More upside in Copper, J-curve coming on Lithium, Iron Ore’s run is done – Citi

Aussies love investing in mining stocks – I bet you’ve got at least one mining company in your portfolio right now. And why not? If you can time the commodity price cycle correctly, to quote various chat room ramp-talkers, there are “bags for the taking”! 🚀

But! Investing in mining stocks is a double-edged sword. If the commodities your mining stocks are digging up are in the downward spiral part of their commodity price cycles, it’s going to be all 😭 emojis for you!

So, which way are the prices of your favourite commodities about to go? Good news! I’ve got the latest lowdown on major broker Citi’s commodity price forecasts to help you successfully navigate the current price cycle. Let’s kick off with every Aussie investor’s favourite commodity at the moment: copper.

More upside in copper, other base metals less certain

Citi notes it is still “bullish” on copper. The broker expects the price on the London Metals Exchange (LME) to tip US$10,500/t in the “coming weeks”. FYI, copper is currently trading around US$9,870/t – so Citi’s call represents roughly a 6% gain to come.

To be fair, as I reported back in March, Citi’s standing view at that time was “everything below 9k is cheap for copper”. If copper does hit Citi’s target of US$10,500/t it would have gained over 20% in just a few months – so, a very nice call indeed.

The reasons why Citi is still bullish on copper:

• LME and Shanghai Futures Exchange (SHFE) copper are likely to decline sharply over the next three months as this will help drive short-covering

• Weaker refined output growth

• Rising US Purchasing Manager Index (PMI) readings

In summary, inventory drawdowns and supply-side constraints will result in the copper market registering a deficit in 2024.

Interestingly, Citi is nowhere near as bullish on other base metals such as aluminium, nickel, zinc, tin, and lead. For these metals, prices have likely run ahead of underlying fundamentals as fund managers have scrambled to gain exposure to any metal in the wake of copper’s rally, plus due to a general increase in what the broker calls “growth optimism”.

Citi notes, “this relative weakness for copper’s peers here suggests elevated positioning and prices are more exposed than copper to a pullback in the coming months”. See below for Citi’s price forecasts for each metal over various look-forward periods (Note: +/- subscript numbers indicate a change from Citi’s last forecast).

Citi industrial metals latest price forecast summary. Source: Citi Research, LME, Bloomberg. From: Citi Research “Metal Matters: Where to next for industrial and battery metals and iron ore? We revise our price forecasts”, 28 April 2024.

Patience required for lithium’s J-curve

Switching to Citi’s views on lithium, the broker has reiterated its short-term bearish – long-term bullish stance. The rationale for Citi’s bearish short-term outlook is explained better in this recent article I wrote about what they see as a mispricing opportunity in certain lithium futures contracts.

In summary, Citi notes that “meaningful supply cuts” are “yet to materialise to ease market surpluses”. At the same time, weaker sentiment towards EVs in Europe and sales mix changes favouring internal combustion engine and hybrid lines in the US are likely to subdue demand in the short term.

Longer term, the broker continues to see a “bullish demand case for lithium and broader EV penetration”. Technological innovation such as Chinese battery maker CATL’s new lithium chemistry-based 1,000km range, 205 Wh/kg energy density battery will “meaningfully” impact the market from next year, Citi says.

The table below shows Citi’s lithium mineral price forecasts out to 2026. Given current prices, it appears that lithium bulls might have to wait until 2025 to see any meaningful gains in lithium minerals prices.

Citi Lithium Price Forecast Summary. Source: Citi Research, LME, Bloomberg. From: Citi Research “Metal Matters: Where to next for industrial and battery metals and iron ore? We revise our price forecasts”, 28 April 2024.

Iron ore’s run is done for now

Citi says it is “neutral” on iron ore. The broker believes that the rebound from the April low of just under US$100/t to just over US$110/t is the result of an improvement in sentiment towards the Chinese economy – mainly on the back of better-than-expected manufacturing data and accompanying improved steel production.

Iron ore CFR China 62% spot price

Looking forward, Citi suggests that for iron ore to maintain the current rally, the data will need to remain positive to help drive steel production in the coming months.

Potentially working against this, however, is the fact that Beijing is heavily involved in steel output, and it’s officially aiming for only a flat output performance this year. Port inventories are high, and this could also “cap price upside”, notes Citi.

Citi’s zero-to-three-month price target for iron ore is US$120/t which does allow for some modest upside from the current price. The broker did not provide forecasts further out than this period in the latest update.