-Lithium supply glut a temporary blip
-Current iron ore prices may be unsustainable
-Favourable long-term outlook for copper<\/strong><\/p>\n
By Angelique Thakur<\/p>\n
All that glitters is not gold (some of it is silver too)<\/u><\/p>\n
TD Securities points to an increase in silver <\/strong>prices since the sell-off in March, driven by a rebound in industrial demand and central bank stimulus measures.<\/p>\n The analysts forecast the precious metal’s price to shoot to peak at US$22\/oz before stabilising at US$20\/oz in 2024.<\/p>\n Pandemic-disrupted production in Mexico and Peru forms about 35-40% of global production of silver and TD Securities estimates the lost supply at circa -40moz to-date.<\/p>\n Even as the mines resume functioning, many are yet to attain full capacity.<\/p>\n With Purchasing Managers' Indices (PMIs) on the rise globally, the broker forecasts industrial demand for silver to rebound by 6% in 2021, at a level similar to 2019.<\/p>\n Contrary to the relatively gradual increase in industrial demand, ETF holdings <\/strong>have increased by 25% year to date, to a record level of 765moz.<\/p>\n TD Securities predicts investment demand will remain strong for the next several years driven by the Fed’s quantitative easing measures (among other factors).<\/p>\n For investors worried about a resurgence of coronavirus cases, gold <\/strong>remains a key safe-haven investment.<\/p>\n ANZ Bank expects this to remain the case, with the uncertain macroeconomic outlook and stimulus measures helping gold’s cause.<\/p>\n UBS’s preferred pick in gold is Saracen Mineral Holdings <\/strong>((SAR)) with its strong growth prospects in production, followed by Newcrest Mining <\/strong>((NCM)) which is still seen as attractively valued.<\/p>\n The broker advocates a move away from Northern Star Resources <\/strong>((NST)) and Evolution Mining <\/strong>((EVN)), both rated Sell.<\/p>\n Lithium: Only a matter of time<\/u><\/p>\n Citi analysts are bearish on lithium <\/strong>in the short term and expect demand to drop -6% this year, led by a supply glut <\/strong>which is expected to last till 2024.<\/p>\n This situation, however, is considered unsustainable and Citi forecasts prices to improve, driven by the rising electric vehicle <\/strong>battery demand.<\/p>\n Over the medium-term, Citi forecasts a compounded annual growth in demand of 19% till 2025 while admitting there will be no re-run of the euphoria witnessed during 2016-18.<\/p>\n Even so, the broker believes It is only a question of when and not if for lithium demand to hit 1mtpa.<\/p>\n While this is expected to happen by around 2027, Citi highlights a price increase to US$9,000\/t is needed in the long run to help achieve this level of supply.<\/p>\n Citi prefers Orocobre <\/strong>((ORE)) and suggests a move away from Pilbara Minerals <\/strong>((PLS)).<\/p>\n Base metals: Supply issues to remain for now<\/u><\/p>\n Contrary to UBS’s expectations, the second quarter did not see a decline in metal demand. Rather, the faster than expected recovery in China and production disruptions around the world kept the supply of metals tight.<\/p>\n This can be seen from the MSCI World Metals & Mining Index which was up 25% over the second quarter against the MSCI World Equity Index's 19%.<\/p>\n The ASX300 Metals & Mining Index was also up 27% in the second quarter (to June 24) versus the ASX 300, which was up just 18%.<\/p>\n For now, UBS prefers iron ore, <\/strong>although it does consider current prices (around US$100\/t) unsustainable and forecasts a drop to below US$90\/t before this calendar year is over.<\/p>\n This is corroborated by commodity analysts at ANZ Bank who feel that while iron ore supply remains vulnerable, the market may be overpricing the risk of supply disruptions.<\/p>\n UBS’s top picks are BHP Group <\/strong>((BHP)) which is considered attractively valued with a diversified portfolio (will also be paying dividends), along with Alumina Ltd <\/strong>((AWC)) and South32 <\/strong>((S32)), both of which offer exposure to alumina.<\/p>\n Coronado Global Resources <\/strong>((CRN)) is upgraded to Buy owing to its attractive valuation and exposure to metallurgical (coking) coal<\/strong>.<\/p>\n Production disruptions in South America coupled with a ban on ore exports by Indonesia have also hit nickel <\/strong>supply pretty hard. UBS expects the full impact to materialise by the end of 2020.<\/p>\n UBS suggests a recovery on the global front will support nickel prices and forecasts a recovery to US$7\/lb in 2021.<\/p>\n While IGO <\/strong>((IGO)) is UBS’s go-to stock for nickel, Western Areas <\/strong>((WSA)) has been downgraded to Neutral from Buy.<\/p>\n Copper Conundrums<\/u><\/p>\n With the world moving towards electric vehicles that use about 80% more copper than a traditional internal combustion engine, copper <\/strong>is expected to play a crucial role in coming times.<\/p>\n Wilsons pegs the demand increase due to the new segment at roughly 20%.<\/p>\n Currently, the largest consumer of the industrial bellwether is China which consumes a little more than 50% of global demand.<\/p>\n The week ending June 19 saw copper prices on the London Metals Exchange <\/strong>(LME) trading above pre-pandemic levels.<\/p>\n In fact, the copper contracts were trading in backwardation – meaning spot price was higher than the future price – with premiums being paid for the prompt delivery of the metal.<\/p>\n This has led to global stockpiles falling to levels not seen in over a decade, observes Wilsons.<\/p>\n Copper stockpiles on the Shanghai Futures Exchange rose by three times to 380kt from 124kt between January and March, falling back to just 128kt, the speed astonishing many.<\/p>\n It is the same on the London Metal Exchange with inventories depleted materially, leading many to ask what exactly is going on?<\/p>\n Half the answer lies in a recovering China, with rising demand leading to an expansion in credit, automotive output, new property and investment in fixed assets (seen in May).<\/p>\n The other half can be explained by the pandemic-induced supply issues. This includes the scrap copper or recycled copper market with collection centres closing.<\/p>\n Wilsons reveals that even before the onset of the pandemic, copper markets were projected to be in deficit by 2021.<\/p>\n The pandemic only seems to have aggravated the situation, impacting new exploration projects for the metal, further increasing supply woes.<\/p>\n Today, copper has one of the tightest supply\/demand outlooks of any base metal, points out Wilsons. Whereas UBS expects the copper market will move to a deficit of about -300kt in 2020 from the current surplus of around 900kt, and reach a balance in 2021. <\/p>\n UBS expects copper prices to move in the US$3.20-US$3.30\/lb range over the coming years, up from US$2.50-US$2.60\/lb level, and remain well supported in the future.<\/p>\n Among the miners, Wilsons likes OZ Minerals <\/strong>((OZL)) which is in process of doubling its production between 2019 and 2023 along with Rio Tinto <\/strong>((RIO)) with 10% of earnings from copper and looking to increase its exposure to the metal.<\/p>\n UBS prefers Sandfire Resources <\/strong>((SFR)) and rates it a Buy. Even more preferred is OZ Minerals <\/strong>owing to its longer mine life (more than 20 years) at Carrapateena.<\/p>\n<\/p>\n Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n![](\"https:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/Base%20metals\/copper%20ore1.jpg\")
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