Volatility in lithium, China's copper/aluminium output; Citi's view on commodity prices in 2024.

-Lithium prices to remain volatile in the near term
-China's copper/aluminium demand should remain solid
-Gold preferred in 2024

Volatile Lithium

As a chemical, lithium is the most volatile metal on the periodic table. As a commodity, lithium carbonate is currently matching that volatility, as have ASX-listed lithium miners, whose share prices have been flying around every day.

Lithium carbonate futures prices saw increased volatility with two down-limits and two up-limits* last week for the contract expiring in Jan 2024. Given the scarcity of price reference points, a volatile lithium futures market could impact the lithium equity market sentiment, in Macquarie's view.

*Trading is halted when futures prices hit daily up/down limits.

The broker believes the futures market could have further price swings in the very near term, due to physical delivery instead of cash settlement, various product specifications, and recently tightened magnetic impurity requirements.

The resumption of lithium production in November was short-lived as marginal players' profitability deteriorated on lowered lithium prices, resulting in production cuts again in December, Macquarie notes. China's lithium carbonate production is expected to decrease -5% month-on-month in December.

Lithium prices have pulled back faster and to lower levels lower than consensus expectations. Citi's global commodity team has reduced lithium price forecasts by -20-30% in 2024.

For those looking for positive catalysts, Citi flags the chance of a short squeeze on the Guangzhou Future Exchange before year-end and expects the third quarter FY24 to bring a price reprieve on post Chinese New Year restocking.

Citi prefers Mineral Resources ((MIN)) against a neutral-to-bearish lithium view due to its iron ore exposure. The broker downgrades Pilbara Minerals ((PLS)) to Neutral on valuation but notes Pilbara Minerals is most leveraged to any pricing bounce.

Macquarie has also reviewed lithium price sensitivity for major producers under its coverage universe. Mineral Resources boasts the greatest lithium earnings sensitivity in the near term, with more than 15% earnings movement for 10% lithium price changes in FY24.

On base case forecasts, both Pilbara Minerals and Allkem ((AKE)) have around 10% earnings changes with a 10% move in lithium prices, while IGO ((IGO)) has a sensitivity of  around 6% in FY24. Allkem's valuation is most sensitive to lithium price shifts, with a 10% uplift in lithium prices over the life of the asset translating to some 20% increase in net present value.

Valuation for other lithium majors also indicates strong correlation to lithium prices, with a sensitivity of 12-14%.

Copper & Aluminium

Despite China's copper/aluminium output reaching all-time highs, trade data and inventory changes suggest this metal is being absorbed, not piling up or being exported, implying continuing strong domestic demand in China, Morgan Stanley notes. Demand remains strong for both metals, despite macroeconomic/property sector concerns.

Property completions have remained resilient, the broker points out, up 18% year to date, and there is potential for next year to remain supportive. Supply side disruptions such as aluminium production cuts in Yunnan, and copper supply disruptions in Chile/Panama, could offer additional upside risks to prices.

For aluminium, Morgan Stanley prefers South32 ((S32)) and Rio Tinto ((RIO)), with around 32% of South32's FY24 revenue and 21% of Rio's 2024 revenue coming from aluminium.

For copper, the broker prefers Rio Tinto over BHP Group ((BHP)) given increasing volumes from Oyu Tolgoi/Kennecott.

Commodities in General

Citi is broadly neutral-to-bearish on commodities as an asset class in 2024 save for precious metals. Retail and institutional commodity fund assets under management were unchanged in November versus October at around US$650bn, but total AUM is down -US$280bn since the first half FY22 peak, challenging the "super-cycle" narrative pushed by some structurally bullish market participants.

The broker is not surprised by the recent unwind in gold markets and would "buy the dip" around US$1,950/oz. Consolidation and profit-taking can be expected in the current high price environment, especially as investor demand for duration [bonds] and risk exposure was so aggressive in November.

Crude oil markets are struggling for bullish momentum and investor longs are historically light. In Citi's view, Brent crude trading should find fundamental support at or above current levels as OPEC-Plus cuts roll forward and are broadly delivered.

Note that the market is sceptical regarding OPEC-Plus cuts as they are voluntary. Recent price depreciation has reflected a belief some members will simply ignore them.

The early December copper rally to US$8,600/t was very short-lived as prices dropped back to US$8,300/t, while iron ore prices fluctuated just north of US$130/t. From here, Citi's base case is still a run-up over the coming weeks on further China easing anticipated at the upcoming Central Economic Work Conference.

The broker expects policymakers to step up urban village redevelopment/affordable housing projects to buffer the drag from community housing sluggishness, and there is a potential for a positive shift in China growth expectations driven by the property sector depending on the degree of easing.

A weak US dollar or dovish December Fed statement could also be supportive for the metals complex.

That said, as 2024 drags on, Citi expects a substantial deterioration in mature/developed/industrial economic growth, weighing on base metals demand and investor risk appetite. The broker believes that interest rate hikes have not delivered their biggest hit to growth yet, with rising debt service burdens (as debt matures) and the lagged impact of tightening financial conditions set to drive developed markets into recession during 2024, including both the US and European economies.

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