Commodities | Sep 25 2024
A glance through the latest expert views and predictions about commodities: Brokers turned positive on iron ore, even before PBOC stimulus; the outlook for lithium & mineral sands markets.
-Brokers highlighted upside for iron ore, even prior to PBOC stimulus
-Morgan Stanley's lithium outlook and stock choices
-Pigment, zircon and mineral sands markets
By Mark Woodruff
Positive iron ore outlook, even prior to PBOC stimulus
It's time again for investors to look at the iron ore sector on the ASX, suggests JP Morgan, as shares are trading at some of the cheapest valuation metrics the broker has seen, and iron ore prices have shown strong gains in the period November-February over the past ten years.
Ongoing demand weakness in property, combined with a deceleration in infrastructure activity, has led to sluggish steel market conditions in China, observes the broker, which has an Overweight rating on all iron ore stocks under coverage.
Additional new research from analysts at Barclays Bank indicates near-term sentiment towards iron ore has continued to deteriorate in China, with bearishness and light positioning seen as creating an opportunity for investors.
On the ground in China, Barclays has noted a lack of confidence in stimulus measures by the government and medium-term supply risks for iron ore. Several contacts suggested more pain was likely before a nadir in pricing was reached, with the Central Economic Work conference in December a potential upside catalyst.
And then, only a day after these updates by Barclays and JP Morgan, the People's Bank of China (PBOC) and financial regulators, yesterday unveiled a batch of new stimulus measures to lift the economy resulting in strong gains for the Resources sector (and iron ore stocks) on the ASX, with further gains in overseas markets last night.
Returning to JP Morgan's research, the analysts note share prices of iron ore companies had previously fallen due to an uncertain Chinese steel production outlook and fears around peak production from 2026 at the Simandou mine in Guinea, which is 53%-owned by Rio Tinto ((RIO)).
Very low steel mill profitability (prompting materially lower output through July and August) and lower property activity forecasts cause this broker to predict Chinese steel output will fall by -3.5% in 2024 compared to the -0.5% decline previously expected.
A rebound for steel demand is seen unlikely in 2025, and the analysts retain a forecast for another -1% fall.
Despite this gloomy backdrop, iron ore prices remain supported in the low US$90's, observes JP Morgan, but lower Chinese steel consumption estimates have prompted the broker to reduce iron ore price forecasts by -3-5% over the next three years.
Each year across 2024-26, the broker forecasts prices will average US$110t, US$100t and US$95t, respectively.
For the fourth quarter of 2024, the analysts expect a seasonal re-strengthening of iron ore prices into year's end, which should see the price average back to US$105t.
Favoured iron ore exposures
JP Morgan's top pick is Fortescue ((FMG)) on valuation, recent share price underperformance, and an attractive dividend yield.
This broker prefers BHP Group ((BHP)) over Rio Tinto in the near-term for its copper exposure (but notes Rio Tinto is marginally cheaper). The share prices for both Deterra Royalties ((DRR)) and Mineral Resources ((MIN)) are also expected to track the iron ore price higher.
Analysts at Barclays favour Rio Tinto on bearish positioning, iron ore's seasonal recovery, and a favourable valuation, with the current share price implying a spot price of US$73t for iron ore.
Broker views on lithium
As the lithium price is trading at the 70th percentile of the cost curve, the price could stabilise from here, suggests Morgan Stanley, noting the recent increase in supply cuts.
Following a third quarter sales slump for luxury electric vehicles (EVs) in China, sales may improve into year's end, suggest the analysts. It's felt demand may be spurred by original equipment manufacturers (OEMs) engaging in more aggressive pricing for strategically focussed models due to higher competition.
Further, China is entering the traditional peak demand season, explains the broker, and sales may be boosted by an extra RMB10-15,000 trade-in subsidy from local governments without compulsory vehicle scrapping, and a strong EV model pipeline.
Forecast to generate around 12% of total revenue in FY25 from its lithium assets, Mineral Resources ((MIN)) is Morgan Stanley's preferred exposure with an Overweight rating.
Management's business transformation is expected to de-lever the balance sheet from 2025, with the broker forecasting a free cash flow (FCF) yield of 14% in FY26.
As lithium headwinds are largely priced-in, the analysts have an Equal-weight rating for Pilbara Minerals ((PLS)) but are rated Underweight for IGO Ltd ((IGO)) where risks include the Greenbushes mine plan and potential for management to go on the acquisition trail.
The analysts at Barrenjoey have been on tour with management at Arcadium Lithium ((LTM)) discussing strategic vision and growth plans and visiting the lithium hydroxide processing plant in Bessemer City (North Carolina), as well as the lithium carbonate processing plant in Becancour, Quebec.
Unfortunately, this broker expects cuts to consensus forecasts across volumes, capex and opex (after guidance for each measure was provided across 2025-2028). Management is resetting expectations in an effort to conserve cash in the weak lithium price environment, explains Barrenjoey.
Regarding overall demand, by 2030 management anticipates the majority of growth will come from EV/Hybrid vehicles, followed by Portable Electronics, and Energy Stationary Storage.
On the supply side, the majority of growth should arise from China, followed by South America, Australia, Africa and North America, in management's view.
Barrenjoey's 12-month price target for Overweight-rated Arcadium Lithium falls to $5.00 from $5.70 due to a higher forecast for total capex to 2028.
Management's total capex guidance for 2025 came in more than 50% above consensus expectations, with the remaining Sal de Vida (lithium brine in Argentina) spend falling largely in the 2025 year, against consensus expectations for a spread across 2027-2028.
On the flipside, this new FY25 guidance meant 2026-2028 capex will be less-than-expected. The remaining capex spend for Fenix (lithium brine in Argentina) of -US$340m also came in below the consensus forecast.
The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE
If you already had your free trial, why not join as a paying subscriber? CLICK HERE