Falling supply and prospect of a trade war truce drive investors into industrial metals
Supply cuts and renewed optimism of a deal to end the China v US trade war triggered a modest realignment this week by investors
9th November 2019
Supply cuts and renewed optimism of a deal to end the China v US trade war triggered a modest realignment this week by investors who shifted funds into industrial commodities and away from gold and other safe havens.
How long that trend can continue will be very much influenced by political factors unfolding around the world, from Brexit in the UK to impeachment speculation in the US and civil unrest in Chile and other important South American copper-producing countries.
If the increasingly severe effects on demand caused by the trade war are mitigated by a truce then the importance of recent supply cuts in nickel, copper and lithium will become more important – and the way cleared for higher prices.
The problem with that rosy scenario is that much depends on the unpredictable nature of political events which, if they take a turn for the worse, could see gold charge back over the $US1500 an ounce mark, which it was testing towards the end of the week after a poor start.
Without an obvious economic trend, other than sluggish growth, the outlook is for stock-specific events and tightening supply to be the major market movers.
Nickel, so far, has been the metal most effected by supply factors courtesy of Indonesia’s ban on the export of unprocessed ore and speculation that a big Chinese steel mill has snapped up a large share of the metal held in terminal markets such as the London Metal Exchange.
The problem with nickel is that while there has been a big fall in LME stocks (they’re down 68% over the past 12 months to a five-year low of 68,000 tonnes) the price hasn’t moved higher, a sign that the leading Chinese stainless-steel maker, Tsingshan, could be playing games with nickel, building a big private stockpile in order to damage domestic rivals.
Investment banks do not believe there is a nickel shortage, which is why they see the price edging down from its current $US7.38 a pound to around $US7/lb, which is still a fair return for most Australian producers.
Panoramic was the pick of the nickel sector, rising 12c to 44c, largely because of a share-swap merger proposal from Independence Group. Interestingly, Independence also rose, by a modest 5c to $6.43, though the increase is unusual because in most takeovers the bidding company generally falls.
Mincor was another nickel play to catch the eye of investors, though not because of the metal price or corporate activity. It was able to deliver a 6c rise to 68c on the strength of excellent exploration and reserves news from its Cassini project, which is now estimated to contain 54,000 tonnes of metal.
Copper stocks held on the LME have also started to decline, and while not to the same extent as nickel, there is the potential for a supply issue developing as civil unrest stirs in Chile and Peru, two of the world’s biggest copper producers.
A US10c/lb uptick in the copper price over the past month to $US2.68/lb doesn’t seem significant but it has been booked during a trade war which has had a significant effect on the global economy. In theory, copper should not be rising unless there is concern about supply and optimism about a trade deal.
ANZ Bank noted the changing copper-market sentiment in this week’s commodity notes saying: “Investors are becoming less bearish on copper as fundamentals shift”.
Sandfire and OZ Minerals were good examples of the copper “bounce” rising this week by 8% and 6% respectively with Sandfire up 46c to $6.21 and OZ up 62c to $10.77.
Lithium, perhaps the most over-supplied of metals thanks to the mad dash to develop mines ahead of a forecast surge in demand which is proving slow to arrive, had a better week thanks to supply cuts, including the mothballing of the Wodgina project in WA before it was officially opened.
The removal of supply can be seen in the share prices of a number of lithium stocks, including Altura, which rose by 1.1c to 6.7c after reporting solid October production numbers and Pilbara Minerals, which is itself in a production limbo, had its best week in several months.
On Tuesday, as news of the Wodgina decision was being digested, Pilbara rose to a one-month high of 38c, before slipping back to 33c, roughly where it was a week earlier though the price bounce was an example of how supply outages have become as important in setting prices as demand.
What’s more interesting about Pilbara than local events is an international deal which saw Tesla, a leading electric-car maker, sign a preliminary deal to buy batteries from Contemporary Amperex Technology Ltd (CATL), the world’s top battery maker – and the same Chinese company which last month agreed to invest $55 million in Pilbara, which will become one of its leading lithium suppliers.
Iron ore was in the news for three reasons:
- The price refuses to fall, largely because of the after-effects of events in Brazil which sharply-reduced exports (another supply shortage event).
- Iluka, a mineral sands producer, said it was looking at spinning off an iron ore royalty it holds over much of BHP’s Pilbara production, potentially creating a major new, royalty-based, business which would be new for Australian investors, and
- Fortescue Metals stormed back as an investor’s darling after reporting a strong production start to the current financial year with its shares trading up to a 12-month share price high of $9.59 on Tuesday before easing back to $9.44 for a gain over the week of 42c.
Smaller mining stocks were in the news for less positive reasons with some starting to feel a cash squeeze as more nervous investors stick to the sidelines during the trade war and global economic slowdown.
Despite the tight conditions, the overall appetite for junior miners was impressive in the three months to September 30 with an estimated $1.1 billion raised, the best quarter since March, 2018 and a strong pick-up from a slow start when just $450 million was raised in the first three months.
Other news and market-moving events included:
- Graphite stocks, after months in the sin bin, staged a revival, perhaps reacting to speculation the battery-story is re-booting. Kibaran added 2c to 9.8c after releasing a positive report on its Ecograf technology and Talga rose by 3c to 53c on news that a ship in Germany is being painted with a mixture containing Talga’s graphene.
- ioneer, an emerging US-based lithium and boron producer, traded up to a 12-month high of 27c on Monday as interest grows in its Rhyolite Ridge pilot plant in Nevada, but later slipped back to 25c, where it started.
- Zenith reported encouraging rare earth chip samples from its Laramie project in the US State of Wyoming including an 80-metre traverse grading 0.4% total rare earth elements. On the market, the stock added 0.4c to 5.4c.
- Stavely Minerals reported fresh high-grade copper and gold intercepts from step-out drilling at its Thursday’s Gossan project in Victoria including 10.3m at 3.09% copper and 1.69 grams a tonne of gold but its share price lost 14c to $1.16 largely thanks to last month’s big capital raising.
- Metro Mining reported strong October production of bauxite from its Bauxite Hills project in Queensland, news which lifted the stock by 2c to 14c, and
- Emmerson Resources added 2c to 12c after reporting encouraging gold assays from drilling at its Tennant Creek project in the Northern Territory, including 10m at 3.01g/t.
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