Material Matters: Lithium, Iron Ore And Base Metals

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Lithium and nickel prices close to lows; the impact of China's National People's Congress; other forecasts for iron ore and base metals.

-Have lithium prices reached a low?
-The impact of China’s National People’s Congress on commodities
-Growing chance for a balanced nickel market in 2024
-Citi’s forecasts for base metals and iron ore

By Mark Woodruff 

Have lithium prices reached a low?

Lithium supply cuts are picking up, notes Morgan Stanley, and lithium prices are likely closer to a trough. Canaccord Genuity agrees and sees opportunities for investors with some currently attractive valuations for lithium companies under research coverage.

Canaccord prefers incumbent producers and low-capex, near-term-development plays, but stresses it is not predicting a return to 2022 “boom” times in the short-term.

This broker now expects minor surpluses for lithium markets over 2024-25 and sees potential for surpluses to swing to deficits, providing pricing upside risk.

Chemicals and concentrate prices will continue to rally in the first half of 2024 to more sustainable levels in the “Goldilocks Zone", according to Canaccord, at around US$16,000/t and US$1,200/t, respectively. These levels are lower than the broker’s prior forecasts.

In this Goldilocks Zone, the analysts suggest prices are “not too hot” as to incentivise high-cost supply and “not too cold” to lead to supply disruption/underinvestment. At the end of 2023/early-2024 pricing was too cold, suggests Canaccord, leading to supply disruptions across spodumene, direct shipping ore (DSO) and lepidolite in Australia, Africa and China, respectively.

The broker’s long-term price forecasts remain at US$22,500/t for chemicals and US$1,500/t for concentrate.

Canaccord Genuity claims to have the most comprehensive lithium equity coverage globally (35 companies) and following the above updated pricing forecasts, price targets for developers/explorers and producers fall by -16% and -11%, respectively.

In Australia, the broker’s targets for producers Pilbara Minerals ((PLS)), IGO ((IGO)) and Sayona Mining ((SYA)) are unchanged, while Piedmont Lithium’s ((PLL)) target falls by -57% to 60c.

From among developers/explorers, Canaccord’s targets for fifteen ASX-listed companies fall in a range of between -6% and -60%.

Morgan Stanley notes both supply cuts and environmental delays are boosting sentiment for lithium, while demand looks stronger driven by better-than-expected China cathode output in the first quarter of 2024.

However, Canaccord Genuity still anticipates a lithium market surplus in 2024 and highlights pausing or delaying upcoming projects sometimes results in additional costs. For example, there can be significant cancellation clauses related to equipment and other contractual agreements.

The impact of China’s National Peoples Congress on commodities

ANZ Bank believes China’s National People’s Congress meeting has important implications for commodity markets.

The higher-than-expected 5% GDP growth target has raised hopes of further stimulus and implies support of the affordable housing market, which ANZ believes will offset some of the weakness in commodity demand caused by the lack of growth in construction activity.

Perhaps more importantly for commodity markets, the NPC highlighted an increased focus on high-quality development in new, emerging sectors, notes ANZ, with President Xi Jinping calling for “new productive forces” to drive the economy in 2024.

These forces include an increased focus on the EV supply chain, artificial intelligence, renewable energy, advanced technology, and cutting-edge semiconductors.

Authorities also vowed to prevent overcapacity in some industries, which the bank feels might curtail investment in the EV battery metals and steel industries. It’s thought the construction of real estate properties will slow further in 2024 and steel consumption is forecast by ANZ to fall by -4%.

The average utilisation rate of Chinese lithium-ion battery factories in 2022 was just 45% and has dropped further in 2024, notes ANZ, yet the government (with export sales in mind) plans to keep building battery plants. It’s noted exports will likely continue to grow given the price competitiveness and supposed technology advantages China’s EV makers have over international peers.

In support for aluminium and copper used extensively in EVs, ANZ notes the Chinese government’s work report highlighted the importance of EVs in the current economy and proposed supportive measures. In line with the bank’s expectations, authorities didn’t announce any new subsidies, but extended a tax exemption for the purchase of new energy vehicles.

Chinese demand for LNG should remain strong, in ANZ’s view, as Beijing has reiterated securing natural gas supply is paramount to both ensure energy security and provide base-load power supply to address intermittent supply posed by renewables.

Globally, ANZ Bank sees a floor for LNG prices, noting India is now poised to become the world’s fourth largest importer as its energy transition accelerates.

For base metals, the bank expects those with supply constraints hold more upside potential.

Potential in 2024 for a balanced nickel market

Nickel is now the best performed based metal so far in 2024, with all price gains made in the last fortnight. Morgan Stanley attributes the rally to both record net short positions on the London Metals Exchange and delays in mine permitting approvals in Indonesia.

The broker sees an improving risk/reward ratio for the nickel price, and suggests a nadir has likely been reached, after a slew of production cut announcements in recent weeks. The analysts now see a growing likelihood of a balanced nickel market in 2024.

As a result of the falling nickel price, there have been -110kt of nickel production cuts, predominantly in Australia and New Caledonia, which has eradicated most of the 200kt surplus (forecast last December), which Morgan Stanley had allowed for in 2024.

Another 120kt of production is also at risk, according to the analysts, where funding has been suspended, or projects are under review. Of suspensions tracked by Morgan Stanley, nearly half have occurred in Australia. BHP Group ((BHP)) is also currently reviewing its nickel operations.

The nickel price declined by -45% over 2023, as surging supply from Indonesia combined with lower nickel-intensity batteries, explains the broker. Nickel-containing batteries continued to lose share to the lithium-iron phosphate (LFP) alternative.

Increasing Indonesian supply destined for the battery sector, suggests ANZ Bank, has the potential to weaken nickel prices, though the response by consumers in cutting output amid low prices should limit the downside.

In a positive for current demand, Morgan Stanley points out nickel sulphate prices have risen by 7% since the start of the Chinese Lunar New Year, suggesting to the analysts re-stocking by cathode producers. Moreover, logistical disruptions have slowed deliveries of Indonesian mixed hydroxide precipitate (MHP).

Citi’s base metal and iron ore forecasts

Despite soft global manufacturing indicators and no meaningful catalysts (so far) from China’s ongoing National Peoples’s Congress (NPC), Citi remains tactically bullish on copper, iron ore and zinc over March and April. Palladium has also recently been added to the broker’s list.

The analysts point to a “strong” January credit reading in China which implies strong February/March data, and note softer US data, along with broader risk-asset strength.

Citi expects softer jobs data in the US and an interest rate cut by the Federal Reserve in June, resulting in a lower US dollar and buoyancy for metal prices. However, any rebound in US manufacturing is expected to be limited for now, as global demand is still subdued and domestic consumption growth is set to slow.

Recent strength for equities and bitcoin is also constructive, according to the broker, as are fears held by investors of missing the turn for the manufacturing cycle.

While a lack of meaningful policy announcements at China’s NPC meeting has dampened sentiment for metals, the broker still sees a signal of ongoing intent by China to support metals-intensive sectors. The government plans to promote trade-in schemes to stimulate sales for consumer appliances and automobiles, especially EVs.

The broker raises its near-term (0-3 month) zinc price forecast to US$2,650/t from US$2,500/t due to low visible zinc inventory in China and a tight market for concentrate supply following a -20% cut to production at the Seokpo smelter in Korea.

In the case of copper, the analysts attribute demand from decarbonisation-related sectors for the red metal’s divergence from global manufacturing sentiment since 2022, along with potential AI-related demand growth.

Current forecasts by Citi are for copper to touch US$8,000/t during March/April, with US$9,000/t also considered feasible. ANZ Bank suggests supply issues in South American mines should protect the downside for copper prices.

Citi also expects the iron ore price will reach US$130/t over the March/April period.

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