Material Matters: Base Metals, Coal & Iron Ore

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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.

Decarbonisation tailwinds for base metals

Over the past 12 months, capex estimates for base metals miners have risen the most within the global mining sector, highlights Citi, as companies focus on metals which are enablers for global decarbonisation.

Amid property sector headwinds, the broker believes China will accelerate support for metal-intensive green industries such as renewables, electric vehicles, and the power grid to help meet growth targets, thereby underpinning manufacturing activity and metals demand.

Citi suggests the worst impact of the global rate tightening cycle is in the rear view mirror, with copper consumption remaining resilient.

The broker is still bullish on copper due to its secular demand story, broader growth exposure, and tight supply backdrop.

There has been a rebound in global manufacturing sentiment led by the US and China, explain the analysts, which has lifted long copper positioning and prices.

Overall, capex growth for the global mining sector should moderate to around 4% in 2024, according to the broker’s forecasts, following growth of 9.7% per annum over the last three years.

Despite consistent increases in recent years, total global mining capex is still -17% short of the peak attained in 2012. Underinvestment for many years has resulted in a lack of volume growth, explains Citi, despite a number of new projects around the globe.

Sector aggregate capex estimates have been revised higher for 2024 and 2025 by 8.4% and 11.6%, respectively, compared to estimates six months ago, with capex expectations rising most for precious metals followed by base metals.

Price forecasts for coking coal and iron ore

Global coking coal prices have recently collapsed on supply recovery and demand weakness, with the Australia prime hard coking coal (PHCC) benchmark falling by around -US$100/t so far this year to reach the lowest level since July 2023.

Seaborne coking coal weakness has stemmed from ongoing weakness in the Chinese steel market, explains Citi, amid consecutive rounds of metallurgical coke price cuts.

While robust demand out of India (which helped push prices above US$350/t in the fourth quarter of 2023) is expected to ease heading into the country’s general elections, the broker suggests the selloff is overdone, and expects restocking will emerge and support prices for coking coal over the second and third quarters of 2024.

Economic activity should pick up again after the Indian election, with pre-monsoon restocking also poised to support imports. The Chinese steel market too has shown some signs of bottoming as margins recovered on rebounding steel product prices and weak raw material prices, while blast furnace operating rates have also ticked-up.

Imports to China have been very sensitive to prices and opportunistic buying should emerge in the low-US$200/t range, predicts the broker, as was the case in the past two summers.

The outlook also looks constructive for coking coal prices in the last quarter of 2024 and the first quarter of 2025, with Citi analysts pointing to heightened weather disruption risks in Queensland from a potential shift to La Nina.

Citi’s 0-3 month coking coal forecast is US$250/t for Australian premium hard coking coal, rising to US$275/t on a 6-12 month view. Estimates for thermal coal for the corresponding periods are US$135/t and US$150, respectively.

Regarding iron ore, improving steel margins amid rising steel output have lifted prices by circa US$10/t from the recent trough to around US$106/t, though inventories at Chinese ports are higher, which could cap near-term price upside, suggests Citi. It’s thought an absence of further policy easing in China could also limit any rally.  

In an incentive for steel mills to restart, raw material prices have fallen faster than steel prices, highlight the analysts.

A gradual turn in activity could drive prices to the broker’s 0-3m target of US$120/t over the next three months.

Citi’s 6-12 month forecast for the iron ore price remains at US$100/t, while further out the US$85/t forecast for FY26 is also maintained.

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