battery grade lithium carbonate equivalent (LCE) prices closed out March at RMB229,500/t and Macquarie suggests the RMB200,000/t level should provide a base, while Citi also forecasts support in a range of RMB180,000-200,000/t.

Bearishness is more pronounced in the carbonate markets rather than hydroxide, explains Citi, as China has a higher lithium iron phosphate (LFP) battery penetration rate, to which carbonate demand is more sensitive.

Citi expects restocking of the battery supply chain into the latter half of the second quarter, leading into the second half of 2023, will stabilise prices and provide a base for a fresh rally.

However, this broker also cautions near-term prices will remain under pressure given the wide margin between lithium costs and market prices.

Citi has downgraded its average 2023 price forecasts for both carbonate and hydroxide by an average of -12% to US$43,500/t and US$48,000/t, respectively.

Preferred Lithium Exposures

Mineral Resources ((MIN)) and Pilbara Minerals ((PLS)) are Macquarie’s preferred producers, while Patriot Battery Metals ((PMT)) and Global Lithium Resources ((GL1)) are the favoured exploration plays, with the latter providing the greatest near-term exploration upside.

This broker also likes the Outperform-rated Allkem ((AKE)) which offers unique exposure to both lithium brine in South America and spodumene production in Australia.

As the long-term electrification theme remains alive and well, Macquarie expects long-term investors will swoop on lower prices, while strategic investors and corporates may opportunistically take advantage of a confused market and launch takeovers and business mergers.

The recently rejected bid by US-based Albemarle for Liontown Resources ((LTR)) supports this latter view.

Macquarie has an Outperform recommendation for Liontown in the belief construction at Kathleen Valley will de-risk the project and provide valuation support.

As a result of the Albemarle bid, Morgans now considers both Pilbara Minerals, with its exposure to high-quality hard rock, and Allkem as attractive takeover targets. However, it’s thought potential acquirers with pre-existing South American brine exposure may see fewer diversification benefits from acquiring Allkem.

Pilbara Minerals becomes the broker’s key pick from among the pure lithium plays under coverage, and is preferred over Allkem for its larger resource base and ability to quickly rebound as the Chinese electric vehicle industry grows next year.

Pilbara's share price has also recently underperformed relative to Allkem, point out the analysts.

Among the diversified large cap stocks, the broker likes Mineral Resources for growth options provided by not only lithium, but also iron ore and mining services.

Oil Post OPEC Production Cut

After a jump in oil price to ten-week highs following a production cut by OPEC, Longview Economics still expects surpluses for most of 2023, albeit somewhat reduced.

Longview's updated projections imply global oil inventories should continue their uptrend throughout 2023 and the underlying price trend should remain bearish, given the strong inverse relationship between inventories and prices.

No surprise, Longview’s oil price models are signaling overbought levels, approaching sell recommendations.

No further adjustments are expected from OPEC, unless the oil price heads meaningfully below US$60-70/bbl. On Longview's assessment, OPEC is ‘a price-responder’ not ‘a price-maker’ and was spooked by the fall in oil prices to 15-month lows in the wake of the recent banking crisis.

Longview has identified additional underlying bearish factors for the oil market, including signs from voting trends that OPEC members are becoming less willing to cut production. The latest supply cut is smaller than last October’s, after which oil prices continued to fall, notes Longview.

Sector analysts at Morgan Stanley agree with the view that OPEC production cuts signal weakness in underlying demand.

Beyond 2023, Longview expects oil prices will hit a nadir in the next 12-18 months after supply surpluses fall to/below zero by the end of 2023. This view is based on an assumed recovery in oil demand in combination with weak global supply growth.

While Morgan Stanley still expects an oversupply of oil in the first quarter of 2023, a return to balance in the second quarter and deficits in the third and fourth quarters, the nature of the deficits has changed due to the OPEC production cut.

The broker had previously suggested a robust demand outlook and constrained non-OPEC supply would drive the deficits, but now OPEC production cuts are considered the primary cause.

Morgan Stanley predicts oil prices will rise toward the US$87.5-90/bbl range in the second half of 2023, without reaching the US$95/bbl target previously forecast. The 2024 forecast is lowered to US$85/bbl from US$90/bbl.

While this broker moderates its oil demand forecast for 2023, the China and aviation drivers of growing global oil demand have remained largely intact.

Statistics out of China still point to a recovery for the economy, while data suggest rising jet fuel demand globally, explain the analysts. Excluding these positives, global oil demand has been considered relatively weak for some time.

Economists at Morgan Stanley also modestly lowered their GDP forecasts for the US and Europe as “tightening credit conditions should drag down growth in the back half of this year”.

Tin Off Its High

Tin demand will benefit materially from the energy transition, with usage in solder expected to grow at a compound annual growth rate (CAGR) of 5.2% from 2022 to 2027, forecasts Macquarie.

The price of tin hit a high of US$32,000/t in January, driven by short covering on the London Metals Exchange (LME), explains the broker, against the backdrop of a broader market relief rally and some production hiccups in South America.

Since January, there has been a general metals market correction. 

Macquarie adds there have been indications of an emerging physical surplus for tin, with global semiconductor billings registering a -23% year-on-year fall in January, the eighth consecutive monthly decline.

The currently weak global growth outlook will impact on soldering and tinplate sectors, projects Macquarie, along with other areas of industrial tin demand, such as plating.

The tin market is likely to have been in surplus through much of the second half of 2022, and the broker forecasts a full year surplus of 5kt in 2023. This surplus is expected to persist in 2024, before the market drifts back towards progressively larger deficits. 

Macquarie's base case assumes a phasing in of restrictions on refined metal exports by the government of Indonesia. Should immediate and wholesale restrictions occur, the tin market will likely experience a shock, cautions Macquarie.

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