Commodities | Jul 26 2023
The general outlook for commodities; copper's unique qualities and upside; rising supply to weigh on nickel pricing & a bearish view on iron ore.
-Near-term outlook for commodities
-Citi recommends accumulating copper
-Rising supply to weigh on next year’s nickel price
-Morgan Stanley’s bearish view on iron ore
By Mark Woodruff
Brokers’ near-term commodity outlook
Citi maintains its neutral-to-bearish stance on base metals over the next six to nine months, while more broadly across commodity markets, ANZ Bank expects prices will remain range-bound for the time being due to ongoing lacklustre demand.
Coal, gas and gold are the exceptions when it comes to demand.
The requirement for coal is picking up due to lower hydro-power generation in China, while the gas market is stabilising on increasing Asian demand, explains ANZ.
Warmer weather in both Asia and Europe is expected to support gas demand, along with coal-to-gas switching.
A recent pullback in both US bond yields and the US dollar has supported gold prices, and the bank suggests confirmation of the Federal Reserve’s terminal federal funds cash rate will be a further positive.
Central banks excluding Turkey are still net buyers of gold, while physical demand is considered healthy in the Asian market.
A further drop in July inflation data in the US should put a rise to US$2,000/oz back in play during August, believes Citi.
After oscillating between US$72-78/bbl over May and June, Brent oil prices have inched above US$80/bbl, as export volumes from Russia and Saudi Arabia have fallen, yet demand is yet to show any material improvement, observes the bank.
Rising Russian oil exports are thought to pose downside risk, as oil is trading above the Group of Seven (G7) price cap of US$60/bbl. Also, leading indicators such as rig counts are signalling supply is likely to disappoint in coming months, explains ANZ, and road traffic levels in China are easing.
Chinese steel demand has remained soft due to lean seasonal demand and a background of deteriorating property indicators, observes ANZ, while steel mills are incurring losses, limiting the chances of any immediate increase in Chinese steel production.
Outside of China, European steel production is stabilising as fears of an energy crisis ease. In the US, rebounding steel demand is expected, if a rising US mill utilisation rate is anything to go by.
Overall, steel inventories are experiencing a seasonal rise, while iron ore inventories are falling, which could spur imports, according to ANZ Bank.
Meanwhile, softening manufacturing activity suggests to the analysts industrial metals demand will remain subdued over coming months, while battery material prices are stabilising amid strong electric vehicle sales.
Citi’s near term neutral-to-bearish stance on base metals is based on a greater impact from further weakening in developed markets growth compared to the upside from a modest strengthening in Chinese growth through the second half of 2023.
Citi notes industrial metals are down year-to-date by -13%, while softs, precious metals and agriculture are up 14%, 4%, and 3%, respectively.
Citi recommends accumulating copper
A unique set of characteristics suggests copper provides the best exposure to the energy transition thematic and will likely be the first trade investors put on as global growth fears subside.
Citi assigns an 80% probability of higher copper prices over the medium term.
The broker anticipates demand share from decarbonisation-related uses, such as power generation, grid storage and electric vehicles, will more than double to 22% in 2030 versus 2022.
Meanwhile, traditional copper demand sectors with greater sensitivity to global cyclical growth are expected to continue dominating overall consumption.
For the near-term, Citi points out physical demand is constrained as Europe and the US head towards economic recession and China's growth remains sluggish despite optimism for fresh stimulus.
The broker is neither outright bearish or outright bullish on commodities for the balance of the third quarter of 2023.
However, it’s suggested investors buy copper at or below US$8,000/t over the next six-to-nine months in the expectation of the price reaching US$12,000/t during 2025, with a bull case of US$15,000/t.
This compares to -10-15% downside in the analysts’ bear case scenario.
Copper is the only commodity in the major commodity futures indices that has strong decarbonisation-related demand growth, according to Citi.
The metal is already a feature of major commodities indices and has its own futures-based ETF, so is more readily able to attract higher allocation from index funds, as well as from retail and traditional equity investors, explains the broker.
Other unique qualities of copper include liquidity and the all-important ESG friendliness.
There is also limited physical pushback to speculation-led price rallies in copper, notes Citi, since end-user demand and mine supply are relatively inelastic to price.
Rising supply to weigh on the nickel price next year
Global refined nickel supply could increase by as much as 25% next year as almost 200kt of new capacity comes online.
As supply ramps-up, Morgan Stanley anticipates a pick-up in LME refined nickel inventories and downward pressure on the LME nickel price.
Last week, the London Metal Exchange (LME) approved nickel produced by Quzhou Huayou Cobalt New Material, a subsidiary of China’s Zhejiang Huayou Cobalt, as a list brand and expects more brand applications in coming months.
The LME is encouraging more stock and liquidity to the nickel contract to revive trade volumes after the disorderly trading of March 8, 2022, when LME prices doubled in a matter of hours.
Over the past few years, LME deliverable class 1 metal has been losing market share and now accounts for just 26% of global nickel supply, notes Morgan Stanley.
So called class 2 nickel, nickel pig iron (NPI) and ferronickel, as well as intermediate products (which can be used in batteries), have driven more than 100% of nickel supply growth, note the analysts, as other sources have seen declines.
The broker points out this disparity between refined and intermediate products [mixed hydroxide precipitate (MHP) and matte], also shows up in Chinese import data.
Year-to-date refined nickel imports are down -54% and by -67% compared to 2018 levels, while imports of intermediate products have more than doubled year-on-year. LME inventories of class 1 metal are at historical lows, indicative of the tight refined market
As a result of these market dynamics, China's nickel sulphate price is currently at a -10% discount to the LME price, despite being a more premium product, explains Morgan Stanley.
Due to the nickel sulphate discount, it is economically viable to convert sulphate into refined metal, observes the broker, assuming the metal meets the required specification to be exchange deliverable.
Not only is Huayou Cobalt’s refined nickel capacity set to expand by around 20kt, but should Chinese nickel group Tsingshan Holdings also apply to list on the LME (unconfirmed media report), around 170kt of refined nickel capacity could be added to the refined nickel market.
Morgan Stanley’s bearish view on iron ore
In attempting to address a currently weak steel market, China has set 2023 production controls on the country’s largest steelmaker Baowu Steel Group, according to S&P Global Platts.
Although restrictions at different mills may vary, steel output for Baowu is likely to be capped at 2022 levels.
Should China apply this same cap on a country-wide basis, Morgan Stanley forecasts output would need to fall by -12% sequentially from June levels, a significant slowdown.
The broker was already expecting these announced steel production controls and currently assumes Chinese steel output will fall by -0.5% this year, which should push the iron ore market into a second half surplus.
These controls, along with rising shipments, drives a bearish view on iron ore, and a fourth quarter 2023 price forecast of US$90/t.
As domestic demand in China is weak, the analysts note a lot of year-to-date steel production is leaving the country, as shown by the 33% year-to-date rise in finished steel exports.
China has been managing down steel production over the last two years, with each year's output falling by -2-3% compared to the previous year, points out Morgan Stanley.
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