Material Matters: Base Metals, Coal & Iron Ore

Commodities | Apr 17 2024

Base metal pricing aided by Russian bans along with decarbonisation tailwinds; plus price forecasts for coal and iron ore.

-Bans on Russian metals may lend upside price support
-Decarbonisation tailwinds for base metals
-Price forecasts for coking coal and iron ore

 By Mark Woodruff 

Bans on Russian base metals

Morgan Stanley and UBS see some upside price support for aluminium, copper and nickel following new UK and US restrictions banning Russian deliveries produced on or after April 13 to the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) warehouses.

This action is in response to Russia's invasion of Ukraine in 2022, and is the first blanket ban of Russian metal onto these globally significant exchanges, notes UBS.

The US is also banning Russian imports of all three metals in the new restrictions, but Morgan Stanley points out there is very little Russian material currently entering the US.

Noting these limitations do not stop the trade of Russian metal between one company and another, Morgan Stanley anticipates some temporary upside price pressure if traders and users become less willing to handle Russian material, leading to disruption of broader trade flows.

As existing Russian metal is unaffected, and any metal currently held off-exchange could in theory be put onto exchange, it is very difficult to get a sense of potential volumes, concedes the broker.

Regarding global production of aluminium, refined copper, mined nickel and refined (class 1) nickel, Russia accounts for around 5%, 4%, 5.5% and 16%, respectively, highlights Morgan Stanley.

Less Russian metal on the LME over time could support prices, suggest the analysts, who also draw attention to a recent Bloomberg article stating some contracts include clauses specifying they will be void if the metal ceases to be LME-deliverable.

UBS points out China is responsible for 51%, 50% and 61%, respectively, of primary aluminum, copper and nickel demand, and displays limited adherence to western sanctions, as demonstrated by recent actions in the oil market. It’s felt the overall supply-demand balance should remain unaffected, albeit less efficient.

Already, China has been taking on an increasing share of Russian metals, highlights Morgan Stanley, pointing to a redirection of global trade flows over time, which has potential to boost premiums for non-Russian metal more structurally. Russian aluminium is also still flowing to Europe and Asia.

Potential disruption to base metals markets aligns nicely with the UBS preference for copper and aluminium over bulk commodities.

From among the large cap diversified miners, UBS reminds investors Buy-rated South32 ((S32)) is the most leveraged into base metals, followed by Rio Tinto ((RIO)).

Pure-play exposure to copper, nickel and aluminium may be achieved via Neutral-rated Sandfire Resources ((SFR)), Nickel Industries ((NIC)) and Alumina Ltd ((AWC)), points out the broker. The latter two companies are not currently under research coverage by UBS.

Already, a positive view on gold by UBS is supported by ongoing geopolitical tensions between Russia and the West, and any escalation in the Middle East.