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Canaccord Genuity bullish on base metals, battery materials amid virus fears

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Canaccord Genuity bullish on base metals, battery materials amid virus fears

Canaccord Genuity expects lithium and copper to bottom and nickel to recover in 2020 amid warnings from ANZ Research to Australian explorers that the worst impacts on commodity prices from the coronavirus outbreak may be yet to come.

Canaccord Genuity Head of Mining Research Reg Spencer told the RIU Explorers Conference in Fremantle, Australia, on Feb. 19 that copper is well placed for a rebound after having been range-bound for most of 2019 due to the U.S.-China trade dispute.

The firm expects copper prices to bottom in 2020, with the long-term outlook being driven by declining ore grades, a lack of new discoveries, and burgeoning demand from electric vehicles and renewable energy. Improving supply-demand fundamentals as represented by tightening scrap imports in China and the trade truce will also provide support.

Spencer said lithium prices suffered in 2019 for mineral concentrates and refined chemicals due to the rapid supply-side response over 2018 and 2019, compounded by a revision to China's electric vehicle subsidy policy, then the coronavirus "took heat out of demand" that was expected to rise after China decided not to scrap the electric vehicle subsidies in 2020.

Spencer said lithium is displaying "bottom of the cycle signals," particularly given that prices are below the marginal cost of production for two-thirds of current global lithium production, and Europe is "picking up the slack" of China's depleted electric vehicle sales, leading Canaccord Genuity to expect a price rally in 2021.

The longer-term outlook for lithium and other battery materials also remains positive as carbon emission reductions from transport is still a "key force for politics and social conscience" over the near term, while longer-term falling battery costs will drive increases in electric vehicle sales over the next decade.

Though rising inventories and softening demand led to a pullback in 2019 nickel prices, Canaccord Genuity sees potential for a rally in 2020, led by hopes of a post-coronavirus stimulus and historically low inventories.

Longer term, Canaccord Genuity expects nickel prices to be supported by the electric market, becoming an increasingly important driver of demand given the lack of visible class 1 nickel supply. The firm believes that by 2025, demand for batteries will comprise 11% of overall nickel demand, up from 3% in 2019.

Supporting this thesis, ANZ Research Senior Commodity Strategist Daniel Hynes told delegates Feb. 19 that the export ban on Indonesian raw materials will push the nickel market further into deficit, while increasing EV use will also impact demand.

Different virus impacts

Hynes said the coronavirus' impact will be different from the 2003 SARS outbreak because Chinese consumption made up about 40% of global iron ore demand in 2003 compared to over 70% today, its nickel use was about 10% and is now about 55%, and coal was "virtually non-existent" in China but now takes up over a quarter of global consumption.

However, Hynes said the real impact for industrial commodities will be in spare capacity in China.

China iron ore port stocks dropped significantly since their peak in 2018, and imports may continue unabated "for the moment," given much of the ore unloading off the ship to the ports and into storage is automated.

ANZ believes that if the virus' impact can be limited to no longer than early in the second quarter, then raw materials manufacturers and consumers will weather the storm.

Hynes said the issue will be whether the virus can be contained relatively quickly. ANZ has adjusted its China economic growth forecasts for the first quarter to between 3.2% and 4%, down from 6%.

If China's economy cannot rebound to capture the lost growth in the first quarter, "much of the demand impacted in the first quarter will be lost entirely," Hynes said.

"A lot of those [commodity] markets where inventories fell due to strong demand and supply-side issues will start to build up again, and those inventories within China will stay relatively high for an extended period of time," Hynes said.

Though no one knows how long the virus will last, Hynes said an elongated response and travel restrictions remaining in place in the second quarter would see the latter worse scenario eventuating, which will hit global growth and commodity markets.