Commodities Update: Nickel Nears Floor, Copper Presents Openings, Gold Stays Strong
Nickel Prices Approaching a Floor
According to Morgan Stanley, nickel prices might be nearing their lowest point, with the year-end price target of $16,000 per ton already achieved. While short-term rallies may occur due to existing market conditions, elevated nickel inventories and weak demand are likely to hinder any sustained price increases. Nickel inventories globally have surged by 67% in 2024, reaching their highest since November 2021.
Despite potential challenges, Morgan Stanley believes there is limited further downside for nickel prices, as they have dropped to around the 70th percentile of the cost curve, a historical support level. The firm suggests that prices may remain range-bound, noting that the current nickel price is near the lows for 2024, following a brief rally above $21,000 per ton.
Factors contributing to nickel's price pressure include the growing market share of lithium iron phosphate (LFP) batteries, which caused the share of nickel-bearing batteries to fall to 53.6% in June, the lowest since April 2018. While stainless steel continues to account for about 70% of global nickel demand, batteries now represent approximately 16% of demand. Robust stainless steel output in China contrasts with potential overproduction issues, and European output is expected to decline.
In response to low prices, supply adjustments are occurring, such as BHP Group's suspension of its Nickel West division in July. Production challenges in New Caledonia and weather impacts in Indonesia are also tightening supply, potentially reducing projected surpluses for 2024 and 2025.
Copper Prices: Opportunities Amid Declines
Macquarie reports that the recent drop in spot copper prices to $3.94 per pound presents opportunities for investors to gain exposure at attractive levels. Despite short- to medium-term volatility and lowered copper price forecasts, the broker maintains its long-term forecast at $4.08 per pound.
Macquarie has adjusted its 2025-2027 copper price forecasts downwards by 5%, 4%, and 2%, respectively, citing weaker global demand and slightly increased production. Forecasts for Chinese copper demand growth in 2024 have been reduced from 2.9% to 1.2%, and North American demand growth has been lowered from 2.5% to 0.5% due to deteriorating economic conditions and potential recession risks.
The largest target price reductions for copper-focused companies under Macquarie’s coverage are Sandfire Resources and Capstone Copper, with respective falls of 5% to $9.40 and 6% to $12.40. Despite these adjustments, Capstone Copper remains Macquarie's top pick in the sector for its strong organic growth and portfolio optimization potential.
The impact on major miners like BHP Group, Rio Tinto, and South32 is relatively minor, with target price reductions of 1-2%. Companies with significant copper exposure, such as Newmont Mining and Evolution Mining, also see minimal impact.
Among smaller companies, 29Metals and Aeris Resources show the largest downside due to high-cost operations and leveraged balance sheets.
Morgans’ Gold Sector Preferences
Gold prices have risen by 19% in Australian dollars and 17% in US dollars since mid-February, driven by global conflicts and central bank buying, explains Morgans. The anticipation of interest rate cuts in the second half of 2024 adds to gold's appeal.
Morgans highlights that companies with sustainable and growing production profiles, such as Red 5, Westgold Resources, and Catalyst Metals, deserve a premium as spot prices generate strong cash flows. The average gold sales price for the ASX Gold sector increased to $3,413 per ounce in the June quarter from $3,070 per ounce, bolstered by hedge book closures and restructuring for companies like Catalyst Metals, Bellevue Gold, Capricorn Metals, Regis Resources, and Westgold Resources.
Despite ongoing cost pressures, the average all-in sustaining cost (AISC) per ounce fell by 1% over the June quarter. The downturn in the nickel sector has freed up resources, alleviating market tightness.
Potential cost or operational issues could pressure margins for companies like Bellevue Gold, Genesis Metals, and Pantoro Ltd, which trade on multiples implying significant growth.
Morgans identifies Ramelius Resources, Capricorn Metals, and Northern Star Resources as having the lowest AISC. In contrast, Ora Banda Mining and Genesis Minerals face challenges due to recent weather impacts and ambitious growth strategies, respectively.
Among smaller companies, Morgans favors Catalyst Minerals, Red 5, and Westgold Resources for their potential growth and resilience.
