Strong and weak fundamentals for sustainable growth of metals
Anthony Goodwin's picture

Herein I try describe bottom line of some positive and negative (conservative) fundamentals for Nickel, Copper, Palladium, Platinum and Cobalt. Shortly focus on favorable and unfavorable factors which determine upcoming upsides and downsides trends. If you, my readers, have different opinions on these trends please share it with audience. And thank you.

Nickel

Favourable factors:

  • Market remains in deficit (90-120 kt Ni in 2018-2019), exchange stocks decreasing (LME+SHFE: 2016 – 486 kt, 2017 – 410 kt, 2018 – 276 kt)
  • Strong demand growth (total +9%, from 2.1 mt in 2017 to 2.3 mt in 2018) in all segments: stainless steel (+143 kt), batteries (+32 kt) and other segments
  • ~100% supply growth in 2018 and ~80% supply growth in 2019 will be driven by low-grade products from Laterite Ores. Production from Sulphide Ores is decreasing (per annum CAPEX reduction from 8-10 bn$ in 2010-2012 to 4-5 bn$ in 2014-2018E)
  • LT demand growth from battery segment due to vehicle electrification (EV-revolution)
    • Expected electric vehicle (battery EV + Plug-in hybrids) market growth: CAGR 2016-25E ~28%, ~15 mln electric vehicles sales in 2025 (8-9% of total autos; in 2017 ~1%)
    • More Ni-intensive cathodes (% Ni in cathodes: 2015 = 20%, 2020E = 36%, 2020+ 48%)

Unfavourable factors:

  • Exchange stocks level remains high (~40 days of consumption, normal level 15-25 days)
  • NPI production increasing in Indonesia (+85 kt) and China (+92 kt). That lead to supply growth by ~9% (from ~2.0 mt in 2017 to ~2.2 mt in 2018)
  • Increasing of Indonesian ore export to China (from ~3mt ore in 2017 to ~18 mt ore in 2018; additionally, export from Philippines will remain high, ~29-30 mt ore in 2017-2019)
  • Risk of EV market growth decreasing due to subsidy reduction in China in July 2018 (Government’s motivation – to stimulate auto producers to focus more on technological improvements instead of relying on fiscal policy)

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Copper

Favourable factors:

  • Infrastructural projects in USA (~170 bn$ pa), China (~200 $bn pa, plus it is expected additional expenses to compensate negative effect from China-USA trade war), India (~150 bn$ pa) (roads, power, rails, etc.)
  • EV market growth: expected electric vehicle (battery EV + Plug-in hybrids) market growth CAGR 2016-25E ~28%:
    • Copper demand: electric motors, generators, wires, parts (especially, in hybrids, charging stations, etc)
  • Normal level of reported stocks (8-10 weeks of consumption, average since 2012)
  • Decreasing of quotas for import of copper scrap to China: constraints for import of low-quality scraps, completely banning of “category 7”
  • Supply ST constraints: (1) strikes in Chile and Peru (including still possible strike at Escondida), (2) smelters shutdown (India – protests in Tuticorin, Philippines – maintenance shutdowns in Pasar)

Unfavourable factors:

  • US-China trade wars (traders’ fear of trade war escalation, threats of tariff increasing in USA on all China’s import, global economy’s growth rate decreasing)
  • Economy’s growth rate decreasing in China (IMF: 2017 = 6.9%, 2018E = 6.6%, 2019E = 6.4%) and EU (IMF: 2017 = 2.4%, 2018E = 2.2%, 2019E = 1.9%)
  • High level of non-reporting stocks: inventory of China’s State Reserve Bureau in 2015-2016 ~150-200 kt
  • Supply support: (1) USD appreciation (DXY Index: Q1 2018 = 90,155; Q2 2018 = 92,647; Q3 2018 = 94,954), (2) comfortable price level (< 5% of existing copper producers are loss-making)
  • Despite some strikes in industry, major risks are not materialized (industry wide strikes in Chile and Peru, strikes at Grasberg)
  • New greenfield and brownfield projects, as there is a return of capex budgets, deferred and cut since the copper price crashed in 2015. However, this is a LT perspective: the last of megaprojects, Cobre Panama, will be commissioned in mid-2019, and most currently potential projects still at the preapproval 

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Cobalt

Favourable factors:

  • LT demand growth from battery segment due to vehicle electrification (EV-revolution)
    • Expected electric vehicle (battery EV + Plug-in hybrids) market growth: CAGR 2016-25E ~28%, ~15 mln electric vehicles sales in 2025 (8-9% of total autos; in 2017 ~1%)
  • Decent demand for metal for super alloys (2017 = 12 kt, 2025E = 20 kt, CAGR ~5%)
     

Unfavourable factors:

  • Demand growth is expected to be compensated by restarting of operations (e.g., Glencore’s KOV operation in DRC) and new operations (e.g. Shalina’s 14ktpa Mutoshi plant, 3.8ktpa Etoile plant, 2.4ktpa Usoke plant) on the back of high prices
  • High level of stocks, ~30 weeks of consumption (mainly in the form of raw materials, intermediate salts, in China)
  • Development of less Co-intensive Li-ion batteries: (1) technological shift to substitute Co with Ni in NCM (% Ni in cathodes: 2015 = 20%, 2020E = 36%, 2020+ 48%), (2) Tesla & Panasonic plans – reduction of Co per unit in Tesla from 11 kg to 4.5 kg in 6 years
  • Development of new energy storage technologies. For example, in Sep 26, 2018, NANTENERGY announced results of development of zinc battery system (system deployed in 9 countries, 3000 systems supporting 110 villages and 1,000 installations across cell tower sites):
    • Manuf.cost of this system below $100 kWh (for example, Li-ion batteries in 2017 ~200 $/kWh, level of $100/kWh is expected to be reached in 2020+)
    • Zinc (vs Cobalt): (1) reserves Zinc ~230 mt, Cobalt ~7.1 mt, (2) production Zinc ~14000 ktpa, Cobalt ~100 ktpa, (3) less price elasticity (Zinc: in 2014-2018 deficit up to 9%, price increase from ~2 k$/t to ~3k$/t; Cobalt: in 2014-2018 deficit up to 5%, price increase from ~30k$/t to ~80k$/t)

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Palladium

Favourable factors:

  • Structural deficit (850-1000 koz, ~8-10%)
  • Auto market: (1) sustainable growth by 3-5% per annum, (2) growth of hybrid vehicle market share worldwide from ~3% up to 7-9%, (3) high level of Pd utilization in hybrids (Pt:Pd utilization ratio in Hybrids 1:4, like in gasoline autos), (3) growth of SUV market share (CAGR 2018-23 ~10%) 
  • Strengthening emissions legislation worldwide (China-6, Euro 6d-TEMP)
  • Despite Pd trades with premium to Pt, there are constraints for substitution of Pd with Pt in autocatalysts: (1) Pd is more efficient for gasoline engines, (2) 2+ years to certify and roll out new loadings, (3) questionable perspectives (Pt might begin to trade with premium to Pd again after such substitution)
  • Increasing of share of gasoline vehicles in EU among new cars (2011 ~50%, 2017 ~60%, 2018E ~65%)
     

Unfavourable factors:

  • US-China trade wars: threats of tariff increasing in USA on all China’s import and, as consequence, production decreasing (auto, chemical)
  • USD appreciation (DXY Index: Q1 2018 = 90,155; Q2 2018 = 92,647; Q3 2018 = 94,954) and Fed’s key rate increasing (Q4 17 = 1.25%, Q1 18 = 1.50%, Q2 18 = 1.75%, Q3 18 = 2.00%, since 26/09/2018 = 2.25%)

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Platinum

Favourable factors:

  • Auto market: (1) sustainable growth by 3-5% per annum
  • Strengthening emissions legislation worldwide (China-6, Euro 6d-TEMP)
  • Increasing of jewelry demand for Pt in India (in 2018 +21%, up to ~400-450 koz)
  • Supply decreasing due to productions cuts in S.Africa and Zimbabwe (2015 = 5.1 moz pa, 2016 = 5.0, 2017 = 4.9, 2018E = 4.8, 2019E = 4.6)

Unfavourable factors:

  • US-China trade wars: threats of tariff increasing in USA on all China’s import and, as consequence, production decreasing (auto, chemical)
  • USD appreciation (DXY Index: Q1 2018 = 90,155; Q2 2018 = 92,647; Q3 2018 = 94,954) and Fed’s key rate increasing (Q4 17 = 1.25%, Q1 18 = 1.50%, Q2 18 = 1.75%, Q3 18 = 2.00%, since 26/09/2018 = 2.25%)
  • Decreasing of share of diesel vehicles in EU among new cars (2011 ~50%, 2017 ~40%, 2018E ~35%)
  • Decreasing of jewelry demand for Pt in China by almost 9% (preference for gem-set, branded jewelry)
  • Despite Pd trades with premium to Pt, there are constraints for substitution of Pd with Pt in autocatalysts: (1) Pd is more efficient for gasoline engines, (2) 2+ years to certify and roll out new loadings, (3) questionable perspectives (Pt might begin to trade with premium to Pd again after such substitution)