Australian Resources & Investment enlists PwC and Fitch Solutions to provide their commodity predictions for the second half of 2022.
If we thought 2021 was a year of surprises in the commodities world, no one could have anticipated the events of early 2022.
Even before Russia invaded Ukraine on February 24, a move that sent global markets into a spin, dwindling supplies sent nickel prices to 10-year highs in January.
Aluminium prices reached their highest point since 2008 in early February, with falling inventories a growing concern.
Lithium joined the party as well, with the price of spodumene concentrate surging by 45.5 per cent in January, according to price reporting agency Benchmark Mineral Intelligence (BMI).
Then the Russia–Ukraine conflict began and countries and jurisdictions across the world imposed sanctions on Russia, which had a significant ripple effect on global commodities.
The London Metal Exchange (LME) halted nickel trading on March 9 as market panic saw prices momentarily race beyond $US100,000 ($143,811) per tonne.
A week earlier, aluminium prices soared beyond the January peak to reach record highs as Western sanctions prompted the world’s three biggest container lines to suspend cargo shipments in and out of Russia.
This came at a time where aluminium inventories were already low; in fact, Reuters reported that aluminium stocks in LME-registered warehouses had more than halved in the 12 months prior to March 2022.
While the Russia–Ukraine conflict has taken much of the spotlight, common commodity trends have sustained in the background.
“Those longer-term themes are continuing,” PricewaterhouseCoopers (PwC) Australia partner Marc Upcroft told Australian Resources & Investment.
“Everything we were talking about last year in terms of what’s happening in the sector continues despite what those short-term impacts are.
“Those trends around decarbonisation, the change in energy mix is continuing, governments investing in new infrastructure and renewal of infrastructure is continuing. The global economy is still doing relatively well, that’s continuing.
“All of those trends that are supportive of commodities and the mining sector generally are still there.”
Considering the Russia–Ukraine backdrop and the prevailing trends sustaining regardless of heightened geopolitics, what can be made of commodities as the second half of 2022 commences?
Australian Resources & Investment chatted to Upcroft, PwC national mining leader Debbie Smith, and Fitch Solutions’ senior commodities analyst Sabrin Chowdhury to gain their commodity forecasts for the next six months and beyond.
What should we expect of nickel?
Nickel cobalt aluminium (NCA) and nickel manganese cobalt (NMC) lithium-ion batteries are two of the most commonly used batteries in the electric vehicle (EV) manufacturing process. NCAs and NMCs contain 80 per cent and 33 per cent nickel, respectively, while newer formulations of NMCs are containing up to 80 per cent nickel.
According to the International Energy Agency (IEA), global EV sales increased from 2.2 million cars in 2019, making up just 2.5 per cent of global car sales, to 6.6 million cars in 2021, representing close to nine per cent of the global car market.
Combine nickel’s rising importance in lithium-ion batteries with escalating global EV demand and it’s a perfect storm for the base metal going forward.
“Nickel is definitely a metal with a very bright demand outlook from the EV industry and the green transition,” Chowdhury told Australian Resources & Investment. “So the outlook for nickel is very positive now and for the second half of this year.
“Our outlook for the entire of 2022 is that (nickel) prices would average around $US27,000 ($38,829)–27,500 ($39,548) a tonne so we do expect some more consolidation for nickel given the huge spike in nickel prices following the LME instance,” she said.
“Russia accounts for 10 per cent of global nickel production and 25 per cent of refined nickel production, so there is obviously a threat to supply and there could be supply disruptions going forward if Russia decides to withhold its nickel, etcetera.
“But prices reaching to the February, March levels? That’s not sustainable. It doesn’t reflect the true picture of what’s going on in the market.”
Chowdhury remains pragmatic about nickel, though she doesn’t foresee the commodity regressing to pre-2022 levels of below $US20,000 ($28,762) per tonne any time soon.
What about lithium?
According to BMI, at the time of writing (late June) the price for lithium carbonate was up 386 per cent YoY and up 116 per cent since the beginning of 2022.
Lithium hydroxide had risen even further, increasing by 390 per cent YoY and 136 per cent for the year to date.
The primary lithium resource in Australia is spodumene concentrate, which is converted by international customers into lithium carbonate or lithium hydroxide for batteries.
While Australia is a prominent global producer of spodumene and has new projects restarting or coming on stream for the first time, this won’t be enough to abet the commodity’s supply squeeze in the short term.
“The demand outlook for lithium is very strong going forward, and the supply of lithium is still quite tight,” Chowdhury said.
“Many miners are investing in lithium projects and there are new players emerging in the lithium market, but it will take quite some time for supply to match up with demand. So lithium prices will continue to remain elevated for a time to come.
“We won’t see the huge spike that we saw in the last 2–3 years in the lithium market again, because there will be a better balance of supply and demand. But prices will not fall back to pre-2020 levels at least.”
The Australian Government’s Resources and Energy Quarterly documented the lithium slide of 2019.
Reporting on the September quarter of 2019, the Resources and Energy Quarterly found the lithium hydroxide price fell 33 per cent YoY – from $US18,000 ($25,886) per tonne in 2018 to approximately $US12,000 ($17,257) per tonne in 2019. This came amid strong supply and slower EV growth.
Will gold remain a trusted asset?
The gold price jumped in the wake of the Russia–Ukraine conflict, breaching $US2000 ($2876) per ounce in the second week of March.
Investors flocked to the commodity as a safe-haven asset, seeing it as a hedge in the face of uncertainty.
However, gold regressed below $US1900 ($2732) per ounce to start May, which coincided with the US Federal Reserve (the Fed) raising interest rates by 50 basis points amid rising inflation. US Treasury yields rose and a firm US dollar (USD) pressured demand for the greenback-priced bullion.
Upcroft said investors took a liking to alternate safe havens in the wake of the rate hike.
“The increase in the US dollar. This seems to be taking a lot more of the share of geopolitical risk rather than gold, which is interesting,” he said.
“But I suspect that as we continue through 2022, there’s still going to be uncertainty and I think that’s still going to be supportive of gold prices.”
Chowdhury believes gold will keep its charm as we enter the latter half of 2022.
“Gold will always remain a strong investment option,” she said. “Gold thrives on uncertainty and, as you’ve seen, there is no end to uncertainty in 2022.
“So even though gold saw a bit of a setback due to the Fed hiking rates and the stronger USD, gold still remains … above pre-COVID levels.
“Due to uncertainty with the Russian invasion of Ukraine, also uncertainty in China, investors still feel the need for gold as a safe haven asset so there is still significant demand for gold.
“Our forecast for gold for this year is (an average of) $US1900 per ounce. We see a slight dip next year provided that some uncertainty in the global economy fades away.”
What should we make of iron ore?
From an analytical point of view, iron ore is a tough nut to crack, with sustained uncertainty in China plaguing consistent demand growth.
Just as there’s signs of infrastructure and construction stimulus, China plunges into lockdown and steel mills are closed.
Smith said a holistic view was required to understand the iron ore market.
“You’ve got to look at what’s happening in the construction and infrastructure space, not just what’s immediately happening in the steel mills,” she said.
“The China lockdown has had an impact, but if you assume that’s a point in time and that global economic growth is going to continue, it should still be fairly solid.
“Iron ore miners, like any other miners, are putting a lot of focus into how they decarbonise their operations. So investment will continue on their side in how they get a lower-emission product.”
Chowdhury said that while we shouldn’t expect the sky-high prices of early 2021, iron ore shouldn’t drop to the lows of November 2021.
“We do not expect any increases in iron ore and steel prices (in the short term) … but they shouldn’t collapse because the Chinese Government’s monetary and fiscal policies are set to remain expansionary throughout this year at the very least,” she said.
“Usually when the Chinese Government wants to stimulate the economy, they do it mainly through the construction sector; and the construction sector is the major consumer of these ferrous metals.
“Our iron ore forecast for this year is $US120 ($173) a tonne. We hold onto that because we have expectations for demand stabilisation later this year from China.”
What’s the future of coal?
At the time of writing, Newcastle coal futures were trading above $US390 ($564) per tonne, which is 186 per cent higher than a year before.
This comes as the European Union (EU) steers away from Russian energy sources, including the country’s coal and natural gas.
According to Wood Mackenzie, Russian coal accounts for roughly 30 per cent of European metallurgical coal imports and more than 60 per cent of European thermal coal imports.
Upcroft said it was difficult to put an accurate finger on coal, given the ever-changing geopolitical environment.
“(Coal prices will remain elevated) to the extent that energy security is a major theme in pockets of the world,” he said.
“We’ve got to see how Europe responds to their energy needs and their desire to manage the risk in Europe because that’s a significant balancing feature of the global situation.
“Today there is a heightened awareness around energy security, both in terms of availability and affordability.
“Coal is one of those energy sources that is easy to adjust quickly because you can put it on the boat and ship it somewhere provided you’ve got the right facilities on the other end.
“So I think that’s been supportive of coal and I think it’s heightening the ongoing role coal will play going forward despite that longer term trend away from fossil fuels to other energy sources.”
Smith said coal’s importance into the future would hinge on the energy transition at a point in time, something that will naturally shift as the pursuit for decarbonisation intensifies.
“I guess the thematic is coal has a role to play in the energy transition, it’s just that role will be different to what it is now,” she said. “For the next 12–24 months, energy security is a dominant feature of what’s going to influence the coal price.”
This feature appeared in the June issue of Australian Resources & Investment.