Material Matters: Bullish Copper, Bearish Lithium

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Bullish outlook for copper prices; bear market not finished for lithium; and value among rare earths miners.

-Bullish copper price forecasts
-Bear market not over for lithium, Goldman Sachs declares
-Valuation upside for rare earths miners

By Mark Woodruff 

Bullish forecasts for the copper price

Twenty years ago, copper’s first secular bull market this century was led by China’s urbanisation and industrialisation, and Citi believes the red metal’s second secular bull market is taking hold. Investors are advised to build long exposures in the coming months or risk missing out.

The copper price has rallied by 15% since mid-February, as the narrative and price continue to gather momentum, observes Morgan Stanley. This broker also remains bullish as persistent supply challenges widen the market deficit forecast for 2024.

Citi attributes the recent copper price rise to a surge in net bullish investor positioning, coinciding with a rebound in key manufacturing indicators.

On the demand side, the market is focusing on the positive impact impact of data centres, according to the analysts. While this represents a small share of copper demand for now, data centres demand is growing fast and attracting new investors to the sector, and also boosting the requirement for grid investment.

Citi also points to the new and exciting (mainly US-centric) AI/data centre kicker on top of the decarbonisation-related demand growth via renewables, the grid, and electric vehicles.

This broker also highlights improving manufacturing indicators in the US and China, which suggest a turn in the manufacturing cycle. Looming central bank interest rate cuts are also expected to provide a cushion against further economic deterioration.

Demand for copper out of China is equally robust. The country’s apparent copper demand was strong in January and February, observes Morgan Stanley, with refined imports up by 27% and refined output rising by 13%.

Mine supply disruptions around the globe have been accelerating, notes the broker, which has resulted in material falls for spot concentrate treatment charges. As a result of these lower charges, China smelters are expected to cut back output during the second quarter, which will likely weigh on refined output.

Citi forecasts global copper mine supply growth of just 0.7% in 2024 compared to the 2.3% growth the broker projected in December. This lower supply growth reflects weaker guidance by major listed producers and the closure of the Cobre Panama project, one of the world's largest open-pit copper mines.

The project was forced to shut down after Panama's top court ruled its contract was unconstitutional, following nationwide protests opposed to its continued operation.

Morgan Stanley forecasts a -700kt deficit in 2024 and a fourth quarter copper price of US$10,500/t, suggesting 12% upside from the current price.

The energy transition demand by itself is driving total copper consumption according to trend, explains Citi, so AI and a cyclical upturn for the global economy represent the additional cream on top, driving a total deficit of -1m tonnes over the next three years.

Only higher prices will solve these deficits, in this broker’s opinion. 

Citi raises its 0-3 month price forecast to US$9,700/t from US$9,200/t, and suggests sub-US$9,500/t is “cheap” on a six-month to two-year view. Prices are expected to trend higher and average US$10,000/t by the fourth quarter of 2024, and average US$12,000/t in 2026.

This base case scenario for US$12,000/t assumes only a small uptick in cyclical demand growth over the course of 2025 and 2026. In the event of strong cyclical growth, explosive price upside is possible over the next two to three years, with prices potentially rising by more than 66% to US$15,000/t, if Citi's bull case scenario plays out.

Under this scenario, the broker believes copper’s bull market may cost unhedged consumers such as automakers, developers and power companies up to -US$320bn over the next three years, or around 0.4% of global GDP.

While maintaining a high conviction regarding rising copper prices in the coming years, Citi cautions the journey could be choppy in response to swings in cyclical growth sentiment and rate cut expectations.

Bear market not over for lithium, according to Goldman Sachs

Further supply rationing of lithium is needed to reduce the 2024 and 2025 market surplus, in Goldman Sachs’ opinion, and the recent rally in lithium prices should not be interpreted as the end of the bear market. 

Indeed, on a recent road trip to Perth, the analysts noted corporate positioning for lower lithium prices for longer.

Globally, many lithium producers remain reasonably well capitalised and may be prepared to wear weaker margins for longer-than-anticipated periods to avoid being among the first to curtail supply, explains the broker. 

Producers may also find other ways of reducing spodumene volumes without full deferral. For example, they may process lower-grade material (potentially from stockpiles), which would reduce mining needs/costs.

So far, a material number of announced lithium volume reductions have related to projects at the lower end of the global lithium cost curve, or with compelling economics, observes Goldman, rather than from higher-cost assets curtailing capacity.

It seems companies' lithium supply considerations often extend beyond the upstream cost curve. For example, vertical integration/committed offtake agreements and competing strategic priorities around higher returning projects are also contemplated, explain the analysts.

Goldman forecasts a 2024 lithium surplus of 150kt, down from 225kt previously, which largely reflects a trend of delays to ramp-up paths, meaning little to no impact on the supply path post-2024. A larger surplus of 336kt is now expected in 2025, up from 288kt.

The broker’s preferred lithium exposure is Buy-rated IGO Ltd ((IGO)) due to undervaluation and a positive free cash flow outlook. Liontown Resources ((LTR)) is granted a Neutral rating, while Pilbara Resources ((PLS)), Core Lithium ((CXO)) and Mineral Resources ((MIN)) are assigned Sell recommendations.

After Goldman updates its forecasts to reflect lithium/nickel pricing updates and company specific changes, the 12-month target for IGO falls to $7.50 from $8.00. 

The analysts highlight the company’s Greenbushes operation is one of the lowest-cost lithium assets. Further expansion of this project is also considered one of the most economically compelling brownfield lithium projects, with a breakeven/incentive long-term spodumene price of around US$400-500/t.

The broker’s targets for Liontown Resources and Core Lithium fall by -10 cents to $1.35 and by -1 cent to 12 cents, respectively, while the valuations for Pilbara Resources and Mineral Resources are unchanged at $2.90 and $48, respectively.

Valuation upside for rare earths miners

Macquarie believes there is valuation upside for miners with rare earths exposures, even though prices have been on a downward trend and reached a multi-year low of US$48/kg in early-March this year.

The broker points to emerging signs of price stabilisation, along with indications that plant utilisation rates at light rare earths producers have increased and are approaching installed capacity limits. Such limits have the potential to limit supply growth in the absence of capital for greenfield or brownfield expansions, explains Macquarie.

Recently, China Northern Rare Earth (Group), one of the major light rare earths producers, kept its April neodymium and praseodymium (NdPr) price guidance flat month-on-month at around US$50.6/kg after three consecutive monthly price guidance cuts, notes the analyst.

Over the last two years, China has restructured its rare earths production and processing industry to retain its dominance in the sector, explains the broker. The number of major companies fell to two from six leaving China Northern Rare Earth and China Rare Earth Resources and Technology, which each mainly produce light and heavy rare earths, respectively.

While a consolidated industry would make production plans easier to co-ordinate, Macquarie believes larger companies are also better able to navigate market downturns.

Compared to the second quarter of FY24, Macquarie’s third quarter forecast is -14% weaker, with an average realised NdPr price of US$52/kg expected. Dysprosium (Dy) and terbium (Tb) projected prices are also -7% and -10% weaker at US$303/kg and US$876/kg, respectively.

The broker’s preferred rare earths exposure is Outperform-rated Lynas Rare Earths ((LYC)), which has a 12-month target price of $7.00. Management is expected to continue prioritising NdPr production and sales, which are both higher quarter-on-quarter.

The analyst has the same ($7.00) target for Neutral-rated Iluka Resources ((ILU)) which has upcoming share price catalysts around progress and a funding solution for the Eneabba refinery in WA.

The broker has modeled lower mineral sands sales at Iluka, with a -40% drop in synthetic rutile (production at SR1 kiln in WA remains offline) offset by higher zircon output.

Macquarie anticipates average realised prices for zircon/rutile/synthetic rutile (Z/R/SR) will be 8% higher quarter-on-quarter at A$2,280/t, which is -2% below the consensus estimate.

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