Material Matters: Dire Lithium Forecast, China, Iron Ore & Base Metals

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UBS lowers lithium price forecasts; conversations on the ground in China; the impact of new Chinese policy on iron ore and base metals.

-UBS slashes its lithium price forecasts
-Conditions on the ground in China
-Chinese policy impacts on iron ore and base metals

By Mark Woodruff 

UBS slashes its lithium price forecasts

Warning signs for battery-electric vehicle demand have been evident for quite some time, according to UBS, which has slashed its lithium price forecasts between -10% to -50% given EVs represent more than 75% of global lithium demand.

Harbingers of declining demand, in the broker’s view, included sequentially declining monthly sales, shrinking backlogs and growing discounts. Such discounting has not been confined to EVs.

In times of economic uncertainty, prices for cars propelled by the internal combustion engine (ICE) have also been marked down, observe the analysts.

In addition, UBS points out subsidies have been falling for EVs, lagging charging infrastructure has been a hindrance for sales and the likes of Honda and General Motors have cut back on EV launches and investments.

The above factors all combine to drastically reduce the broker’s estimates for global EV penetration rates, which now stand at 18% in 2024, down from 20%. Within these figures are significant growth rate cuts for Europe and the US to 10% and 15%, respectively, down from 35% and 45%.

By 2030, the analysts anticipate a reduced EV penetration rate of 47%, down from 54%.

The lithium market will move into surplus, predicts the broker, and remain as such until 2028, resulting in a slowing of project capex.  It’s thought spodumene pricing might be at risk of further downside given rapidly changing supply/demand dynamics and the current profit share across the value chain.

As a result of lower lithium price forecasts, UBS downgrades its rating for Pilbara Minerals ((PLS)) and the 12-month target price falls to $3.45 from $4.15.

The target for price for Sell-rated Mineral Resources ((MIN)) also falls to $52 from $57.

While Buy-rated IGO ((IGO)) remains the top pick among ASX-listed lithium stocks under UBS coverage, its target still falls to $11.90 from $14.10.

Conditions on the ground in China

After returning from a fact-finding mission in China, chief analyst at Danske Bank, Allan von Mehren, suggests low household and business confidence will require more stimulus in coming years. Yet, cautious optimism also prevails for an economic comeback, with the country’s leaders still considered both pragmatic and flexible, despite the rising focus on security and control in recent years.

Mind you, Mr Mehren jetted out a bit more concerned about the ongoing risk of a deeper financial crisis for China, after conversations with a range of China experts, companies and institutions.

Chinese households are in the habit of saving a lot for a rainy day, and this savings impulse was heightened by the tough lockdowns in 2022, explains Danske Bank. Social security is very limited and some household lost part of their savings from either a job loss or the closing of a business.

The weak housing market is also contributing to a lack of confidence. The prevalent view on the ground, according to the analyst, is of a government aiming for stability rather than recovery.

As sales are -40% below pre-pandemic levels, an ongoing struggle is expected for developers, and the default by Country Garden made it clear the sector would not be rescued by government.

Regarding the potential for a deeper financial crisis, the erosion of capital buffers in small banks from more losses is a key concern. Danske notes a lack of fire power in local governments to support these institutions, as they themselves are under severe pressure and a source of financial risk.

For Chinese businesses, a broader uncertainty has been created about policy direction due to the recent years of new regulations and crackdowns on selected areas of the private sector, while the slow growth environment has also impacted profits and confidence, notes the bank.

More positively, the government has been implementing initiatives to rebuild trust within the private sector, though the bank suggests this trust will take time to restore and the most important factor is stronger demand.

The recent 1tr yuan increase in central government bond sales was seen as quite significant by most analysts spoken to by Mr Mehren. Some government officials have even hinted at a growth target of 5% next year, which would be a strong signal and implies China will still be accounting for around 30% of global growth.

There is a predominant belief that China will eventually recover rather than be stuck in a Japanese-like scenario of 3% or lower growth, notes the analyst. While investors (including foreigners) are currently sidelined, it’s thought they will eventually return.

In what has become an urgent issue, according to Danske, new births have fallen below the number of deaths in China, and the population had started to decline much sooner than most expected.

One possible cause was anxiety during the pandemic, high housing costs (more children require more space), along with high education and childcare costs, explains the bank. It’s thought subsidies for these areas will need to be quite significant to have an impact.

One way to compensate for this strong demographic headwind is to lift future productivity growth by technology innovation, believes Danske. It’s felt China is moving fast on several fronts including: digitalisation; automation and upgrade of manufacturing (robots etc.); green-tech; and new materials.

This progress is one reason why the West’s decoupling from China could come at a major cost, in the bank’s view, though fears of retaliation by China may be effective in dampening protectionist urges in the EU.

The popularity of Chinese technology is already evident within trade data showing EU imports from China have surged over the past couple of years, largely due to a sharp rise in imports of EV’s, where 70% are Western brands produced in China.

Regarding deglobalisation, an obstacle for moving supply chains is the cost, and for some more advanced products it is hard to find the same quality of manufacturing skills elsewhere, explains the analyst.

In many cases, new countries of manufacture may need to import components from China, so the reliance on China may not really be reduced, and the supply chain could actually be lengthened.

Most people Mr Mehren conversed with see a small risk of a war with Taiwan, but also predict a big impact if it was to occur.

Impact of Chinese policy measures on iron ore and base metals

As mentioned in the previous segment, Chinese policy makers last week pledged 1tr yuan issuance in central government bonds to help bolster the economy, and in a rare move revised the 2023 fiscal deficit, observes Citi.

The broker points out these measures reflect underlying weakness, and the market should “curb its enthusiasm”. However, there is considered potential for more meaningful policy easing.

While these measures haven’t fully turned around sentiment, iron ore stands to be the greatest beneficiary of further policy support compared to other commodities, in the analysts’ view.

Base metals may also experience a short-term bounce, according to the broker, especially copper and nickel due to current shorting activity in the market.

There may already have been short covering for aluminium, suggests Citi, given fresh supply disruptions from Yunnan province. Consequently, the broker’s 0-3-month point price aluminium forecast is raised to US$2,300/t from US$2,100/t.

The iron ore price has bounced in reaction to not only the Chinese policy efforts, but also an industry strike in Western Australia, observes Citi, which raises its 0-3-month point price to US$120/t from US$100/t.

The broker sees potential for the iron ore price to reach US$130/t given near-term demand strength in China.  

Should the country continue to step-up policy supports in the next few months to engineer a strong start for 2024, the iron ore price could climb even further, suggests Citi, especially as hot metal production remains elevated.

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