Up, Up, Down, Down: Lithium and rare earths outperform the commodities complex to bounce off 2023 lows in May
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% Change: +10.42%
For the first time this year we welcome lithium back to the winners’ circle, as the ructions from within China that sent chemical prices tumbling from more than US$80,000/t to under US$40,000/t begin to unwind.
Lithium prices in the world’s biggest market for the commodity have dramatically turned back for the better over the past month.
According to the last weekly assessment by Fastmarkets, lithium hydroxide is now fetching 300,000RMB/t, equivalent to around US$40,000/t, with carbonate slightly higher.
Spodumene, the main product churned out by Australian hard rock miners, continues to pick up a hefty price on the spot market, despite falling US$270/t over the past fortnight.
Confidence in the market has been demonstrated with a wave of M&A in the sector. Last month saw Allkem announce a friendly $16 billion deal to merge with US-listed Livent, which will create the world’s third biggest lithium producer by lithium carbonate equivalent tonnes.
Leo Lithium (ASX:LLL) meanwhile hit an all time high this week after its JV partner in the Goulamina mine in Mali, Chinese giant Ganfeng, agreed to tip $106 million into the stock for a stake a little under 10%, in a move that should see an accelerated ramp up at Africa’s first spodumene mine to 1Mtpa, as well as the proposed construction of a chemical plant in Europe.
On the flipside, there are concerns a renewed overtone of bearishness could see Chinese producers and battery makers pull the market down again.
“The recovery in the downstream nickel cobalt manganese battery sector is not as good as what had been expected in the beginning of May,” a Chinese lithium producer told Fastmarkets.
“Consumers are feeding on stockpiles of lithium hydroxide that they built up at the end of April. There are also concerns that current prices may not be sustainable.”
There are also concerns spodumene prices may be too high for Chinese lithium chemical producers.
Most large scale miners are now in the process of heading further downstream, trying to capture a competitive advantage by supplying their own spodumene into converters or selling their material for toll treatment in China.
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Everybody wants rare earths, and they’re proving to be a bit of a commodity du jour, with new companies moving into the space seemingly by the day.
But recent prices have been tepid, with neodymium-praseodymium oxide falling from over US$100/kg at the end of last year to a little over US$60/kg last month.
In a similar to mode to lithium, NdPr prices have bounced back after the Labour Day Holiday in China, rising steadily over the month despite concerns about industrial demand in the major critical minerals hub.
UBS analysts Levi Spry and Dim Ariyasinghe said in a recent note on Lynas Rare Earths (ASX:LYC), which last month won approval to continue operating cracking and leaching at its plant in Malaysia until at least the end of this year in a major regulatory win, that rare earths prices may be hitting a bottom.
“Our base case for now is that the seasonal inventory build ahead of the Spring Festival closures will help prices stabilise into year-end but a lot hinges on consumer confidence and the broader economic recovery in the interim,” they said.
“While industry feedback tells us that some cost support is coming in at these levels, we need to build conviction on this given history showing sustained periods of price below US$50/kg.”
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Uranium is the one commodity that has not fallen prey, it seems, to extreme volatility this year, making a regular appearance in the winners’ list and hovering around the US$50/lb mark.
There are some analysts who caution against getting too bullish on uranium.
Far East Capital’s Warwick Grigor for instance warned there was a lot of capacity that could be switched on as shortages emerge in utility inventories to fill the gap.
A number, including Paladin Energy (ASX:PDN), Boss Energy (ASX:BOE) and his sector pick Peninsula Energy (ASX:PEN) have already approved restarts as contracting from nuclear plant owners begins to ramp up.
According to Boss, well, boss, Duncan Craib at the Resources Rising Stars Conference on the Gold Coast in May, that US$45-50/lb level was becoming a floor price in contract negotiations.
It’s worth noting the spot price was below US$20/lb around five years ago.
“We thoroughly believe there’s going to be a pinch point between now and the next three years where it’s likely to give an over-reaction to the commodity price because there’s simply not enough new uranium supply,” Craib said.
“It follows that the best deal a new uranium producer can enter into in a rising market is to enter into market related contracts with a strong floor and a high ceiling.
“Cameco’s quarterly announcement just made reference that the floors are now US$45-50, ceilings at around US$75-80/lb.”
There are a few clouds over certain parts of the sector. Rumours of plans to partly nationalise Namibian mineral assets sent Paladin shares down late in the month, with concerns it could have to cede part of its 75% owned Langer Heinrich mine to the Namibian Government.
The project is due to return to production in Q1 2024 for the first time since entering mothballs in 2018.
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Iron ore’s price fall has not been as stark in May as in April, but there have been few signs a major rebound is on the cards either.
The muted trading in iron ore prices comes amid a tough outlook for manufacturing and property in China, along with negative steel mill margins which could hurt demand for iron ore at current prices, which remain well above the cost point of the majors.
“In China, falling industrial profits and poor demand have impacted the profit margins at domestic steel mills recently,” ING’s Ewa Manthey and Warren Patterson wrote.
“Meanwhile, the China Metallurgical Industry Planning and Research Institute expects the total steel demand in China to drop to 910mt this year from 920mt in 2022 following weak demand from the construction sector.
“Steel demand from the property sector is expected to decline this year as well, while China will continue to reduce domestic steel output and replace older steel capacity this year in its constant effort to meet the set decarbonisation goals.”
There remain specks of positivity, especially if China can finally execute the post-Covid rebound so many expected in the second half of 2023.
A centralised iron ore buyer in China, the China Mineral Resources Group, is yet to really take the market by the balls (our description), according to reports from Reuters, with steel factory owners saying they aren’t seeing lower prices from the intervention of the CMRG.
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It would have been virtually unthinkable seeing coal back here in somewhat normal territory six months ago.
Few executives seemed as bullish about the supply-demand metrics for their commodities as coal miners, who were talking of long-term structural undersupply caused by the unfashionable nature of the fossil fuel and a growing trend of protests, finance blacklisting and regulatory roadblocks on new developments.
But a milder than expected northern winter has put a dent in the demand side of the market, with reports European stockpiles are being sold off into Asia amid strong renewable generation and high natural gas storage levels.
Not all brands of coal are alike.
At US$223.50/t, premium hard coking coal is at a big premium to thermal right now, a reversal of the unusual discount it copped for much of last year as energy shortages persisted at a time of weak steel demand.
But met coal prices could be sensitive to any planned steel production cuts in China later this year, with negative mill margins and a strong start to 2023 raising the prospect of lower output through the second half.
We may or may not be at a bottom for thermal coal, with Europe’s recent gas storage level at 68% of capacity, well above the five-year average of around 50%, Commbank’s Vivek Dhar said.
“The decline in both thermal coal and gas prices has slowed from earlier this year, raising the prospect that prices for both commodities are near a bottom,” he said in a note.
“However, we are surprised by just how quickly both commodities have declined this year.
“Northern hemisphere weather (i.e. warmer than usual summer and colder than usual winter in the northern hemisphere) likely hold the key for a rebound in both commodities. In any case, we flag downside risks to our thermal coal and LNG price forecasts.”
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Copper has always seemed to have at least one investment bank in its corner, with long term bulls Goldman Sachs commonly beating the drum for the commodity.
That has mediated recently with a poor outlook for Western manufacturing growth seeing the investment bank, which famously called copper the new oil and suggested it could hit US$15,000/t and above, dropping its 2023 forecast from US$9750/t to US$8698/t.
Hedge funds are also net short on copper prices for the first time in three years, making investment gambles on the price of the commodity going down.
Others say the recent dip for copper, falling below US$8000/t briefly towards the end of May, is only momentary.
Bank of America still held to a US$10,000/t price target on expectations China would make major investments in its power grid through the back end of 2023.
Ivanhoe Mines chairman Robert Friedland, famed for his role in the discoveries of the Voisey’s Bay nickel deposit and Oyu Tolgoi copper-gold mine, says China will recover in the second half, calling copper’s recent fall a momentary phenomenon.
“It’s momentary. The world’s worried about the US budget crisis and there’s all kinds of worries about recession, rates have been rising worldwide,” the Ivanhoe Mines chairman said.
“But we take the long term view on copper and we’re very, very bullish on demand. I just came from Beijing, I think the mood there is good.
“We’re facing a crisis for finding enough copper.
“We think we need to mine as much copper in the next 25 years than has been mined in all of human history if we’re to have any, any possibility of having the energy transition we all desire.”
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Gold continues to pound away at the glass ceiling above US$2000/oz. But it can’t seem to sustain a run beyond the magical mark.
That is despite a really fertile environment for the precious metal.
Banks have gone bust, governments seem to be tiring of using rate hikes to curb inflation and economic activity is starting to wane.
In these situations investors and nations head for safe havens to protect their nest egg, and that has seen central banks continue to buy gold at accelerated rates while bar and coin investments, especially in America, are on the rise.
Just what will it take to get there and pierce that resistance beyond US$2050/oz?
Gold’s run early in the month was closely aligned with concerns the Biden Administration would not be able to deal with Congress Republicans over raising the US debt ceiling.
OANDA’s Ed Moya says growing confidence the ceiling will be raised will not necessarily be bad for bullion.
“A debt deal is not necessarily bad news for gold. In early May, gold was surging as the risk of a US default was rising. Congress appears to be in a position to pass a debt deal that will avoid a catastrophic default, which initially was hurting gold prices,” he said.
“The details behind the proposed piece of legislation includes significantly lower spending, which will be a major blow to the economic outlook and likely trigger a much harder hitting recession.
“Another dose of robust labor data is also raising the risk that the Fed will need to do more tightening that will eventually lead to much weaker lending.
“Unless inflation plays nice over the next few months, the US economy is likely headed towards a recession. The risks of inflation being sticky should be the base case, which means the Fed will raise rates at least once more.”
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China’s weak industrial data has taken nickel with it along with iron ore and copper.
Economic performance elsewhere in the developing world has hurt.
The slide in prices across May prompted S & P Global Market Intelligence to knock down its LME price forecast for 2023 from US$25,322/t to US$23,237/t, largely, its analysts say, due to lower primary consumption in Indonesia, the world’s largest producer of the stainless steel and battery ingredient.
It stainless steel plants have been cutting output due to weak downstream demand in China. Stainless steel output in China itself fell 4.1% YoY in April.
Weak consumption means a nickel market surplus previously forecast by S&P at 152,000t could be as large as 222,000t this year.
Prices correct as of May 31, 2023.