Commodities Update March 2024
Commodity prices moved lower through February led by a 10% fall in iron ore and a 4% fall in met coal but thermal coal had a solid 14% rally while nickel bounced 12%. Nickel has always been a boom–bust commodity with a memorable market collapse in 2007 associated with the emergence of Indonesian supplies.
The following is based on text from the Westpac March 2024 Market Outlook. (PDF 426KB)
For more details on our longer-term forecasts see Westpac March 2024 Commodity Forecasts.
Commodity prices softened through February with our broad index falling almost 2% since the February report to be down around 7% in the year. Leading the correction was a decline in iron ore (–10%) while met coal lost –4% and LNG declined 2%. But as is often the case some commodities contrasted with strong rallies; thermal coal surging around 14% in the month while nickel bounced 12% and copper prices gained 4%. Gold lifted more than 6% in the month to hit a record high of US$2,172/oz as we go to press.
Nickel – a boom bust commodity
The highlight through February was nickel prices finding a base around US$15,800/t in the first half of February, rallying 13% to around US$17,800/t as we go to press. Readers may remember that through February, when nickel prices collapsed –43% from the January 2023 peak of US$31,000/t, mining and political leaders were clamouring for government support, including tax incentives, to avoid the potential collapse of the Australian nickel industry. The reaction of miners, with mines being slated for mothballing, is understandable given the collapse in nickel prices has collided with rising costs to render most nickel mines unprofitable. However, those that have watched commodity markets for any length of time will know boom–bust cycles in nickel are nothing new. Two years ago nickel reached a high of US$48,000/t during a Ukraine–fuelled short squeeze only to correct –58% to around US$20,000/t in July 2022.
We can also look further back to 2007 when nickel surged to around US$53,000/t as it appeared China’s appetite for stainless steel could not be sated, with insufficient supply of nickel due to years of low prices and under–investment in mines and refining capacity. At the time, it was the introduction of Indonesian nickel pig iron, made from the nickel–rich laterites that Indonesia is well–endowed with, that saw nickel prices halve to US$26,000. This time around, we have again seen a surge in Indonesian nickel supplies but the change has come from China developing a way to use lower–grade Indonesian nickel in batteries which has brought this supply into much closer competition with other, higher grade sources.
Another factor in the mix is shifting sentiment towards electric vehicles (EVs). Here, sales have slowed as moderating demand amongst ‘early adopters’ has combined with rising concerns around affordability with EVs becoming more expensive than an equivalent ICE vehicle. However, of perhaps greater concern for nickel is the continued lift in the production of lithium–iron–phosphate and lithium–manganese–iron–phosphate – LFP/LF(M)P – cathode batteries which have enjoyed a renaissance and increased their market share from around 15% to around 40% of cathode supply over the last three years. With battery demand representing around 15% of current nickel demand, and expected to grow around 17%yr to be around 30% of total demand by 2030, a potentially shrinking NCM(A) share presents a significant risk for long term nickel demand. Given that we believe some of the stalling in EV demand is due to affordability it’s reasonable to assume that, as the focus shifts to price over performance, EV–driven demand for nickel may not be as robust as previously anticipated, especially if LFP/LF(M)P batteries continue to increase their market share.
There are significant environmental concerns regarding the mining of Indonesian nickel. As long as these concerns remain secondary to battery makers’ access to affordable supplies then nickel prices are set to remain depressed. Overlay this with the shift in demand for alternative cathodes and we see little upside for nickel and plenty of downside. As such, we have revised down out forecasts to a low of US$14,400/t in early 2025. Nickel has a volatile history of significant booms and busts. Recent events give us little reason to expect this to change any time soon.
Iron ore – market has shifted to over supply
Another highlight occurred just as we were preparing this report. In early March iron ore prices started to weaken and on the 11th the spot price fell 7% to US$108/t. This correction appears to reflect the market’s weak sentiment towards China plus an unwinding of net long positions. At US$108/t spot iron ore is at its lowest level since August 2023. Market sentiment deteriorated following China’s 2024 National People’s Congress for while it may have met expectations with respect to key policy actions, market participants were clearly hopeful the Congress would bring a more aggressive policy action (see page 14 of March 2024 Market Outlook).
At the local government level there are also concerns about production controls, property market defaults and infrastructure funding while the economic data since the Lunar New Year has continued to be on the weak side of expectations. In addition, even with the recent fall in iron ore and met coal prices, Chinese steel margins and blast furnace utilisation rates remain quite weak while iron ore inventories at Chinese ports are now at the highest level since March 2023. Even with weak iron ore exports from Australia, Brazil has been more than offsetting this and thus iron ore shipments from traditional markets have started to recover and are up +3% year to date.
While recent trends in China remain a concern for iron ore, we expect the significant cuts in interest rates and deposit rates, plus an end to uncertainty over developers’ finances, should quickly see a rebuilding of the investment pipeline with investment driven by households rather than direct Government support. As such, Chinese construction activity should pick up as we move into the second half of the year rebalancing the iron ore market.
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