Material Matters: Lithium Enthusiasm Is Back

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Two brokers anticipate a material lithium price rally, and analysts review iron ore and base metals price forecasts.

-Citi and UBS contemplate a material lithium price rally
-A modest late-2024 rebound for metal prices?
-A weaker-than-usual seasonal rally anticipated for iron ore
-Copper resilience from growing decarbonisation demand

By Mark Woodruff

Bounce for lithium prices

Citi, in research released today, reports November Guangzhou Futures Exchange (GFEX) lithium futures rallied by 8% on the back of reports that Chinese battery manufacturer Contemporary Amperex Technology Co Ltd (CATL) has suspended operations at its lepidolite mines in Jiangxi.

These mines account for around 6% of total LCE supply in China, points out the broker.

The analysts now expect the lithium market will run at small deficit over the next two-to-three months as recent closures and some restocking have seen the Chinese lithium market balance up in recent weeks.

Just yesterday, UBS suggested the Chinese lithium price would experience strong support at around US$8,600/t after the GFEX lithium carbonate (Li2CO3) price fell to an equivalent level last week.

This broker noted the spot price of Li2CO3 had been trading below CATL’s cash cost level since mid-July and forecast a suspension would lead to an -8% production cut for China’s monthly Li2CO3 production helping rebalance supply with demand.

Potential price upside

UBS anticipated upside of between 11-23% for the lithium price over the remainder of the year, though the price rise may be capped at circa US$10,968/t as CATL may resume its lithium operation at around this level.

Citi is even more optimistic in expecting a 20-25% rally in the lithium price as investors cover their short positions and prices rally to US$13,000-14,000k/t on Comex.

The new 6-12 month forecast by Citi is US$13,000/t-$13,200k/t for carbonate and hydroxide and US$950/t for SC6. It’s noted subdued ex-China EV sales over the period remains a major headwind for lithium consumption.

Over at RBC, long-term price forecasts for hydroxide, carbonate and spodumene remain at US$17,500/t, US$15,000/t and US$1,250/t, respectively.

In the shorter-term, the bank lowers price forecasts on ongoing demand headwinds and a persistent market surplus this year after relatively tame cuts to supply in the March quarter.

RBC also points to the negative impact of ongoing project ramp-ups, especially by the emerging suppliers, namely Zimbabwe, Argentina and Brazil.

Base metals and iron ore

Global manufacturing sentiment contracted further in August, with Citi highlighting new orders decelerated across China and other major developed countries.

The broker suggests Manufacturing Purchasing Managers’ Indices (PMIs) are to remain weak for the next couple of months, ruling out any meaningful short-term metals price rally based on prospects for a recovery in cyclical demand.

Grounded in three decades of seasonality analysis, Citi states the period May through October is typically softer for Chinese steel demand. Similarly, mining equities struggle to perform during the Northern Hemisphere summer and tend to bottom out by late-September/early-October and then rally strongly in the subsequent months.

Citi analysts remain cautious on base metals ahead of the US election in early-November with associated uncertainty likely to keep risk appetite subdued and delay any major incremental Chinese policy support.

In a broad summary for the metals complex, Citi reminds investors metals are leveraged to an eventual rebound in tepid cyclical demand growth. Physical markets are considered largely in balance or in small deficits with clear headwinds to supply growth, especially in the case of aluminium and zinc.

Citi’s forecasts over 0-3 months for both metals are kept at US$2,500/t and US$2,800/t, respectively.

While the threat of significant new/higher trade tariffs from a potential Trump presidency remains a key risk for metals markets, the analysts see a more constructive period late in the fourth quarter of 2024 and into early-2025. Federal Reserve interest rate cuts are anticipated, along with further policy easing out of China, on top of a potential upturn in global manufacturing sentiment.

In broad agreement, RBC Capital believes commodity prices have generally overshot on the downside and the stage is set for modest rebounds by the end of 2024.

Normalising inflation and easing monetary policy will be key themes for most major economies (ex-China), which RBC expects will be supportive for growth.

Citi points out share prices are languishing for big sector heavyweights like BHP Group ((BHP)) and Rio Tinto ((RIO)) with significant iron ore and copper exposures.

Unsurprisingly, the iron ore price has been weak given the soft China property data and worsening infrastructure outlook, but Citi suggests bottom-up indicators don’t look that bad and a seasonal rally may ensue – though the rally into the year-end will likely be much more muted than in previous years.

RBC expects fourth quarter 2024 demand for iron ore will be supported by seasonal construction demand, government funded infrastructure projects, and seasonal re-stocking, and forecasts prices will recover to around US$110/t by year’s end.

On the copper front, Citi highlights robust decarbonisation-related demand growth (which rose by 1.6% year-on-year in July) continues to underpin global copper consumption resilience.

This broker maintains its 0-3-month price forecast for copper at US$9,500/t.

Global gold equities have broadly caught up with the gold price performance year-to-date, notes Citi, and incremental upside depends on a further rally in the gold price.

RBC raises its near-term gold prices forecasts by between 1-4% and in the long-term by 10% to US$2,200/oz citing higher operating costs, cost inflation, increasing discount rates, heightened political volatility and higher investment demand.

Across RBC’s research coverage, unchanged key picks are BHP Group, Sandfire Resources ((SFR)), Pilbara Minerals ((PLS)), Northern Star Resources ((NST)), Bellevue Gold ((BGL)), Westgold Resources ((WGX)), Regis Resources ((RRL)), South32 ((S32)) and Mineral Resources ((MIN)).

While bulks could outperform near-term, RBC has a relative preference for gold/base-metal exposure. The largest earnings forecast increases are reserved for RBC’s gold equity coverage, resulting in 5-6% higher 12-month price targets.

The analysts highlight Regis Resources, Ramelius Resources ((RMS)) and Westgold Resources for their high near-term free cash flow (FCF) yields.

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