Metals roundup Mar’24: Copper gets pulse, spod gets guernsey

Image: Pixabay

TL;DR 🕐

  • In March, the overall commodities price index decreased by 4.9%, nearly triple the rate of February's decline.

  • While the Base metal complex prices rose by 2.9%, despite ongoing China nickel trade changes, Bulk mineral prices plummeted further, down 13% month-on-month.

  • Over the past year, the index dropped by 15.3%, led by thermal coal, iron ore, coking coal, LNG, and lithium prices.

  • Fun fact: Lithium (spodumene) was added to the index for the first time in March.

  • Big fact: Using spot prices, the bulk commodities index was 17.8% lower over the past year.

  • Nickel faces challenges from Indonesia/China moves (LNE Nickel fell 11% in March) while copper is firming, possibly due to supply constraints and dovish comments from the Fed.

  • Lithium and uranium prices continued their decline.

  • Factors such as high cost of capital, restrictive interest rates, USD strength, and geopolitical tensions contribute to the current market conditions.

  • Bulks have completed a 24-month price deceleration trend. Supply and demand dynamics from China, Russia, and India will likely determine the future direction of prices.

  • A weaker USD, improving demand from China, and geopolitical stability are needed for a significant market shift and while March showed some progress, a new macro backdrop is needed for substantial changes.

  • Despite that, markets continue to anticipate the Fed's policy pivot, with this reflected in recent copper prices.

  • If the Fed lags other central banks in easing policy, lower costs of capital outside the U.S. may support USD-denominated commodity prices. Base metals and energy-focused bulks might benefit from this scenario.

  • Metals Roundup will be back in May with further analysis, but in the meantime feel free to access the monthly charts and detail 👇👇👇

1. Base Metals 🔗🏮🔌

Copper was still in a bear market in February while the nickel price found some life at the end of the month.

Manufacturing PMI prints out of China indicate that China manufacturing is still in contraction. However, recent U.S. manufacturing PMI prints (last week) showed a nice increase.

Base metals firmed in March with a 2.9% month-on-month price acceleration. That makes it the biggest positive rate of change in the base metals index since January 2023. But it’s not as though it’s a head-snapping number. And we can’t yet say whether we might be returning to a 2021 recovery cycle.

And while LME Copper is up 9% over the past 30 days, that of itself does not necessarily mean the 2.9% price acceleration in the March base metals complex (which includes aluminium, nickel, zinc, lead, etc) marks the end of a 24-month secular price downtrend (i.e., 24 months following the start of U.S. interest rate hikes in March 2022) because it’s only one month.

Notably, aluminium was up around 3.7% in March while nickel was down 11%. Zinc flew for the first two weeks of March before crashing back to almost where it started in the final weeks of the month.

That said, copper’s move is somewhat bullish, especially considering the deterioration in nickel and zinc prices.

Recent copper strength might have been brought about by dovish interest rate comments and green transition related (promised) spending by northern hemisphere governments, or it might be a supply shortage realisation, or from Chinese stockpiling, or maybe all of those.

We’ll check back once the April index is published. In the meantime, here’s the monthly rate of change chart for March 👇👇👇

Copyright, NextLevelCorporate Advisory (after March debasement)

2 Bulk minerals - inch by inch 🧱👷‍♀️🌉

While U.S. economic resilience, expectational green transition spending, and a future change in monetary policy seem to be providing some wind in copper’s sails, the bulk minerals complex has had a torrid time.

In the March edition of Metals Roundup, I pointed to February’s 7% spot price deceleration as notable because it signalled an almost 8 percentage point reversal on the prior month and broke an 8-month acceleration trend.

I also stated that China’s demand trajectory, centralised iron ore buying, and self-sourcing acceleration continued to cast a long and complicated shadow over this construction and energy minerals complex.

Well, in March it got way worse with a 13% month-on-month price deceleration.

We now have a 24-month downtrend in prices that started in April 2022, one month after the first U.S. interest rate hike.

But what’s even more notable is that these annual price decelerations are deeper than the decelerations in February and March 2023. And given the further price disinflation that occurred in April and May 2023, the question becomes whether or not tomorrow’s rate of change will rhyme with April/May 2023 👇👇👇

PS: expect more desperation M&A at the smaller end as well as multi-metallic diversification at the big end.

Copyright, NextLevelCorporate Advisory

3. Energy minerals (ex-coal and oil) ⚗🧲☢

As mentioned above, spodumene was added to the RBA’s index of commodity prices in March.

The July 6, 2023, price high for LME Lithium Hydroxide CIF was US$46,046. Today, it remains at US$13,150 which is a total of 71% down from July last year.

Relative to the GFC-to-COVID years, the cost of capital is still high, the USD is still strong, and China peaked some time ago. These headwinds fly in the face of some recent sentiment or M&A-related bounces in some lithium stocks.

That aside, it’s going to take more time for the price deceleration trend to unwind and the question is whether technological advances and product substitution will occur before ‘EV/battery metal’ prices can reach their historical all-time-high.

Uranium was fetching US$85-87/lb as of the end of March. This is quite the pullback from US$106/lb. We’re still experiencing a pullback in uranium stocks, despite the supply side of the equation becoming tighter in March following negative supply announcements from Cigar Lake owner Cameco in February, as well as the world’s largest producer, Kazatomprom.

Uranium developers do not seem to be attracting a premium at this time, which is probably a sign that prices as well as the cost of capital, inflation and labour shortages are still weighing on project viability, as they are on many capital and people intensive projects.

4. Key takeaways from March 2024 ✅✅✅

The Fed’s narrative in March was more dovish than usual and it’s only in recent days that the market has started to harken the hawk. April will be an interesting test of demand and supply side narratives for bases, and copper in particular.

Bulks have completed a full 24-month price deceleration down trend.

Where to from here? Well, it’s likely that supply and demand factors to and from China, Russia and India hold the answer for bulks.

Outlier lithium prices are predominantly M&A driven whereas the great bulk of the sector is being driven by oversupply expectations in light of China’s EV cost advantage (squeezing refiner and other margins).

Uranium prices are a different kettle of fish and currently being influenced by spot versus contract, supply issues with CCJ and the Kazaks, the Sprott ‘buy-back’ mechanism, and the growing realisation that the only energy source that can solve for density, efficiency, zero emissions and the sheer increase needed to support compute, data storage and AI - is nuclear.

In March we also got a better glimpse of where central banks are at. Which is to say that if the U.S. Fed lags behind other central banks in easing policy (let’s see) it may be that in the second half of 2024, a lower cost of capital outside the U.S. might provide some headroom to support an increase in certain USD denominated commodity prices. And that would be bullish for bases and some energy-focused bulks. Just a theory at this stage.

In summary, prices for the commodities that I track are likely to remain subdued regardless of clear supply side and ESG factors until we start to see a new macro backdrop (seriously) forming; with lower interest rates, a weaker USD, improving demand catalysts from China, and much cooler geopolitics.

While we got a little closer to this in March, we didn’t quite get there and instead markets continued to front run the Fed’s eventual policy pivot (rather than waiting for it 😂). Maybe we get more of this in April - or perhaps some of the front running will capitulate. What do you think?

Feel free to reach out if you’d like to debate this over ☕ and 🥐

Metals Roundup will return in the first week of May.

Mike

Next Level Corporate Advisory is a leading Australian corporate development advisor specialising in M&A, investment, financing and exit solutions. With a dealmaking track record spanning three decades, we help family, private and publicly owned entities develop and realise value in their businesses and investments.

All written content is copyright NextLevelCorporate.

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