If Trump and China get over their tiff, base metals could enjoy a happier 2019
While base metals prices continue to take a hit over a lack of faith that the US and China can reach a compromise in their trade war, things are forecast to be a lot rosier next year if the two nations can find mutual ground.
UBS is backing nickel, copper and aluminium in particular.
The London Metal Exchange price for copper this week slipped 0.85 per cent to $US6139.25 ($8491.23) a tonne, marking a new one-week low.
The nickel price slid 1.2 per cent to $11,080 a tonne and aluminium was down 0.2 per cent at $US1969.15.
US President Donald Trump and his Chinese counterpart Xi Jinping last weekend agreed to place new tariffs on hold for the next three months while they continue talks.
UBS commodities strategist Lachlan Shaw said the recent trade war ceasefire, if carried through, should lift sentiment toward trade war beat-up metals nickel, copper and aluminium next year.
He noted this came at a time of low inventories and supportive premiums.
Additionally, China’s infrastructure build should lift from the second quarter of 2019, supporting demand as property eases.
“The threat of a broad trade war stoked growth fears and short positioning across commodity markets, base metals particularly,” Mr Shaw explained.
“A trade war ceasefire reached at G20 should boost sentiment and see short positioning, especially in base metals, ease somewhat.
“World growth too should do a bit better as a result. Nickel, copper and aluminium may rally and outperform bulks in reaction.
“We are also starting to warm to aluminium on a 12mth+ view given evidence that China’s supply reform is gaining traction.”
Stepping up pollution crackdown
China’s “war on pollution” is continuing at pace, which is seeing drastic supply cuts from the Asian powerhouse.
Mr Shaw said even as industry is injecting extra cash to comply with more stringent emission standards, bad pollution is still expected to elicit strong, disruptive intervention from government through the key winter months.
Fat Prophets resource analyst David Lennox agrees the halt on increasing tariffs is good news for commodities.
Mr Lennox told Stockhead earlier this week that if the US and China take a more “conciliatory” approach then he would expect to see a “moderately better outlook for commodities longer term”.
Nickel in particular is in a better position than other base metals.
“A trade war ceasefire may aid a reversal of sentiment short term,” Mr Shaw said.
“But it is ongoing inventory declines coupled with the rise of EV batteries that keeps us on a positive footing toward nickel into the medium term.”
Junior explorer Estrella Resources (ASX:ESR) has uncovered itself some pretty nice high-grade nickel sulphides from a project called “Spargoville”.
The company revealed on Thursday grades of as high as 12.9 per cent. High-grade nickel is anything from about 3 per cent upwards.
Chief Christopher Daws said the current market reminds him a lot of the early stages of the nickel boom of 2007.
“The outlook for nickel is bullish with the forecast of large supply deficits and the need to provide quality nickel stocks to the EV/battery storage manufacturing industries,” he said.
Legend Mining (ASX:LEG) also revealed a new find this week — in WA’s highly fertile Fraser Range region.
The company told investors it had identified two new prospects from recent drilling at its Rockford project.
The project is a partnership between Legend (70 per cent) and wealthy prospector Mark Creasy (30 per cent).
Panoramic Resources (ASX:PAN), meanwhile, has completed the $15.1m sale of its Lanfranchi nickel project to Texas-based Black Mountain Metals.
The sale leaves it free and cashed up to focus on the restart of its Savannah nickel project.
The project was mothballed in mid-2016 following the decline of the nickel price.
But Panoramic now has itself a customer and the cash it needs to bring the project back into production, with first concentrate to be delivered in the March quarter of next year.
St George Mining (ASX:SGQ) last week announced its “best ever” hits from the Mt Alexander nickel and copper project near Leonora in Western Australia.
The company intersected thick, high-grade nickel and copper sulphides at the Investigators prospect.
The latest drilling program is aimed at expanding the resource.
Base metals prices set to climb
Although UBS has revised its price expectations down for 2019, it still expects copper, nickel and aluminium to fetch higher prices next year.
Copper is tipped to reach $US6371.35 per tonne, while nickel should make $12,786.80 per tonne and aluminium $2028.25 per tonne.
So which metals are going to be on the nose in 2019?
According to UBS, its “least preferred” commodities are alumina, gold and zircon.
With respect to zircon, analyst Glyn Lawcock says: “We don’t think the market appreciates how a major chunk of existing supply (~150ktpa) is to be lost through lower grade in the next couple of years at Iluka’s Jacinth Ambrosia”.
“Major producers are rationing customers,” he noted.
The alumina market, meanwhile, has born the brunt of China’s rapid ramp-up in output in response to the halt of production from the Alunorte refinery in Brazil and the US sanctions on Russia.
“China has proven to be the alumina supplier of last resort to world ex-China buyers, having commenced exporting material after the world price spiked dramatically higher than the China price due to the Alunorte and Russian sanction related outages,” Mr Lawcock said.
“Up to 430kt per month has flowed out of China, pushing prices lower.
“Ultimately, the alumina spot price should reset lower again once clarity is gained on the Alunorte restart and resolution of Russian sanction outages.”