August ‘23 metals roundup: Bases down 7 in a row, Bulks pop a tad
Commodity prices in August
The secular or long-term prognosis for industrial metals is still good, yet there are still many macro factors working against higher prices.
A strong USD for longer as yields remain high to support trillions of new Treasury issuance to fund the U.S. deficit. Crumbling demand from China with still only incremental stimulus. European recession. There’s a few.
In the meantime, here’s an update on the RBA’s commodity index, which tracks rural and non-rural commodities alike 👇👇👇
For August, the Index was down 2.7% month on month, across all hard and soft commodities tracked. Yup, another decrease.
Overall, commodity prices (on an indexed basis) have lost just about all of their Russia/Ukraine premium. That’s the take home.
Industrial metal prices in August 🏭
Below are the NLC industrial metal rate of change price charts for August 2023.
1 Base metals
The month-on-month rate of change in base metals prices continued to decelerate for a 7th month in August, but at a slower pace than in July 👇👇👇
NextLevelCorporate research, RBA
This might be a signal for reversal, potentially in September or October.
We will have to wait and see.
That said, here’s what’s happening in the base metals complex since September 3:
Doctor Copper is ~2.4% below its price at the start of August, but since January ‘23 it has steadily declined. Each time it has recovered it has reached a lower high, and each low has bumped along the US$8,000/t support level. The pattern looks weak, so it will be interesting to see whether the recent mortgage rate cuts in China stimulate enough real estate demand to arrest the pain and stimulate consumption. Maybe the former, but don’t think were at stimulus point yet.
Notably, during the month, Copper was added to the U.S. list of critical minerals and this might be the reason for recent small gains.
LME Nickel spot prices are 1% up since the beginning of the month but 9% down from a month ago.
LME Tin (used in soldering for electronics amongst other things) is also 9% down from a month ago.
LME Zinc is only down 2.7% from a month ago, and there are calls for it to be included on the critical minerals list.
LME Aluminium is down 1.5% from a month ago.
2 Bulk minerals
August brought a 2.7% month on month acceleration to the Bulks index.
Still nothing to dent the hefty declines in February, March, April and May ‘23, but an improvement and perhaps growing confirmation of a slight pickup.
What we really need to see is a deluge of construction related stimulus in China to really light up the bulks 👇👇👇
NextLevelCorporate research, RBA
The next 12 months 🤔
If we get a faster/higher level-up in Bulks this month, it might mean the market sees Xi’s recent mortgage rate stimulus as perhaps half decent. The jury’s out on that.
And like I reported last month, what we ideally want to see for the industrial mineral commodities complex to recover, is:
China to start building again, if policy allows for ‘construction’ friendly monetary stimulus 💉
Critical hard and soft commodity supply chains to heal 💉
Weakness in the USD to make commodities more affordable 🤑
But what have we seen recently?
Germany has entered a technical recession (with two quarters of -ve GDP growth) and Reuters reports there’s likely to be a third quarter of negative growth. As a major manufacturer and consumer of manufacturing metals, Germany’s a passion killer.
Another problem is China’s real estate development market. Real estate and support industries makes up ~20% of the Chinese economy. Push forward that throttle and that’s what generates demand for commodities, particularly structural bulks like iron ore and coking coal that are used to make steel. But it’s not beer and skittles in China just yet and there are some shaky developers making some people nervous.
Evergreen was the last bone shaker, but now Country Garden (one of the top 10 developers) is having issues with a series of bonds maturing in 2024, 2025 and 2026, with the 2024 bonds sporting a coupon of 8% compared to 5.625% for the 2026 series.
This is a problem as Country Garden has tentacles in thousands of housing projects and employs 70,000+ people meaning that if it were to go under there would be contagion.
While it recently won an extension from creditors on around a half billion of maturing debt, the corporate bond market says it’s not out of the woods and is pricing its high coupon bond at 12c in the dollar, and its lower coupon bond at 8c.
Not a good sign. Let’s keep an eye on that.
August teardown: Chalice Minerals 😲
Finally, for a teardown.
The biggest news in Australian base metals in August came out of Chalice Minerals (ASX:CHN).
Chalice owns the Gonneville Base Metals and PGE project.
Copper, nickel, cobalt, palladium, platinum and gold - a literal Swedish smorgasbord of battery, platinum group and precious metals.
It’s a great example of timing (or cooking) as it caught the COVID precious metals tailwind, and then the battery EV tailwinds.
That’s quite a lot of wind from behind, no choke required, and enough to power it into a 50 bagger. From 20cps during the COVID days, to a high of around $10 in November 2021.
Since rate hikes and Russia, some of those hot winds have wafted elsewhere (mainly to lithium), and last week the Perth based rock kicker released its inaugural scoping study on Gonneville - or as the press referred to it, the first ‘hard numbers’ on the project.
And while the net present value (NPV) of Gonne printed $2.8bn to $4.2bn, the market assessed there to be a slight problem with that outcome, namely:
It requires a much larger cheque than originally anticipated thanks to the present inflationary circumstances.
The price input assumptions seem overly optimistic with copper, cobalt and palladium aggressively above consensus.
Nickel demand/supply opacity, given the growing role of Indonesia and its closer geo-political ties to buyers.
A WACC, or discount rate that's hardly 2 bips above the risk-free rate.
On the day of release, the stock lost a quarter of its value as the market which had previously bought the rumour, sold the fact, and how.
By Friday, the company’s enterprise value had fallen 35% to $1.14 billion.
What that implies is that after stripping out cash, the market is ascribing zero to the company’s other projects which includes the Yilgarn assets. Therefore, the implied market value for Gonneville (if you set the Yilgarn assets to zero) represents a 73% discount to its NPV.
That’s more than just a development/execution risk discount. And the price might fall further.
This will not be the only teardown of its kind. High capital costs remain across most projects. Labour shortages remain. Most but not all metal prices are low. None of this is conducive to creating a financeable supply response sufficiently large enough to supply the 384 battery metal mines (excluding the copper and rare earths) required by 2035 to meet decarbonisation targets.
That probably means they won’t have a hope in hell of being delivered.
Talking about battery minerals, LME Lithium Hydroxide CIF spot price is currently ~US$30,000/t, and that’s down 35% since its US$46,046 high on July 6.
And yet, Albermarle is back with a $6.6 billion offer for near-term lithium developer Liontown Resources (ASX:LTR), another company controlled by Chalice’s major shareholder 🥁🥁🥁
See you in the market.
Mike
Image: Leonid Altman
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