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Experts warn US-China trade war truce needed to restore mining sentiment

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


Experts warn US-China trade war truce needed to restore mining sentiment

Veteran resources executive Norm Seckold, who co-founded one of the ASX's biggest 2018 metals and mining IPOs Nickel Mines Ltd., has joined a chorus of analysts saying resource stocks will continue to suffer throughout this year even amid robust commodities demand, unless the U.S.-China trade war ends.

Seckold's 11-year wait to list the company ended with its A$200 million IPO in August 2018, striking while the iron was hot after LME nickel had hit US$15,745 per tonne in June, its highest point since about December 2014.

It was just in time, as Nickel Mines enjoyed its highest stock price of 36 Australian cents per share on Aug. 31 before markets seriously deteriorated due to ongoing trade war tensions, compounded by the U.S. government shutdown.

While many commodities had fallen away over the second half of 2018 leading to less capital raised on the ASX, nickel's story was exacerbated by German chemicals giant BASF SE's reported plans to use less of the metal in its electric car batteries in favor of manganese.

By Jan. 9, Nickel Mines was trading at an all-time low of 22.5 Australian cents, and Seckold told S&P Global Market Intelligence that the market's rapid change of sentiment over the past five months has been "bizarre."

"In this sort of market we've had in the last five months I would hate to try [to list] Nickel Mines, because we just wouldn’t have got it away, as a big chunk of it was institutional money," he said. While there was a "really positive attitude" to the nickel market at listing, "if the overall commodity market wasn't in reasonable shape you still wouldn't have got it away."

More of such negative sentiment is expected for this year, but analysts are not unified on that front.

Alto Capital Investment Manager Tony Locantro told S&P Global Market Intelligence that "there's no just no appetite for resource stocks at the moment" with China's weak manufacturing numbers and concern over its credit bubble weighing on stocks, along with the trade war.

He believes that some kind of truce between the U.S. and China will "hopefully put a floor under commodity prices and increase sentiment."

Strong nickel fundamentals

Bernstein said earlier in January that consensus expects a worse 2019 than 2018, except for nickel, which the firm has long argued is looking at a structural shortage in the medium to long-term and for which "consensus expects a significant recovery from current spot prices."

"When you combine the potential demand-pull from electric vehicle batteries with the fact that the 'traditional' nickel market has itself been relatively depressed for many years now, with prices at times cutting deep into the cost curve (more so than even for other commodities towards which we have been positively predisposed over the years such as copper), the price upside potential becomes clear," Bernstein said.

This is particularly the case, the firm added, given the geological constraints and significant decline of investment in nickel capacity.

S&P Global Market Intelligence said in its Jan. 11 Consensus Price Forecasts analysis that the while the LME nickel cash official price ended 2018 at a low of US$4.97/lb — the lowest since US$4.76/lb on Oct. 6, 2017 — after undoing all gains seen in the first half, "expectations appear to be that nickel will make one of the more significant recoveries in 2019 to average US$6.32/lb."

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Juxtaposing beliefs

Vested Equities CEO Stuart McClure told S&P Global Market Intelligence that while he has a similar belief in nickel, "it's going to be a tough year" for commodities' equity markets with U.S. President Donald Trump in power and expensive global markets.

Goldman Sachs said in December 2018 that gold and base metals offered an "extremely attractive" entry spot in long positions; and Canadian firm Haywood Securities also has a positive full year outlook for base metals.

HSBC Bank Australia Chief Eonomist for Global Commodities Paul Bloxham said that while "there is always the risk of trade tensions feeding through to a weaker global story which has a reverberating effect," the key is China's domestic demand which will receive support from policies.

"China's domestic growth has slowed recently but we think it get will support from policy stimulus which should support demand for base metals as well as the bulks," he told S&P Global Market Intelligence.

"The Chinese authorities are likely to deliver a fiscal stimulus this year to support growth which will include looser monetary policy, corporate tax cuts and support for infrastructure investment."

He also believes the mining industry has been doing quite well, with profitability high, and the major commodities which Australia exports — iron ore and coal — have well-supported prices. Therefore, "I'm more opportunistic on the resources industry, whose capacity utilization is running at very high levels having been very weak in 2016."