Rio shutdown more evidence of supply problems outweighing demand as key commodity price driver

Iron ore last year, nickel and titanium minerals this year (so far) with the connection being commodity price increases caused by supply disruption – with shortages and “outages” an investment theme likely to be as significant as demand.
2nd July 2021
Tim Treadgold

Iluka Resources was the major beneficiary in Australia from this week’s big event, the closure of the world-class Richards Bay titanium minerals processing centre on South Africa’s east coast.

The loss of supply from Richards Bay drove Iluka shares to a 10-year high of $9.27 before the stock settled at $8.89, up 73c (9%) over the week.

If Rio Tinto, the owner of Richards Bay, keeps it closed for an extended time following outbreaks of communal violence which has seen some its staff murdered, then prices for titanium minerals and zircon could follow the same route as iron ore after supply cuts in Brazil - up sharply.

Other stocks exposed to titanium minerals such as ilmenite and rutile also performed well because of the Richards Bay supply event. Sheffield Resources added 5.5c (18%) to 36c. Strandline put on 1.5c to 21c while Base Resources crept up by 1c to 30c.

Nickel’s price driver this week was the start of industrial action at the big Sudbury operations in Canada of the mining giant Vale, which gave nickel a short boost before the price faded back to $US18,212 a tonne – but with one leading investment bank tipping a price surge over the next three months.

Citi, which has been a nickel bull since the start of the year, reckons the metal will hit $US20,500/t thanks to strong stainless-steel demand and restocking in the battery metal supply chain as electric vehicle demand soars.

The bank said it was also bullish on oil and copper with Brent quality crude tipped to hit $US85 a barrel while copper would retrace its recent pull back to reach $US10,500/t, up another $US1000/t to what would be an all-time high driven by demand and concern about supply cuts in politically unstable South American countries.

The importance of supply issues in the next phase of the commodity cycle was highlighted in a separate report by another bank, UBS, which warned that Chinese Government action to calm markets meant that most prices could fall over the next 12-to-18 months as the post-Covid reflation trade ended.

UBS said the greatest downside threat was to iron ore and while record dividend payments were on their way, balance sheets are strong and capital expenditure contained, the free cash flows of 2021 “are not sustainable”.

In a gloomy view of what slowing demand will do to prices, UBS sees iron ore falling by 50% next year to $US101/t, copper dropping to $US7700/t and gold continues its retreat with a slide down to $US1675.

What UBS is not factoring into its pessimistic outlook is the type of supply events which this week delivered a boost to nickel and titanium minerals and which could be a big factor in copper next year if Chile and Peru persist with attacks on their mining industry.

Morgan Stanley weighed in on the commodity direction debate earlier in the week with a report that advised investors to look more closely at energy rather than metals, though in the emerging era of battery metals the two are becoming inseparable.

In the words of Morgan Stanley: “As the world emerges from lockdowns, buying stuff will make way for doing things”, favoring energy as an investment theme.

Oil and coal are examples of the energy winning theme, up significantly since the start of the year, oil by 57% to $US75/bbl and thermal coal up by 74% to $US129/t.

Demand for old energy is spilling over into new energy commodities, led by lithium, which received a double-barreled boost in the form of an upgraded price forecast from Macquarie Bank and an even more bullish report into overall battery metal demand from Bloomberg New Energy.

Macquarie reckons lithium, in its carbonate form, will rise from $US9982 a tonne in the Asian market this year to $US10,875t next year and then up to $US13,000 in 2024.

Spodumene, the material produced by Pilbara Minerals, has been upgraded by the bank from a forecast of $US678/t next year to $US880/t, a 30% increase by Macquarie which also reckons that the lithium market has entered a period of “perpetual deficit”.

Until a supply side response kicks in, the global lithium deficit is tipped to rise from 2900t this year to 20,200t next year and then up to 61,000t in 2023.

“In the longer term, we believe the lithium market is likely to be in perpetual deficit,” Macquarie said. “As a result, lithium prices are expected to continue to rise, moving into incentive pricing (encouraging new projects) by 2024.”

Macquarie’s optimism was too late for Pilbara which slipped 12c lower this week to $1.46 while other lithium stocks also weakened. Orocobre, down 16c to $6.40 and Galaxy, down 8c to $3.65.

Independence Group, which is also a nickel producer, signed off on its purchase of a 49% stake in Greenbushes lithium mine and associated processing plant, to enjoy a 33c price rise to $7.97 and an upgraded buy tip from Canaccord Genuity which reckons Independence is heading for $8.75.

Bloomberg New Energy has lifted its forecast for lithium demand from battery makers by 35% with passenger vehicles accounting for 72% of the market as sales increase from three million last year to 14 million vehicles by 2025.

In other lithium news, Sayona won court approval to acquire the Canadian-based North American Lithium and saw its share price rise by 1.5c to 8.2c and ioneer signed a sales deal with a Korean battery business for material from its Rhyolite Ridge project in the U.S. and enjoyed a 5c share price rise to 36c and a buy tip from Canaccord, which sees the stock heading up to 60c.

Gold, despite the dismal forecast from UBS mentioned earlier, showed encouraging signs of life yesterday (Thursday), rising by $US20 an ounce to $US1775/oz, taking most gold stocks with it.

Northern Star, as it said farewell to long-term chief Bill Beament, added 5c to $10.13, but only after a mid-week plunge to $9.78. Evolution rose to 8c to $4.64 and exploration favourite De Grey managed a 1c rise to $1.20.

Gold-sector news events included Capricorn pouring first gold at its Karlawinda project in WA, followed by a 10c share price rise to $1.93. Gold Road downgraded production guidance and was whacked with a 10c share price fall to $1.31, but remained a favourite of Macquarie and Canaccord, which see the stock climbing back to $1.50, according to Macquarie, and $1.95, according to Canaccord.

Other news and interesting market moves interest this week included:

  • Freshly floated Australian Rare Earths made a splash on debt with its 30c shares trading up to 58c before settling at 53c, a gain of 76% on day one for the company which is exploring the Koppamurra ionic clay deposit in South Australia’s Coonawarra district.
  • Challenger Exploration added 4c to 27c after reporting a set of encouraging assays from its Hualilan gold project in Argentina with a best hit of 15.6 metres at 71.7 grams of gold per tonne.
  • Aurelia Metals reported its best-ever base metal intersections at its Federal project in NSW with a top assay of 18.4% combined lead and zinc plus copper and gold readings over 70m from a depth of 583m. On the market, Aurelia added 7c to 44c.
  • Predictive Discovery put on 1c to 9.3c after reporting high-grade gold intercepts at its Bankan project in Guinea, including 44m at 8g/t.
  • Todd River Resources added 2.5c to 8.7c after reporting extensive nickel, copper and platinum group metals in augur samples at its Berkshire Valley project in WA, about 100km north of the Julimar palladium discovery of Chalice Mining, and
  • Black Canyon said it had extended known manganese mineralisation by 5km during surface field work at its Flanagan Bore project in the Pilbara region of WA. The stock added 2c to 26c.

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