Commodities | Nov 22 2023
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A glance through the latest expert views and predictions about commodities: China stimulus supporting iron ore, copper; near-term risk for zinc; lithium prices to fall further.
-China's fiscal stimulus targeting construction
-Copper supply growth fears overblown
-Zinc to see sustained surplus
-The lithium bear market not over yet
By Greg Peel
China’s Stimulus: Iron Ore/Copper
It appears Beijing has cried wolf once too often. The Chinese government’s recent declaration that iron ore prices are “unjustifiably high” might have worked in sending prices lower in the past, but not this time. The price has risen to over US$130/t from around US$120/t at the time.
Never mind the government’s attempts to intervene in a “free market,” it’s a bit incongruous to make such a declaration on the one hand and then provide infrastructure stimulus on the other.
It appears to Citi, China will likely increasingly push towards fiscal expansion to engineer investment-led growth, and this time with a focus on urban village redevelopment/affordable housing to support overall property market-related activity in 2024.
Yesterday, the iron ore price was boosted by a front-page editorial in state-owned media that said funds from the one trillion yuan debt issuance announced by Beijing last month should be disbursed into construction projects and allocated in a timely manner.
In a further sign that Beijing is determined to breathe life into a sector that’s endured more than a year-long slump, fifty Chinese real estate developers may be eligible for financing, according to reports.
Citi has further upgraded its iron ore price forecast to US$140/t from US$120/t on a zero-to-three month basis after upside risk materialised at US$130/t, and sees an upside skew surrounding the broker’s FY24 forecast.
Based primarily on a significant shift in Citi’s near-term China easing expectations, some larger-than-expected supply disruptions in Panama and Peru, and related short-covering, the broker now expects the recent copper rally to continue into year-end 2023 and early 2024.
Citi has thus raised its zero-to-three month forecast from US$7,500/t to US$8,600/t, with the potential to touch US$8,800/t, compared to last US$8,457/t (three month) on the London Metals Exchange.
More on Copper
UBS notes most corporates, consultants and analysts expect the copper market to move to surplus in 2024, largely driven by supply growth. The broker sees a more balanced market in 2024, with the market moving into a growing deficit from 2025, largely due to more conservative supply forecasts.
The broker acknowledges if all the miners deliver, supply could lift over 5% year on year in 2024, pushing the market into surplus, but observes that supply estimates have consistently been too optimistic in recent years. As miners recalibrate their guidance for 2024, UBS expects supply forecasts to decline.
In the broker’s view, evidence from September quarter reporting and supply-side newsflow supports this thesis.
UBS is not bullish on copper near-term, but does not see a protracted period of oversupply driving prices into the cost curve for an extended period and believes investors should be positioning for a tighter copper market in 2024-25.
UBS has a Buy rating on Sandfire Resources ((SFR)).
Caution on Zinc
Citi is struggling to build conviction in the near-term zinc price direction amid competing drivers. The broker believes weakness is more likely than strength, but the downside is likely limited by mine cost support.
Zinc’s recent price strength reflects a mix of fears around mine supply constraints, Chinese steel demand optimism (seen in iron ore’s surge beyond US$130/t), and US dollar weakness on growing rate cut expectations.
Citi’s base case still assumes sustained surplus conditions will weigh on pricing over the next three to six months. China’s refined zinc output has recovered from summer maintenance, so import demand is now ebbing, and this could drive ex-China inventories higher in the months ahead.
Citi has raised its zero-to-three month zinc price forecast to US$2500/t from US$2300/t. The broker’s updated global zinc supply/demand balance sees a narrowing in refined surplus in 2024 (144kt versus 185kt in 2023) as refined supply shifts from smelter-constrained to mine-constrained.
Accelerated Lithium Price Decline
Goldman Sachs has lowered its 2023-24 lithium price forecasts to reflect significant downside risk to lithium prices on oversupply-led, low-cycle pricing, which is yet to arrive.
It is too early to call the bottom of the lithium bear market, Goldman suggests, despite sector pricing down some -70% this year on a rise in supply combined with a shift lower in retail EV volume growth in China.
The size of upcoming surpluses has not yet been fully realised in prices, the broker suggests.
EV demand growth has been faltering globally as inflation, rate hikes and cost of living pressures have lured buyers away from more expensive fully-electric vehicles towards cheaper electric-petrol hybrids. China’s struggling economy has only exacerbated.
Amongst Australian-listed lithium miners, despite spodumene pricing down some -40% since September, sector performance has been mixed, Goldman notes, with IGO Ltd ((IGO)) and Allkem ((AKE)) down around -35%, Pilbara Minerals ((PLS)) down -25%, and Core Lithium ((CXO)) losing less than -10%, with M&A activity on emerging resources contributing to ongoing sector outperformance versus global peers.
The broker downgrades Core Lithium to a relative Sell on valuation. Liontown Resources ((LTR)), on the other hand, is upgraded to Neutral on valuation, noting that stock has lost close to -50% of its value since Albemarle pulled its takeover bid, compounded by falling lithium prices.
Goldman Sachs continues to prefer low-cost assets of scale into lithium price declines and has a Buy on IGO for free cash flow, and on Allkem for growth.
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