Commodities Update September 2024
Generally weaker through August as met coal, iron ore and crude oil all head south while lithium is starting to look like nickel.
The following is based on text from the September Market Outlook (PDF 2MB)
For more details of our longer-term forecasts see Westpac September Commodity Forecasts
Brent to go below US$70/bbl
Robert Rennie has been highlighting the near term risk of Brent extending its trend decline to possibly as low as US$74/bbl. He also suggested that unless there was a “significant deterioration in the Middle East disrupting shipping activity again, or Ukraine renewing its attacks on Russian refineries it was doubtful that OPEC+ would be able to return the voluntary cuts in production in 2024”. Thus, we are not surprised to see that OPEC+ held an eight member virtual meeting and “emphasized their collective resolve to ensure full compliance with the voluntary production adjustments”. The statement highlighted that “the eight participating countries have agreed to extend their additional voluntary production cuts of 2.2 million barrels per day for two months until the end of November 2024, after which these cuts will be gradually phased out”.
The market’s reaction was disappointing to say the least as it focused on this being a two-month reprieve highlighting the pressure on OPEC members to return production to the market – for if they do not, then others will fill the gap instead (particularly North America). The EIA is forecasting global crude production to rise by 2.2mbpd over the next year with 1.6mb coming from non-OPEC producers and just 0.67mb from OPEC. Contrast that with a 1.35mbpd increase in world consumption over the same period. If OPEC only brings back part of the 2.2mbpd it cut, then global crude production will grow at the sharpest pace in two years. But if all of the 2.2mbpd are returned to the market then supply is set to grow materially faster than demand until lower prices see North American producers cut back on production.
This scenario is behind our revised forecast for a low of US$67/bbl in March 2025 before a rallying in the second half of the year to US$77/bbl as demand lifts and supply from North America moderates.
Iron ore heading to US$85/t
We suspected that the recent bounce in iron ore prices back into the low $100s would be temporary before prices moved back down to $90 and then into the mid-$80s. Through August we noted that port inventories of ore surged to a fresh 29-month high while steel inventories at major mills grew to a seasonal two year high. Chinese port stocks are up around 35Mt year to date and now back to levels, relative to steel production, last seen in 2022. At the same time steel mill profitability dropped to a multi-decade low in late August (despite falling met coal prices offering some offset) while blast furnace operating rates dropped to the lowest seasonal level since 2018. All these indicators suggest ongoing weakness in the demand for iron ore.
Meanwhile, Chinese property starts dropped to the lowest level since 2006 in July and steel production was down 6%yr, with preliminary indicators for August pointing to a decline of more than 9%yr. That would leave combined July and August steel production at its lowest level since 2018.
At the same time Chinese steel exports held at record highs – the surge in exports also indicative of weak domestic demand for steel. Chinese pig iron production is down 4.1%yr so some of the hit has been taken by local ore supplies (Chinese ore is the most expensive source and tends to be used by inland mills that are integrated with a mine while the larger coastal mills tend to use imported ore). However, a large share of the increase in imports has gone into port inventory.
India continues to be the swing iron ore supplier to China taking advantage of high prices when they are available. So as prices eased from the peak of US$140/t at the start of the year, supplies from India have declined. Sluggish consumer spending and weak manufacturing new orders for steel in August pose a risk to steel production and iron ore demand as we move through September, supporting our view that iron ore will finish the year around US$85/t.
Met coal heading south
Met coal prices continued to fall into September, the market plagued by a glut of premium hard coking coal. Supply has recovered from the major suppliers while demand in China continues to soften as steel production adjusts to the continuing correction in Chinese construction. It does appear that this correction in met coal prices may offer some modest support for iron ore prices that remain at levels higher than you might expect given current market conditions.
Lithium market action is mirroring nickel
As we have seen in the nickel market, we large swings in supply and demand can create significant boom/bust cycles, to date the lithium market looks to be evolving in a similar way. LATAM brine and Western Australian spodumene did lead the initial supply response to the increase in demand, the emergence of African and Chinese lithium production upended the market. These new sources are a real threat to existing producers are they benefit from:
1. Chinese efficiencies,
2. Simpler and faster permitting/approval processes; and
3. Lower investment hurdles and better economics especially for integrated mining projects.
African potential appears to be larger than expected
It is true that Africa remains a challenge from a logistical perspective a recent report from UBS suggested that African lithium productions could grow from zero in 2022 to around 290kt LCE in 2028. Some estimates have Africa production growing to the point where it is supplying around 10% of total global production. While some dispute these estimates we are cautious as we note similar comments were made about Indonesian nickel, and its use in batteries, when the battery let nickel boom started.
China lithium has a lower marginal than market expectations
UBS also conducted an in-depth cost review of Chinese lithium supply finding that Chinese lepidolite producers (and Chinese-operated African spodumene producers) are generally the marginal cost players in the market. They also found that the Chinese marginal cost for lithium is much lower than what the market previously thought.
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