Volatility in lithium,
-Lithium prices to remain volatile in the near term
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-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
*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.
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
Citi prefers Mineral Resources ((MIN)) against a neutral-to-bearish lithium view due to its iron ore exposure. The broker downgrades
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
Valuation for other lithium majors also indicates strong correlation to lithium prices, with a sensitivity of 12-14%.
Copper & Aluminium
Despite
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
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
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
The broker is not surprised by the recent unwind in gold markets and would "buy the dip" around
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
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
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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