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21 June 2022 Global
COMMODITIES
As goes global growth, so go aggregate
commodity prices
This publication has been prepared by Sales and Trading personnel at Macquarie
and is not a product of the Macquarie Research Department.
Commodities Compendium
Fork in the road
In March we laid out a bearish case for commodity prices, forecasting all markets
under our coverage, with the exception of EU carbon, to be lower in a year’s time.
Specifically, we believed contemporary market conditions would “set at least a
cyclical high watermark for many commodities… strong supply growth is being
incentivised and its arrival threatens to dovetail with the negative impact of
inflation on end demand. As central banks attempt to deliver a soft landing, the
risk of a policy mistake (i.e. recession) is uncomfortably high”.
Source: National Statistics Agencies, IMF, Macrobond,
Bloomberg, Macquarie Strategy, June 2022
Given commodities’ aggregate relationship to global GDP and our economists’
now explicit forecasts for a global growth slowdown and developed market
recessions in summer 2023, we maintain this bearish view, before forecasting
significantly divergent performance between structural winners and losers
over the medium-term. Much of which, unsurprisingly, should be driven by the
energy transition.
While significant investment will be required in almost all markets to avoid
dramatic deficits later this decade, from nickel pig iron to shale oil production,
current prices are more than incentivising a sufficient supply response for
the coming quarters. Even commodities with far longer project lead times, such
as copper, are entering a period of healthy incremental supply growth.
Strategists
Macquarie Bank Limited London Branch
Marcus Garvey +44 20 3037 1185
marcus.garvey@macquarie.com
Alice Fox +44 20 3037 1126
alice.fox@macquarie.com
Serafino Capoferri +44 20 3037 2517
serafino.capoferri@macquarie.com
Jim Lennon, Senior Commodities
Consultant
+44 20 3037 4271
jim.lennon@macquarie.com
Aurelia Waltham +44 20 3037 2517
aurelia.waltham@macquarie.com
Macquarie Bank Limited, Representative Office
Vikas Dwivedi +1 713 275 6352
vikas.dwivedi@macquarie.com
Walt Chancellor +1 713 275 6230
walt.chancellor@macquarie.com
Macquarie Commodities Trading (Shanghai) Co. Ltd
Lynn Zhao +86 21 2412 9035
lynn.zhao@macquarie.com
Joyce Li +86 21 2412 9087
joyce.li@macquarie.com
Macquarie Group
Sukriti Kalra +91 96 5452 1131
sukriti.kalra@macquarie.com
Nevertheless, we did not anticipate the speed at which many markets would
correct in Q2. To a certain extent this reflects an unwind of risk premium in
those markets where Russian supply has neither yet been heavily disrupted (e.g.
palladium and aluminium amongst the largest losers) nor is it expected to be in
the near future – note that outperformers thermal coal and crude both face export
sanctions, whereas TTF gas had been the largest faller before the past week’s
supply disruptions.
Added to this has been the weakness in equity markets at the same time as the
impact of lockdowns in China proved far more severe than had been
foreseen in early March. In combination, these factors change the expected
path for prices, with the pace at which global growth slows presenting a fork
in the road for markets.
The bull case for a Q3 rebound rests on a stimulus led China reopening and
US resiliency supporting end demand, with oil also benefitting from strength
in transportation fuels through the summer months, ahead of potential supply
disruptions into the winter. In contrast, the bear case focuses on signs that
European demand is already deteriorating, as the wider global restocking
cycle peters out. All while China’s reopening is struggling to gain traction and a
US slowdown looks increasingly likely.
Given our global growth forecasts, our base case (outside individual markets’
micro drivers) is for steady prices in Q3 and a firming into Q4 as China’s
economy rebounds and the US proves resilient. Nevertheless, that should be as
good as things get, with China failing to sustain a strong growth cycle and
developed markets falling into a technical recession by summer 2023. At the
same time, growing examples of physical demand weakness (e.g. falling physical
aluminium premiums, collapsing scrap steel prices) make us increasingly wary
that industrial commodity markets could roll over sooner rather than later. High
frequency indicators will be key to watch.
Sales and Trading personnel at Macquarie are not independent and, therefore, the information herein may be subject to certain conflicts of
interest, and may have been shared with other parties prior to publication. Note: To the extent Macquarie Research is referenced, it is
identified as such and the associated disclaimers are included in the published research report. Please refer to the important disclosures
www.macquarie.com/salesandtradingdisclaimer.
Commodities Compendium
Inside
Key commodity calls
3
Summary of latest commodity price forecasts
4
Material price forecast revisions
5
Macro Outlook
6
Commodities Backdrop
14
Oil & Natural Gas
23
Copper
26
Aluminium
30
Alumina & Bauxite
34
Zinc
38
Lead
42
Tin
45
Nickel
47
Stainless steel
49
Ferrochrome
51
Molybdenum
53
Steel
55
Iron ore
57
Metallurgical Coal
59
Thermal Coal
61
Carbon
65
Gold
68
Silver
72
PGMs
75
Cobalt
79
Lithium
81
Rare earths
83
21 June 2022
2
Commodities Compendium
Key commodity calls
Our commodity preferences listed below are set relative to spot prices reported shortly before the
publication of this report.
3–6-month tactical views
•
Iron ore – Has been our downside pick if China’s reopening failed to gain traction quickly but, having
already fallen to ~$110/t, should find some support.
•
Copper, Aluminium – Both markets have seen an improved China import “arb” and stronger bonded
premiums into recent price pull backs. With investor length having liquidated, they appear
comparatively attractive for any signs that China’s industrial and construction activity is picking up.
•
Silver – A build of investor shorts creates vulnerability for some position covering but the market faces
significant headwinds from rising rates and slowing global growth. We expect it to break lower.
Next 12 months’ most preferred
•
EU Carbon – Increased coal burn to offset weaker industrial activity.
Next 12 months’ least preferred
•
Oil – Demand headwinds to emerge post summer’22 as inflationary pressures weigh, at the same time
as US production ramps up and Russian export losses miss expectations.
•
Industrial metals and bulks – A global growth slowdown would be bad news for prices across the
board.
5-year winners
•
Carbon – California prices will struggle to converge with European ETS but both markets should
benefit from a policy tailwind.
•
Electrification metals – The EV revolution is underway and sustained high prices will be required for
sufficient supply. Though not such extremely high prices as lithium is currently enjoying.
5-year strugglers
•
Palladium – The end of the structural bull market, with autocatalyst demand set to decline at the same
time as primary and secondary supply rise.
•
Zinc – Alleviation of smelter bottleneck compresses prices.
•
Fossil Fuels – Current cyclical tightness wanes and structurally negative demand trends develop.
Fig 1 Next 12-months: Downcycle likely to extend into 2023,
even if China reopens and US resilience enables a bounce first
Sep-23 vs. Sep-22 quarterly forecast avg
20%
Fig 2 Five years out: Prices need to reset before we can be
bullish on structural winners, while losers face a long way down
40%
2026 vs. 2023 annual forecast avg
20%
10%
0%
0%
-10%
-20%
-20%
-40%
-30%
-60%
-40%
EU carbon
California carbon
aluminium
iron ore
platinum
alumina
silver
tin
lead
palladium
steel scrap
gold
copper
zinc
nickel
cobalt
steel (HRC)
natural gas - HH
crude oil - Brent
thermal coal
hard coking coal
lithium
Source: Macquarie Commodity Strategy, June 2022
21 June 2022
silver
EU carbon
platinum
nickel
California carbon
gold
aluminium
steel (HRC)
copper
tin
lead
steel scrap
cobalt
alumina
crude oil - Brent
iron ore
zinc
hard coking coal
natural gas - HH
palladium
lithium
thermal coal
-80%
-50%
Source: Macquarie Commodity Strategy, June 2022
3
Commodities Compendium
Summary of latest commodity price forecasts
Fig 3 Macquarie’s metals, bulk and energy price forecasts
commodity
unit
LT price
2022$ real
Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
est.
est.
est.
est.
est.
2021
2022
2023
2024
2025
2026
est.
est.
est.
est.
est.
est.
copper
aluminium
zinc
nickel
lead
tin
$/tonne
$/tonne
$/tonne
$/tonne
$/tonne
$/tonne
7,700
2,500
2,350
20,000
1,850
30,000
9,680 9,800 10,000 9,500 8,700 9,310 9,868 8,650 8,100 8,350 9,050
2,850 2,700 2,800 2,900 2,850 2,476 2,906 2,800 2,963 3,138 3,025
3,960 3,800 3,950 3,600 3,300 3,006 3,865 3,200 2,800 2,650 2,600
29,500 27,000 23,000 21,000 21,000 18,459 26,863 21,000 21,000 23,000 24,500
2,230 2,150 2,250 2,000 1,950 2,203 2,241 1,963 1,900 1,925 2,000
37,500 35,000 40,000 37,000 35,000 32,593 38,968 34,000 30,000 33,000 35,000
gold
silver
platinum
palladium
rhodium
$/oz
$/oz
$/oz
$/oz
$/oz
1,500
21.0
1,050
1,000
2,000
1,875 1,850 1,750 1,650 1,600 1,799 1,838
22.75 21.50 20.00 19.50 19.00 25.14 22.08
950 1,000 1,100 1,050
950 1,096 1,021
2,100 2,100 2,250 2,100 1,900 2,410 2,199
16,500 14,000 15,000 12,000 10,000 20,125 15,823
iron ore, spot fines
iron ore, spot lump
hard coking coal
LV-PCI
semi-soft coking coal
steel (avg HRC)
steel scrap (avg #1HMS)
$/tonne, cfr China
$/tonne, cfr China
US$/tonne, fob Aust.
US$/tonne, fob Aust.
US$/tonne, fob Aust.
$/tonne
$/tonne
80
96
175
130
117
527
230
150
168
460
437
382
1,111
508
120
145
380
342
304
998
442
135
160
350
315
280
870
496
120
139
300
267
267
689
400
120
138
250
213
213
689
400
160
183
225
163
154
1,125
456
thermal coal, spot
thermal coal, JFY
EU carbon
California carbon
US$/tonne, fob Aust.
US$/tonne, fob Aust.
EUR/t, spot
US$/tonne
56
58
100
44
360
320
83
33
320
320
80
33
330
320
80
33
300
320
90
35
250
200
90
35
135
100
53
23
alumina
ferrochrome
molybdenum
cobalt
lithium
US$/tonne, spot fob Aust.
c/lb, EU
$/lb
$/lb (99.8%)
$/tonne, Asia Carbonate
288
130
13.00
28.5
14,000
370
360
380
380
370
328
383
368
350
337
340
216
216
200
180
150
152
203
153
145
150
155
18.30 17.00 16.00 15.00 15.00 15.77 17.59 15.00 14.00 13.00 13.00
38.50 36.00 32.00 30.00 28.00 24.31 35.63 28.50 27.75 27.00 27.00
64,300 65,000 58,000 51,000 44,000 16,578 61,337 41,500 29,000 23,250 18,000
crude oil - Brent
crude oil - WTI
natural gas - HH
$/bbl
$/bbl
$/mmBtu
61.00
57.00
3.75
110.00 110.00 100.00
107.50 108.00 97.00
7.50
7.10
7.30
85.00
80.50
7.00
80.00
75.50
5.00
1,613
19.88
1,025
1,925
9,500
1,650
22.00
1,150
1,550
5,000
1,700
23.25
1,200
1,250
3,000
1,750
24.50
1,200
1,200
2,750
137
159
419
371
330
1,012
494
120
138
248
205
201
686
400
100
118
280
196
168
650
376
95
115
220
154
132
674
367
105
125
200
140
120
720
405
319
267
81
32
233
230
90
35
123
125
90
38
85
85
95
40
80
69
110
40
70.82 104.48
67.97 101.88
3.71
6.62
76.25
71.25
5.50
66.34
61.99
4.08
68.29
63.81
4.20
70.28
65.68
4.32
Source: Macquarie Commodity Strategy, LME, CME, ICE, Bloomberg, Platts, (i.e. 2022$ real, active from 2027), June 2022
21 June 2022
4
Commodities Compendium
Material price forecast revisions
• Crude oil upgrade – Having marked our forecasts to market, we still expect fears of Russian supply
disruptions to dissipate and rising shale production to help move the market towards a 2Mbpd surplus
by Q4 but demand should benefit from strong transport fuels consumption through the summer months
and it will take time for light-sweet balances to visibly loosen.
• Thermal Coal upgrade – Surging European imports as the continents’ consumers look to get ahead of
August’s ban on Russian imports, amidst disruptions to gas supplies, and stronger Indian import
demand combine to lift prices.
• EU Carbon long-term upgrade – Increased coal burn should lift emissions and offset reduced demand
from an industrial slowdown. This draws down banked allowances and tightens longer-dated balances.
• Base metals downgrade balance of 2022 – Unwind of supply risk and negative impact from China’s
lockdowns, alongside rising concerns of a global growth slowdown arriving sooner rather than later.
• Precious Metals downgrade – Faster than initially anticipated unwind of risk premium and more
aggressive pace of monetary tightening, while silver also suffers from downgraded global growth.
• Steel raw materials downgrade 2022, upgrade beyond – Slowing steel production has now put raw
materials under pressure but China stimulus should provide support in 2023.
Fig 4
Revisions to Macquarie’s price forecasts (annual averages)
commodity
2022
2023
2024
2025
2026
LT price
2022$
copper
aluminium
zinc
nickel
lead
tin
-3%
-18%
6%
3%
0%
-10%
1%
-11%
7%
0%
1%
0%
1%
-3%
8%
0%
0%
0%
-5%
0%
4%
3%
0%
0%
-2%
0%
0%
30%
0%
-5%
3%
0%
4%
0%
2%
0%
gold
silver
platinum
palladium
rhodium
-1%
-7%
-7%
-16%
-13%
0%
-1%
-16%
3%
0%
0%
0%
0%
3%
0%
0%
0%
0%
0%
0%
0%
0%
-4%
0%
0%
0%
0%
0%
0%
0%
iron ore, spot fines
iron ore, spot lump
hard coking coal
LV-PCI
semi-soft coking coal
steel (avg HRC)
steel scrap (avg #1HMS)
-3%
-4%
-3%
6%
-3%
28%
11%
20%
17%
14%
14%
14%
10%
0%
11%
9%
17%
17%
17%
4%
7%
0%
0%
10%
10%
10%
3%
0%
0%
0%
11%
11%
11%
6%
0%
0%
0%
0%
0%
0%
15%
0%
thermal coal, spot
thermal coal, JFY
EU carbon
California carbon
3%
51%
13%
0%
39%
51%
-8%
0%
17%
16%
-10%
0%
0%
0%
19%
0%
0%
0%
22%
0%
0%
0%
25%
0%
alumina
ferrochrome
molybdenum
cobalt
lithium
-11%
17%
-1%
0%
-1%
-1%
11%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
crude oil - Brent
crude oil - WTI
natural gas - HH
31%
34%
47%
29%
32%
48%
11%
12%
47%
12%
12%
48%
12%
13%
48%
9%
10%
44%
Source: Macquarie Commodity Strategy, LME, CME, ICE, Bloomberg, Platts, June 2022
21 June 2022
5
Commodities Compendium
Macro Outlook
The final countdown
- extract from: The End of "Modern Monetary Theory"
The post-COVID economic rebound has continued, with global GDP in Q1 around 4.8% above its preCOVID level and only 1½% below its pre-COVID trend. However, the combination of high inflation, the war
in Ukraine and tighter monetary conditions, along with Chinese lockdowns, has seen the underlying pace
of expansion moderate significantly.
•
Global activity looks to have fallen modestly in Q2. However, much of the dip was technical in nature,
with growth likely to resume in Q3.
•
The fall was led by China, where the lockdowns likely saw GDP fall by nearly 2% in the quarter.
However, with gradual reopening underway, activity has already begun to recover.
•
In the rest of the world, growth was also soft, with GDP expected to be up only a modest ¼%.
 In the US, much of the weakness is attributable to a slower pace of inventories accumulation and
weak net exports, with domestic demand generally remaining solid.
 But we are starting to see a more fundamental slowdown in the UK and to a lesser extent Europe,
as high energy prices, and the resultant fall in real wages, weigh.
Fig 5 Global GDP has continued to recover, but activity is
expected to have dipped in Q2
Global Real GDP
%
12
Composite PMIs
Index
60
Cumulative change from peak
World ex-China
World
Pre-COVID
(2015-19) trend
9
Fig 6 The Q2 weakness was mainly driven by the China
lockdowns, but cracks have also begun to appear elsewhere
55
6
50
3
45
GFC
0
40
-3
China
35
-6
30
Now*
-9
*Dashed line represents Macquarie
forecast for 2022Q2
-12
-4
-2
0
2
4
6
8
10
12
Quarters before/after peak in real GDP
Source: Macrobond, Macquarie Macro Strategy, June 2022
14
16
25
20
15
16
17
18
19
20
21
22
Source: IHS Markit, Macrobond, Macquarie Macro Strategy, June 2022
While the relaxation of lockdowns in China, coupled with significantly policy stimulus, will help to support
global growth over the remainder of 2022, the outlook for next year has soured materially alongside
persistent, elevated inflation. Indeed, we now expect several of the major advanced economies – including
the US, UK, Eurozone and Japan – to enter recession over the next 12-18 months, as strong inflation
weighs on real incomes and sentiment, and as monetary policy moves from being highly accommodative
to contractionary.
21 June 2022
6
Commodities Compendium
Fig 7 Global growth is likely to weaken considerably from
late 2022…
Global GDP Growth
%
15
Market exchange rate weighted
12
Year-ended
9
6
Fig 8 …despite robust growth in China, as recessions hit
many major advanced economies
Real GDP Growth
%
6
Quarterly
Macquarie
forecasts
5
Australia
4
Average
(1980-Present)
3
US
3
China
2
0
1
-3
Quarterly
-6
0
Eurozone
-1
-9
-12
10 11 12 13 14 15 16 17 18 19 20 21 22 23
Source: Macrobond, Macquarie Macro Strategy, June 2022
•
-2
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
Jun-23
Dec-23
Source: Macrobond, Macquarie Macro Strategy, June 2022
Over 2022, we expect global growth to come in around 2½%, modestly below its long-run average,
with China accounting for more than half of that growth.
 Risks are skewed towards the downside given the possibility that falling risk assets will drive the
advanced economies into recession sooner than currently expected.
•
We expect growth to then slow to around 1¼% over 2023. However, this understates the extent of the
projected slowdown, with annualised growth over the second half of the year expected to come in at
around ½%, well below the 1% that generally constitutes a global recession.
 While there are risks to both sides of this outlook, a sharper slowdown is more likely than a soft
landing.
 Energy markets remain a key risk. If Russia were to weaponize the flow of energy commodities to
Europe, we could see further dramatic price increases, which would almost certainly push Europe
and, with a lag, the rest of the world into a deeper recession. Note that Russia withheld gas from
Europe last week, suggesting that if the war in Ukraine continues, this scenario will become
increasingly likely as the Northern Winter approaches.
 With China planning to stick with the zero COVID policy for the foreseeable future, it is likely that
China will have further outbreaks and lockdowns, which, given the large contribution China makes
to global growth, will likely drive further output volatility.
 Finally, we do not fully understand how quantitative easing or quantitative tightening work. And with
the Fed planning to reduce the size of its balance sheet by $95 bn per month from September, the
risks of significant financial volatility and poor market liquidity will build as the year progresses,
potentially forcing the Fed to pause at some stage.
Major economy outlooks
United States – Recession 2023
The US economy has proven resilient thus far in 2022, although overall growth has clearly slowed due to
fiscal policy withdrawal, headwinds for real consumption from inflation, and the impact on housing activity
resulting from the dramatic back-up in mortgage rates.
Real GDP contracted in Q1 and appears to be tracking towards a weak Q2. Much of this, however, has
been due to headwinds from net exports and a reduced pace of inventory building relative to the elevated
levels that prevailed in the latter half of 2021.
Underlying real activity has been stronger, with final domestic demand tracking in the 2-2.5% range. We
expect this pace to continue in 2H22, with consumer spending on services and business fixed investment
(particularly in the energy sector) key growth drivers.
21 June 2022
7
Commodities Compendium
Looking ahead to 2023, the outlook is less benign. The impact of the 2022 sharp rate hike cycle should
start to become more apparent in final demand. Housing investment is likely to become a more material
drag, the consumer is likely to be less able to cope with the ongoing headwinds to real disposable income,
and weakness in financial markets could lead to hesitation in the corporate sector to invest and hire.
In our baseline scenario, the combined impact of these forces pushes the US into a recession in 2023, with
Q2 likely to be marked as its starting point.
Fig 9 US consumption remains strong, but inflation is
eating into real income growth…
Fig 10 …and while there is still more than 2 trillion dollars of
“excess saving”, most resides with wealthy folk who are less
likely to spend
US Real Personal Disposable Income
US$tn
85
US Cash & Deposits by Wealth Percentile
Trillions
Monthly
80
75
US$tn
2.5
Level as at 2021Q4 relative to 2019Q4
2.0
1.5
70
1.0
65
0.5
60
*Dashed line indicates extrapolated
2015-19 exponential trend.
0.0
Top 10%
55
18
19
20
21
Source: Macrobond, Macquarie Macro Strategy June 2022
22
50-90%
Wealth percentile
Bottom 50%
Source: Macrobond, Macquarie Macro Strategy, June 2022
Eurozone – Stagflation
Eurozone GDP growth was relatively strong in Q1, despite the headwinds from higher energy prices, weak
consumer sentiment and supply-chain constraints. However, the headline figure masks weakness in
underlying demand. Indeed, more than all of the growth was driven by an inventory rebuild and distortions
related to Ireland’s net exports, with final domestic demand contracting in the quarter.
In the near term, we expect the Eurozone economy to eke out modest growth, supported by an easing in
supply-chain constraints, a release of pent-up demand (following reopening in late Q1/early Q2) and fiscal
measures (both the Recovery and Resilience Facility and recent policies to limit the effects of elevated
energy prices on consumers and businesses).
However, heading into 2023, still-elevated energy prices, slower global growth, and tightening monetary
conditions are expected to weigh further on activity, leading to a mild recession beginning early in the year.
While there are risks to either side of this forecast, recent developments suggest risks are skewed towards
an earlier recession.
China – Lockdown-driven volatility
We expect China’s economy to stage a robust recovery in 2H22, after the sharp slowdown in 2Q22 due to
the lockdowns. In terms of policy support, we expect it to be conducted in two stages. The first stage would
take place in the next month or two, when policymakers would implement the existing measures as quickly
as possible, including the issuance of RMB3.65tn local government special bonds. The second stage
would happen around the Politburo meeting in late July, when policymakers could roll out additional
stimulus measures.
The two major concerns at this stage are the property sector and the zero COVID policy. Regarding
property, 2Q22 might be the low point for the sector, which could then see some improvement in 2H22 on
the removal of lockdowns and more policy easing. Regarding the zero COVID policy, policymakers have
adopted regular mass PCR testing and quick lockdowns to avoid another long lockdown. That said, the
COVID situation remains the key downside risk for China for the rest of this year.
21 June 2022
8
Commodities Compendium
Fig 11 Eurozone growth remains solid for now, but the UK
appears to already be in recession
Composite PMIs*
Index
65 *y-axis truncated
Fig 12 Chinese activity fell in Q2, but reopening should
allow a bumpy recovery
Index
65
China Composite PMI*
*Average of IHS Markit and NBS measures
60
60
55
UK
55
50
45
50
Eurozone
40
45
35
40
30
35
Jan-19
25
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Jan-22
Source: IHS Markit, Macrobond, Macquarie Macro Strategy, June 2022
Source: IHS Markit, Macrobond, Macquarie Macro Strategy, June 2022
Australia – Resilient for now
Momentum in the Australian economy remains strong according to a range of high-frequency activity
indicators. Nonetheless, the economy is clearly facing a myriad of capacity constraints. Demand is
crashing up against tight supply across many parts of the economy and inflation is surging. High inflation
will weigh on real income and demand growth and monetary policy tightening is happening earlier, and
more aggressively, than what we envisaged earlier this year.
We have therefore lowered our 2022 growth outlook to 3½% on a year-ended basis – this is still above
‘potential’ and is expected to result in the unemployment rate falling a little further from 3.9% currently.
However, with higher unemployment necessary to help take the steam out of inflation, monetary policy will
need to be tightened until growth slows below potential. As a result, growth over 2023 is now expected to
be around 1¾% but with annualised growth slowing from 2¼% over H1 to 1-1¼% over H2.
Fig 13 Australia has experienced a V-shaped recovery, with
GDP per capita well above the prior trend
Australia - Real GDP per Capita
$000
21.0
Fig 14 Closed borders significantly contributed to the
labour market tightness
Ppts
1.0
Chain volume
20.5
Working Age Population
Deviation from pre-COVID trend
Japan
0.5
20.0
0.0
Trend: 2012-2019
19.5
Eurozone
-0.5
UK
19.0
-1.0
18.5
Canada
-1.5
18.0
US
-2.0
17.5
Australia
-2.5
17.0
16.5
05
07
09
11
13
15
17
Source: ABS, Macquarie Macro Strategy, June 2022
19
21
-3.0
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Source: Macrobond, Macquarie Macro Strategy, June 2022
Central banks
Despite early signs of a slowdown in growth, markets and central banks remain focused on inflation, with
the surge in prices that began in the US, now broadly based across the world, with parts of Asia (including
China and Japan) notable exceptions. We expect central banks to tighten fairly rapidly over the remainder
of the year, but recessions in 2023 will necessitate a pivot back towards easing (which a moderation in
inflation should generally permit).
21 June 2022
9
Commodities Compendium
Fig 15 G7 inflation is now the highest since the early 1980s,
with inflation becoming more broad-based
G7 CPI Inflation
%
16
Fig 16 Moreover, there are not many encouraging signs in
terms of a moderation in underlying inflation
US Core CPI Inflation*
%
8
Year-ended
14
7
12
6-month
annualised
6
10
5
Year-ended
8
4
6
3
4
2
2
0
1
-2
0
70
75
80
85
90
95
00
05
10
Source: Macrobond, Macquarie Macro Strategy, June 2022
15
20
*Average of weighted median and
trimmed mean CPI.
83
88
93
98
03
08
13
18
Source: Macrobond, Macquarie Macro Strategy, June 2022
Fed – Playing catch-up is hard to do
The FOMC hiked the fed funds rate by 75bps at its meeting last week, taking the rate to 1.5-1.75%. We
expect the Fed will hike rates by a further 75bps in July, which would bring the policy rate to the median
FOMC participant’s estimate of neutral (2.25-2.5%). Following this, we expect a more gradual pace to be
adopted, with 50bps likely in each of September and November and 25bps in December and January.
This would bring the fed funds rate into the 3.75-4.0% range – a level we believe will mark the peak for the
cycle. This level of the policy rate will be roughly “neutral” after adjusting for inflation that should prove to
be persistently above target. Beyond early 2023, however, we expect the fed to begin cutting rates as the
economy enters a mild recession and inflation momentum slows.
ECB – The end of negative rates
Alongside persistent inflation surprises and a reassessment of the medium-term outlook, the ECB’s policy
stance has turned decidedly more hawkish in recent months. Back in December, they had intended to
taper net asset purchases from EUR40bn per month in Q1 to EUR20bn per month by October, with net
purchases expected to continue until shortly before policy interest rates were first raised. However, at the
June meeting, the ECB announced that net asset purchases would end in June and that policy rates would
shortly be raised for the first time since 2011.
Consistent with this, we now expect the ECB to hike by 150bps over the remainder of this year, with the
deposit rate moving out of negative territory in September and reaching 1% by December – broadly in line
with market pricing. However, in contrast to the several further hikes priced by the market, we expect a
recession in early 2023 to force the ECB to reverse course, with policy rates ultimately ending the year
lower, albeit not in negative territory.
RBA – 180-degree turn
The backdrop of high inflation has seen a sharp change in the RBA’s rhetoric, with Governor Lowe
suddenly an inflation fighter. We expect the RBA Board to hike by 50bps in both July and August, the
second increase being just after a likely strong Q2 CPI print. We have then pencilled in 25bps hikes for
September, November and December, taking the cash rate to 2.60% by year-end.
Ultimately, we see the cash rate rising to 3.10% by May next year, with a key downside risk being the
possibility that something “breaks” in the meantime. By late 2023, however, our expectation for much
slower growth and sharply lower inflation should provide scope for the cash rate to be lowered – we have
pencilled in 100bps of rate cuts by end-2024.
21 June 2022
10
Commodities Compendium
Fig 17 Central banks have embarked on the fastest hiking
cycle seen in decades
Central Bank Policy Rates*
%
5
Fig 18 In addition, the Fed is about to aggressively reduce
the size of its balance sheet
Federal Reserve Assets*
US$tn
0.8
*Dashed lines indicate marketimplied policy rate expectations.
4
Weekly, 3-month change
0.6
Australia
0.4
3
US
2
0.2
1
0.0
UK
0
-0.2
*y-axis truncated; dashed line represents indicative
future path given stated plans (out to mid-2023).
Eurozone
-1
12
13
14
15
16
17
18
-0.4
19
20
21
22
23
Source: Bloomberg, Macrobond, Macquarie Macro Strategy, June 2022
07
09
11
13
15
17
19
21
23
Source: Macrobond, Macquarie Macro Strategy, June 2022
Long-term rates – Is the 42-year downtrend over?
Long bonds have moved up sharply YTD with the US 10-year treasury yield rising ~175bps. This has captured
the dramatic shift in market pricing towards a sharp and more aggressive rate hike cycle from the Fed.
Our sense is that the lion’s share of this move has now unfolded. We believe the US 10-year yield should
stabilize (quarter-end basis) at around 3.5% into early 2023.
While markets could well price in an even more aggressive path from the FOMC should inflation continue
to surprise on the upside, in our view, there would be limited pass through from this to the 10-year yield.
Fixed income markets would likely become even more convinced in this scenario of the possibility of a
recession and would price in subsequent offsetting cuts in 2H23 or 2024. This dynamic is likely to keep the
10-year yield well anchored.
The risks to our view for a well anchored 10-year ahead would be a scenario where the FOMC prematurely
declares victory on inflation and pauses the rate hike cycle. Should this occur, it may lead the 10-year to
move higher due to rising inflation expectations (and more subsequent hikes to reign them in).
Looking into mid-2023, as the market begins to price in the recession, we are forecasting eventual cuts
from the FOMC, with the 10-year yield likely to decline again into the 2.0 to 2.5% range.
Fig 19 In recent history, the Fed has rarely hiked against the
backdrop of a slowing economy
US 10-Year Government Bond Yield
%
16
Fig 20 Coupled with a possible fall in equity markets, this
could see the Fed pause, which we think would be a mistake
%
4.5
14
4.0
12
3.5
Trend 1
std. dev.
10
10-Year Government Bond Yields
China
3.0
2.5
8
US
2.0
6
1.5
Yield and
trend
4
0.0
-2
-0.5
-4
-1.0
Jan-20
85
90
95
00
05
10
15
Source: Macrobond, Macquarie Macro Strategy, June 2022
21 June 2022
Japan
0.5
0
80
UK
1.0
Trend 2
std. dev.
2
Australia
20
Germany
Switzerland
Jul-20
Jan-21
Jul-21
Jan-22
Jul-22
Source: Macrobond, Macquarie Macro Strategy, June 2022
11
Commodities Compendium
Equities – The end of the long bull market
The S&P500 has now fallen by 23% since 3 January, taking it to ~15% below the post-GFC trend. A fall of
this magnitude would normally see the Fed stop tightening/begin to ease policy. However, with inflation
well above target and the labour market continuing to tighten, the Fed “put” is unlikely to kick in anytime
soon, with a rapid tightening likely to take place over the remainder of 2022.
Given the historical lead time between equity market peaks and recession, this suggests to us that either a
US recession will occur sooner than we expect or that we are witnessing a March 2000 repeat, when the
market peaked a full year ahead of the recession. Either way, the peak in equities is clearly in, with the
S&P500 now firmly in bear market territory. As such, the key question now is how much further the
S&P500 will fall before it finds a bottom.
Fig 21 The S&P has now fallen by 23% since 3 January,
taking it to ~15% below the post-GFC trend
S&P500 Deviation from Trend
%
20
S&P500 & US Recessions
Price return, exponential trend since 2009
QE2
Pause after
25bps hike
QE3
15
Started
cutting
10
Peak-to-trough change around recessions*
Aug 1929-Mar 1933
May 1937-Jun 1938
Dec 2007-Jun 2009
CAPE initially
Mar 2001-Nov 2001
above 20***
Nov 1973-Mar 1975
Dec 1969-Nov 1970
Feb 2020-Apr 2020
Feb 1945-Oct 1945**
CAPE initially
Jul 1981-Nov 1982
below 20
Aug 1957-Apr 1958
Nov 1948-Oct 1949
Jul 1990-Mar 1991 *Identified by recession dates.
Jan 1980-Jul 1980 **Decline occurred after recession ended.
***The CAPE was at 38.3 entering 2022.
Jul 1953-May 1954
%
Apr 1960-Feb 1961
Further
cuts &
QE
Stopped hiking
5
0
-5
-10
-15
-20
-25
-30
-35
09
10
11
12
13
14
15
16
17
18
19
20
Source: Macrobond, Macquarie Macro Strategy, June 2022
Fig 22 Despite expecting a plain vanilla recession, we
suspect the decline in equities could be towards the upper
end of historical norms, given the valuation starting point
21
22
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10
0
Source: Shiller, NBER, Macrobond, Macquarie Macro Strategy, June 2022
We suspect the recession next year will be of the plain vanilla type, possibly suggesting an average
correction. With the median decline around recessions being around 30%, this might suggest that most of
the decline is behind us. However, high valuation and the possibility that the long bond bull market is also
over (the end of the Fed “put”) significantly increases the likelihood of a decline towards the upper end of
the historical experience (~50%).
21 June 2022
12
Commodities Compendium
FX – The US dollar is far from finished
The likelihood of a global recession by mid-2023 makes us bullish the US dollar on a 12-month horizon:
falling equities, decelerating growth and generalised risk-aversion usually spark demand for dollars. The
dollar’s widening yield advantage should also help to keep it propped up in the meantime.
It has happened before. A hint of 2018 can already be seen in the current price action. Back then, Fed rate
hikes gave the dollar a commanding yield advantage over developed market peers, boosting the dollar
across the board. Then the sharp fall in US equities in Q4 2018 at the end of the Fed’s tightening cycle
activated the dollar’s safe-haven appeal, fortifying the dollar even further.
US dollar performance could now be set up for a replay of that era, but there are several notable
differences too.
First, the dollar has competition this time. Unlike in 2018, a global inflation surge means most central
banks are tightening now, with the notable exception of China and Japan. So, the dollar’s yield advantage
might not stretch all the way up to 2018 levels.
That said, economies outside the US look more brittle in the face of interest rate hikes, and this could
ultimately see central banks elsewhere lose their nerve before the Fed relents. Already the Bank of
England seems to be wavering in its commitment to further tightening.
Second, dollar valuation is already stretched. The dollar is starting from a point of over-valuation, which
suggests that the scope for further upside is more limited this time around. That’s especially true against
the likes of JPY, and we note that the onset of a global recession has historically triggered yen
outperformance against the dollar.
Third, equities are already in decline. Mild risk aversion is contributing to some dollar strength even now.
But the effect looks likely to intensify as the recession draws nearer, especially given the demise of the
“Fed put” safety net. Against this backdrop, the Australian and New Zealand dollars could be among the
biggest casualties up ahead – although an immediate step-up in China stimulus first should provide some
temporary respite, so long as commodity prices benefit.
Fig 23 GDP growth forecasts (forecasts shaded)
Quarterly
QoQ
US
China
Eurozone
Japan
UK
Canada
Australia
New Zealand
Global (MER)
Global (PPP)
YoY
US
China
Eurozone
Japan
UK
Canada
Australia
New Zealand
Global (MER)
Global (PPP)
Annual
Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
0.6
0.7
2.3
(0.8)
0.9
1.3
(1.8)
(3.8)
1.3
1.9
1.7
1.5
0.2
1.0
1.0
1.6
3.6
3.0
1.4
1.4
(0.4)
1.3
0.6
(0.1)
0.8
0.8
0.8
(0.2)
0.5
0.6
0.4
(1.8)
0.1
0.8
(0.4)
0.6
0.9
1.4
(0.1)
(0.2)
0.6
5.1
0.4
0.6
0.0
0.5
0.9
0.5
1.4
1.5
0.6
2.4
0.3
0.5
(0.3)
0.4
0.9
0.4
0.8
0.9
0.5
1.8
0.0
0.2
0.1
0.2
0.6
0.3
0.7
0.7
(0.1)
1.3
(0.4)
0.1
0.1
(0.5)
0.5
0.2
0.3
0.4
(0.4)
1.4
(0.3)
(0.2)
(0.3)
(1.3)
0.3
0.0
0.2
0.3
Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
4.9
4.9
4.0
1.2
6.9
3.8
4.1
(0.2)
4.7
5.1
5.5
4.0
4.7
0.4
6.3
3.2
4.4
3.1
4.5
4.6
3.5
4.8
5.4
0.7
8.4
2.9
3.3
1.2
4.2
4.2
2.2
1.5
3.3
0.9
2.3
4.3
3.4
0.3
3.0
3.7
2.3
6.2
1.4
2.3
1.3
3.5
6.2
4.8
3.1
3.3
1.2
7.0
1.4
1.8
0.0
2.3
3.4
2.2
2.6
2.8
2.1
5.0
0.8
2.2
(0.6)
1.7
3.3
2.6
2.9
3.0
1.6
5.0
0.2
1.5
(0.1)
0.6
2.9
1.4
3.4
3.7
0.6
5.0
(0.4)
0.7
(0.4)
(1.2)
2.4
0.9
2.1
2.4
2020
2021
2022
2023
2020
2021
2022
2023
(3.4)
2.2
(6.5)
(4.6)
(9.3)
(5.2)
(2.1)
(2.1)
(3.5)
(3.4)
5.7
8.1
5.3
1.7
7.4
4.5
4.8
5.7
6.0
6.2
2.3
5.0
2.8
1.4
2.9
3.2
4.1
2.1
3.2
3.5
1.0
5.0
0.0
1.1
(0.3)
(0.5)
2.6
1.4
2.4
2.7
(0.4)
1.4
0.1
(0.2)
(0.1)
(1.3)
0.3
0.1
0.1
0.1
(0.3)
5.0
(0.5)
0.0
(0.1)
(2.8)
1.7
0.6
1.3
1.6
Source: Macrobond, Macquarie Macro Strategy, June 2022
21 June 2022
13
Commodities Compendium
Commodities Backdrop
Fork in the road
Commodity sectors’ price performance has diverged over the past quarter, with industrial metals falling
sharply and precious metals giving back the gains which followed Russia’s invasion of Ukraine, while
energy markets have generally held up or made new highs. Although nickel is responsible for much of the
industrial metals’ basket performance, this arguably reflects a broader unwind of risk premium in those
markets where Russian supply has neither been heavily disrupted yet (e.g. palladium and aluminium
amongst the largest losers) nor is it expected to be in the near future – note that both coal and crude
exports face sanctions, whereas TTF had been the largest faller before the past week’s supply disruptions.
Fig 24 Base metals turned underperformers in Q2
290
Commodity Sector Performance (1/2020 = 100)
Fig 25 Partly weighed down by reduced supply risk
premium
10%
6%
Ranked Asset Class Returns
0%
240
-10%
-2% -2%
-8% -9% -9%
-10%-11%-12%-12%
-14%-16%
-18%
-20%
190
-30%
-31%
-40%
-39%
140
07/03/2022 to 14/06/2022
-50%
-47%
-60%
90
-57%
-70%
40
BCOM Spot
BCOM Precious Spot
BCOM Energy Spot
BCOM Base Spot
Source: Bloomberg, Macquarie Strategy, June 2022
Source: Financial Exchanges, Bloomberg, Macquarie Strategy, June 2022
Added to this has been the weakness in equity markets, creating a natural risk-off drag for industrial
commodities' price performance. As we have detailed before (see Commodities vs. Equities: The long and
winding road & Commodities vs. Equities: US exceptionalism), although commodity-equity correlations are
positive on average (e.g. c.30% rolling 30d correlation between BCOM and MSCI all world since 2000),
they are far from consistent over time. Moreover, commodities tend to move more closely with equity
earnings (ex-tech), than equity prices. Intuitively, this makes sense, reflecting the extent to which both are
driven by global growth.
Fig 26 Commodities and equities are positively correlated
on average, but the relationship is inconsistent
MSCI All World vs. BCOM Spot
100%
Fig 27 Commodities have tended to track better with equity
earnings, than equity prices
85
750
Commodities vs Equity Indices
80
80%
650
75
60%
40%
70
20%
65
0%
digital economy outperforms
physical
550
60
450
-20%
55
-40%
-60%
50
-80%
45
-100%
350
250
40
Rolling 30d Correlation
Average since 2000
35
2010
digital economy & global goods
demand surge, supply disruption
2012
2014
2016
MSCI All World BEst EBITDA
Source: MSCI, Bloomberg, Macquarie Strategy, June 2022
21 June 2022
2018
2020
150
2022
BCOM Spot (rhs)
Source: MSCI, Bloomberg, Macquarie Strategy, June 2022
14
Commodities Compendium
While equity market declines are largely driven by a contraction in multiplies, commodities should be able
to withstand the pressure. However, if equity moves start to reflect sustained falls in expected earnings,
that would be a different matter. In a similar vein, while USD strength has been a headwind for
commodities, it has been a relatively ineffectual one. Ultimately this comes back to causation - if USD
strength is a function of relative growth outperformance and yield spreads, then commodities can absorb it.
Were it to reflect risk-off financial flows due to a slowdown in global growth, this would present a far greater
challenge.
Indeed, outside of supply shocks, aggregate commodity prices consistently move with global growth –
metals arguably better with industrial production, oil with overall GDP – as the driver of cyclical demand
changes. Given our economists’ expectation for a global growth slowdown in 2023 and recessions across
major developed markets, we maintain our bearish view on the sector, believing, as set out three months
ago, “the current environment will set at least a cyclical high watermark for many commodities”.
Fig 28 Commodities have outperformed in the face of USD
strength
LME Copper vs. DXY Index
12,000
80
Fig 29 Aggregate commodity price changes have
consistently followed global growth
8%
Real Global GDP vs. Commodities
60%
11,000
10,000
85
6%
90
4%
40%
9,000
8,000
20%
7,000
95
2%
0%
6,000
100
5,000
0%
4,000
-20%
105
3,000
OPEC market share
fight + China
real/nominal GDP
divergence
-2%
2,000
2015
110
2016
2017
2018
2019
LMCADS03 Comdty
2020
2021
2022
DXY Index (rhs, inverted)
Source: LME, Bloomberg, Macquarie Strategy, June 2022
-4%
1995
1999
2003
2007
Real Global GDP (y/y)
2011
-40%
-60%
2015
2019
BCOM Spot Index (rhs)
Source: National Statistics Agencies, IMF, Macrobond, Bloomberg,
Macquarie Strategy, June 2022
Nevertheless, there is of course a significant difference between a steady view on the end point of lower
prices and expectations on what path will lead us there. Although our balances have generally assumed
very limited Russian supply losses, risk premiums have fallen far faster than we had anticipated. This
leaves open the potential for a negative supply surprise to support prices – such as an alumina shortage
hitting Rusal production or, as has emerged in recent days, disrupted gas flows lifting European power
prices sharply higher, with knock-on effects for aluminium and zinc smelting margins.
Fig 30 European gas stocks rebuilding with LNG imports,
but Russian vulnerability persists
Fig 31 With cash aluminium margins persistently negative
and zinc again under pressure
Illustrative Smelter EBITDA, US$/t
EU gas, % storage full
100
1,000
90
Zinc
500
80
-
70
(500)
60
(1,000)
50
(1,500)
40
2018
30
2019
20
2020
(2,500)
2021
(3,000)
10
0
Jan
Aluminium
(2,000)
2022
Feb Mar
Apr May Jun
Jul
Aug Sep Oct
Source: Bloomberg, Macquarie Strategy, June 2022
21 June 2022
Nov Dec
Source: Company Reports, CRU, Bloomberg, Macquarie Strategy, June
2022
15
Commodities Compendium
For oil, the dynamics are evidently different, as we estimate the market continues to price in a ~$25/bbl
risk premium for potential Russian export losses. While a reasonable figure given current uncertainty, we
expect this to dissipate if exports only decline by our forecast 500kbpd-1Mbpd range, as sufficient price
discounts help to resolve financing and logistical challenges. Moreover, despite a pervasive narrative of
underinvestment in the supply-side, we still expect US production to breach 13Mbpd by the end of 2023
and 14Mbpd by the end of 2024, as the rig count continues to recover.
From a broader supply perspective, while significant additional capital will need to be deployed to avoid
dramatic deficits in multiple markets later this decade (e.g. in brown and greenfield copper projects), we
still forecast sufficient production growth to cover near-term demand requirements across the board. Most
dramatically, we expect nickel production, led by Indonesian nickel pig iron, to surge 17% in 2022 and 7%
in 2023. Even in aluminium, where our balances already indicate a structural deficit post-2023, the ongoing
ramp-up of >3Mtpa in Chinese capacity should see global production rise 3.7% this year, comfortably more
than offsetting the ~900ktpa of European smelter closures announced to date.
US oil supply seen back to peak levels by YE ‘22
Fig 33 And long-lead time oil pipeline still looks strong
Source: EIA, Macquarie Strategy, June 2022
Source: IHS, Macquarie Strategy, June 2022 Note: Ex-KSA & UAE
Fig 34 Supply growth should range from steady to surging
Fig 35 Rising Chinese aluminium production more than
offsetting European capacity closures to lift world output
6.0
Annual Production (index, 2019 = 100)
150
Primary Aluminium Production (Mt)
3.6
3.4
5.5
140
3.2
5.0
130
120
4.5
110
4.0
100
3.5
3.0
2.8
2.6
2.4
90
Oil
2019
Copper
2020
Aluminium
2021
2022
Nickel
2023
Source: IEA, EIA, Company Reports, ICSG, IAI, INSG, WoodMac, CRU,
Macquarie Strategy, June 2022
3.0
2013
2.2
2.0
2014 2015
World
China
2016
2017
2018
2019
2020 2021 2022
Seasonally Adjusted
Seasonally Adjusted
Source: IAI, Macrobond, Macquarie Strategy, June 2022
This base case reaffirms our view that demand growth will likely be the swing driver of price changes over
the coming eighteen months. Most prominently, as summarised in Industrial metals market backdrop:
China binary, the pace of China’s recovery from recent Covid-19 lockdowns will likely have the largest
single impact on end demand. The far deeper than initially anticipated economic hit from Q2 lockdowns
was another major contributor to metals underperformance versus our expectations from early March, but
another headwind that oil managed to withstand, albeit in large part as the country’s crude imports
remained resilient, resulting in builds of 600-700kbpd.
21 June 2022
16
Millions
Fig 32
Commodities Compendium
So far, May macro data has beaten expectations but high frequency indicators such as traded steel
volumes and base metal fabricator operating rates suggest that sequential improvement was disappointing
in early June, before registering some stronger signs of life over the past week.
Fig 36 Infrastructure FAI began to lift at the end of 2021
1.0
Fig 37 Supported by firm government bond issuance
1,600
Monthly FAI (seasonally adjusted, trn RMB)
China Monthly Credit Issuance May'21 (RMB bn)
1,400
0.9
1,200
1,000
0.8
800
600
0.7
400
200
0.6
0
0.5
2015
2016
2017
2018
2019
2020
2021
2022
-200
2017
2018
2019
2020
2021
2022
Govt. Bonds
Transport + Utilities FAI
Source: China NBS, Bloomberg, Macquarie Strategy, June 2022
Source: PBoC, Macrobond, Macquarie Strategy, June 2022
Further stimulus measures are likely be rolled out around July’s Politburo meeting, with the focus on
infrastructure spending already showing up in combined transport and utilities fixed asset investment
(+8.4% ytd), but the key questions around efficacy remain: can stimulus gain traction while a “dynamic
zero-Covid” policy is maintained (even if the details of implementation change); and will measures be
sufficiently large to catalyse a follow-on private sector cycle (real estate and consumption)?
If sequential activity does lift sharply, as per our economists’ base case, copper appears best placed to
benefit, given the low level of onshore and bonded stock means stronger demand would quickly result in
higher import volumes. Notably, the import “arb” and physical premiums have firmed in recent weeks,
indicating some buying appetite into the recent price pull back. Conversely, if a significant end demand
improvement takes longer to materialise, iron ore prices look particularly vulnerable, as demonstrated by
the past week’s price action. Indeed, steel production is arguably unsustainably high (annualising towards
+2.5% YoY for the full year vs. a target of zero growth and resulting in the absence of seasonal inventory
draws) and improving scrap supply should also compete with pig iron.
Fig 38 Visible onshore copper inventory remains thin
kt
600
110
China social copper inventory
500
Fig 39 Steel production annualising towards YoY growth
2017
2018
2019
2020
2021
2022
Monthly Production (Mt)
100
90
400
80
300
70
200
60
100
50
2016
0
Jan
Feb Mar
Apr
May
Jun
Jul
Aug
Source: SMM, Macquarie Strategy, June 2022
Sep
Oct
Nov
Dec
2017
2018
2019
Steel Production
Current Run Rate
2020
2021
2022
SA
2021 avg. run rate
Source: China NBS, WSA, Bloomberg, Macquarie Strategy, June 2022
Headlining the risk that activity may struggle to lift and that, even if it does, then faces a serious challenge
to sustain any acceleration, is the persistent weakness in real estate since 2H21. May’s construction starts,
completions, and sales volumes were respectively -25%, -23%, and -18% below their seasonally adjusted
December levels, but daily sales in the top 30 cities have begun to recover in mid-June.
21 June 2022
17
Commodities Compendium
Consistent with May’s weakness, the challenge for credit growth appears to be demand, not supply.
Although total social financing (TSF) beat expectations, alongside government bond issuance this was
driven by strength in bill financing (+364% YoY). In contrast, both mortgages (-76% YoY) and long-term
corporate loans (-15% YoY) remained weak. State owned developers are likely to support construction
activity but it remains to be seen if combined central and local government policy easing will be sufficient to
deliver a self-reinforcing property upcycle (we anticipate additional local government purchase incentives
and down-payment reductions will be rolled out, alongside further PBoC cuts to the mortgage rate floor).
Fig 40 Construction activity remained subdued in May
China Monthly Construction Activity (million square
metres, sa)
230
Fig 41 Weak household borrowing curbing credit growth
200
180
210
China Monthly Issuance Medium & Long-term
Household Loans (RMB bn)
1,000
800
160
600
190
140
170
400
120
150
200
130
100
110
80
0
-200
90
2016
1
60
2017
2018
STARTS
2019
2020
2021
Sales (rhs)
2022
2
3
2022
4
5
6
2021
7
8
2020
9
10
11
12
2019
2018
Source: China NBS, Bloomberg, Macquarie Strategy, June 2022
Source: PBoC, Bloomberg, Macquarie Strategy, June 2022
Fig 42 But property sales have shown signs of life in June
Fig 43 Industrial output has been driven by export demand
10k sqm
30 cities property sales (10dma)
90
160
80
150
70
140
60
130
China Indicators (index, Dec'19 = 100)
120
50
110
40
100
30
90
20
2017
2018
2019
2020
2021
2022
10
80
2018
2019
China IP
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Source: Wind, Macquarie Strategy, June 2022
Sep
Oct
Nov
2020
2021
China Retail Sales
2022
Exports
Dec
Source: China NBS, China Customs, Bloomberg, Macrobond, Macquarie
Strategy, June 2022
In addition to the need for a real estate recovery, metals demand remains vulnerable to slowing industrial
production momentum. The past two years has been characterised by ex-China end demand strength but,
via booming exports (+49% since December-19 in nominal terms), Chinese first use demand strength.
With export growth likely to stagnate, if not contract, in the face of inflationary pressures curbing consumer
purchasing power at the same time as people substitute away from durable goods back to services, an
improvement in China’s domestic consumption will take on greater importance. In May, however, retail
sales remained lacklustre, with their level approaching 15% below the pre-pandemic trend.
21 June 2022
18
Commodities Compendium
Fig 44 China is the dominant driver of first use demand
changes
Fig 45 Base metal price changes remain consistent with
China’s secondary sector (industry + construction growth)
40%
Share of demand change, 2019-2022e
120%
100%
80%
60%
40%
20%
Copper
Aluminium
China
Nickel
100%
30%
80%
25%
60%
20%
40%
15%
20%
10%
0%
5%
-20%
0%
-40%
-5%
-60%
-10%
2005
0%
Zinc
120%
China Growth
35%
-80%
2007
2009
2011
2013
2015
2017
2019
2021
Nominal Secondary GDP (y/y growth)
ex-China
BCOM Industrial Metals Spot (y/y change, rhs)
Source: Metal Study Groups, CRU, WoodMac, LMCA, RhoMotion,
Bloomberg, Macrobond, Macquarie Strategy, June 2022
Source: China NBS, Bloomberg, Macquarie Strategy, June 2022
The ex-China picture increasingly resembles the downside scenario we described in Inflation: too much of
anything is a bad thing, whereby inflation shifts from being a commodities tailwind (reflecting demand
strength, reinforcing cost pressures, attracting investment allocations) to a headwind (directly damaging
demand and triggering a central bank policy response). If that inflation is caused by a negative supply
shock, as in the 1970s with oil, those commodities should, inherently, still see higher prices. For the rest of
the complex, however, the negative impact on end demand and subsequent industrial production is likely
to dominate.
Gold is the natural exception to this, and we view its recent outperformance – both versus TIPS and on a
cross-currency basis – as reflecting a combination of geopolitical risk premium and the deeply negative
level of actual real rates. The accelerated pace of Fed rate hikes is clearly a headwind for gold but, looking
at the 1970s/1980s, gold’s price reversals followed upturns in real rates from inflation easing – suggesting
the path of inflation is likely to be the key determinant for gold. In the very short-term the combination of
surging gasoline prices and stickiness in services should keep inflation elevated but, as the market prices
in sufficient Fed tightening to curb inflation, we expect gold to retreat towards $1,600/oz through 2023.
Fig 46 Commodities – inflation correlation is dependent on
causation
25%
Commodity Indices vs. Inflation 3m/3m change
3%
Fig 47 With signs that inflation is becoming a headwind for
some markets, via demand destruction
30%
Inflation versus Industrial Production
25%
20%
2%
15%
20%
Demand pull
15%
10%
1%
5%
0%
0%
10%
?
2%
-5%
-10%
-15%
-15%
-2%
2007
2009
2011
2013
2015
2017
2019
2021
7%
0%
-10%
-1%
-3%
Cost push
-20%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Global IP
BCOM
-8%
US CPI (rhs)
CPI (rhs)
Source: US BLS, Bloomberg, Macquarie Strategy, June 2022
21 June 2022
12%
5%
-5%
-20%
2005
17%
Source: UN, US BLS, National Statistics Agencies, Macrobond, Macquarie
Strategy, June 2022
19
Commodities Compendium
Fig 48 Gold’s outperformance of TIPS reflects the
divergence between expected and actual real rates
12
Fig 49 Plunging consumer confidence a clear warning for
demand growth
US Rates vs. Gold
3000
105
6
2500
95
5
2000
85
4
1500
75
3
1000
65
2
500
55
1
U. Mich Consumer Sentiment
10
8
6
4
2
0
-2
-4
-6
-8
-10
0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Real Fed Funds
Real 10y
US 10y TIPS
45
2005
2009
2011
2013
2015
U. Mich Consumer Sentiment
Gold Real (rhs)
Source: US BLS, Bloomberg, Macquarie Strategy, June 2022
0
2007
2017
2019
2021
Inflation Expectations (next year)
Source: U.Michigan, Bloomberg, Macquarie Strategy, June 2022
The threat from inflation and associated rate rises is nowhere more apparent than in the US consumer
sentiment survey from the University of Michigan, where June’s preliminary figure of 50.2 marked a new
low. That said, although May retail sales showed clear signs of softening, the stock of accumulated
savings (albeit not evenly distributed) and ability of consumers to add leverage, should provide a buffer for
consumption through the remainder of 2022.
In essence, the Q3 bull case rests on a strong China reopening and US resiliency supporting end demand,
with oil also benefitting from strength in transportation fuels through the summer months. In contrast, the
bear case focuses on signs that European demand is already deteriorating (e.g. German factory orders
rolling over since January, and the wider restocking cycle petering out), China’s reopening is struggling to
gain traction and that a US slowdown is increasingly likely, perhaps accelerated by equity market
weakness spilling over to the real economy.
Given our growth forecasts, our base case (outside of individual markets’ micro-fundamental drivers) is for
steady prices in Q3 and a firming into Q4 as China’s economy rebounds and the US proves resilient.
Nevertheless, that should be as good as things get, with China failing to sustain a strong growth cycle and
developed markets falling into a technical recession by summer 2023. At the same time, growing examples
of physical demand weakness (e.g. falling physical aluminium premiums, collapsing scrap steel prices)
make us increasingly wary that industrial commodity markets could roll over sooner rather than later.
Fig 50 German factory orders down 8% since January
130
Fig 51 The global “restocking” tailwind is petering out
65
German Factory Orders
120
110
52
World PMIs
60
51
55
50
50
49
45
48
40
47
35
46
100
90
80
70
30
2016
60
2016
2017
2018
2019
2020
Source: Bloomberg, Macquarie Strategy, June 2022
21 June 2022
2021
2022
45
2018
2020
2022
World, Manufacturing PMI Quantity of Purchases Index, SA
World Manufacturing PMI Stocks of Finished Goods (rhs)
Source: S&P Global, Macrobond, Macquarie Strategy, June 2022
20
Commodities Compendium
A progressive easing of the supply-constraints which have so hampered automotive production should
enable the sector to progress counter-cyclically as output meets pent up demand, but the extent of
1H2022 weakness means we anticipate no global sales growth for 2022 as a whole, before a stronger
c.6% YoY recovery in 2023. On a structural basis, there is arguably no growth in developed markets
beyond a cyclical recovery – EU and US sales figures peaked at the same levels either side of the financial
crisis – but growth in China and other emerging markets mean we still expect total global vehicle sales to
push above 100Mn/yr before 2026.
Fig 52 China auto sales bouncing back from lockdowns but
global figures still depressed
2,500
Monthly Sales (k vehicles, SA)
2,000
Fig 53 The path to electrification is under way
600
120
500
100
400
80
300
60
200
40
100
20
BEV + PHEV Light Vehicle Sales (mn vehicles/yr)
1,500
1,000
500
0
2015
0
2016
2017
2018
2019
2020
2021
2022
China Passenger Vehicles
USA Light Vehicles
EU + UK Passenger Vehicles
Japan (rhs) Passenger Vehicles
Source: Macrobond, Macquarie Strategy, June 2022
0
2015
2020
2025
2030
2035
Total World
2040
2045
2050
100% 2050 penetration
Source: LMCA, RhoMotion, Macrobond, Macquarie Strategy, June 2022
Even more than volume expansion, the rising intensity of commodities usage from EVs (automotive sector
demand for copper should nearly double from 2.25Mt in 2019 to 4.4Mt in 2030) means the sector will be
core to the energy transition’s influence on industrial metals. Combined with the build out of renewable
generating capacity, and associated grid investment, we continue to view this as a key driver of trend
demand over the coming decade (see, for example, Copper demand and the energy transition).
That said, the energy transition is not a rising tide that will lift all ships and it does not negate the global
business cycle’s impact on industrial commodities demand.
Fig 54 World capacity additions forecast to approach
800GW/yr
900
Fig 55 Energy transition should replace China’s
industrialisation and urbanisation to drive demand growth
Demand CAGR
World capacity additions (GW)
800
Palladium
700
Thermal Coal
Met Coal
600
Iron Ore
500
Zinc
400
Lead
300
Platinum
200
Aluminium
Copper
100
Nickel
0
2015
Coal
Utility-scale PV
Batteries
2018
2021
Gas
Small-scale PV
Other
2024
Onshore Wind
Nuclear
2027
2030
Offshore Wind
Hydro
Source: Bloomberg NEF, Macquarie Strategy, June 2022
21 June 2022
-4%
-2%
2005-2019
0%
2%
4%
6%
8%
2019-2025
Source: WSA, Base Metal Study Groups, CRU, LMCA, RhoMotion,
Macrobond, Bloomberg, Macquarie Strategy, June 2022
21
Commodities Compendium
Fig 56
2022 YTD price performance
Commodity & financial asset price moves, 2022 YTD, US$ terms, %
Thermal coal
Heating Oil
Natural Gas
WTI
Brent
GSCI TR
Lean Hogs
RUB
GSCI Spot
Soybean Oil
Wheat
Corn
Cotton
BCOM TR
Soybean
Nickel
BCOM spot
Orange Juice
Sugar
Rough Rice
Dollar Index
BZL
PEN
Soybean meal
Feeder Cattle
Coffee C
Cobalt
Zinc
ZAR
Gold
ZERO
Sugar 11
Live cattle
Palladium
Platinum
CAD
Japan bonds
CLP
Carbon
AUD
Rhodium
INR
CNY
Oats
TIPS
Iron ore
CHF
LMEX index
Silver
NZD
Euro
Copper
Moly
GBP
Aluminium
Lead
US bonds
Shanghai Comp
JPY
European banks
Coffee robusta
Dow Jones
UK bonds
Italian bonds
Tin
S&P 500
German Bonds
Nikkei
EuroSTOXX
Nasdaq
Lumber
Bitcoin
Equity indices
FX
Bonds
Industrial metals/raw materials
Precious metals
Agricommodities
Energy
-35%
(75%)
(25%)
25%
75%
125%
Source: Bloomberg, Financial Exchanges, Macquarie Commodity Strategy, June 2022
21 June 2022
22
Commodities Compendium
Oil & Natural Gas
Risks building as bull run continues
We are increasing our price targets for WTI and Brent substantially to account for mark to market effects
after the large rally YTD, and to express our view that the oil market continues to have too many perceived
and real risk factors to stage a large price pullback in the near-term. Our new targets are below:
Fig 57 Macquarie Oil & Gas Price Forecast
$/BBL
1Q22
2Q22
3Q22
4Q22
FY22
1Q23
2Q23
3Q23
4Q23
FY23
LT
Brent
$97.77
$110.00
$110.00
$100.00
$104.44
$85.00
$80.00
$70.00
$70.00
$76.25
$61.00
WTI-Brent
($2.83)
($2.50)
($1.95)
($2.75)
($2.51)
($4.50)
($4.50)
($4.50)
($6.50)
($5.00)
($4.00)
WTI
$94.94
$107.50
$108.00
$97.00
$101.86
$80.50
$75.50
$65.50
$63.50
$71.25
$57.00
NG [$/MMBTU]
$4.56
$7.50
$7.10
$7.30
$6.62
$7.00
$5.00
$4.75
$5.25
$5.50
$3.75
Source: Bloomberg, Macquarie Strategy, June 2022
Our price targets progressively weaken relative to the forward curve reflecting our view that the market will
move towards larger and larger oversupply through our forecast period. Even though global oil inventories
have increased by approximately 120 million barrels YTD, and we estimate the 4Q22 global surplus will be
nearly 2 M BPD, we have moderated our bearish outlook. Our new targets better reflect a variety of real,
imagined, and misunderstood issues that have kept crude prices elevated. Nevertheless, favourable
skews for bears include the potential for macro-driven demand softness during 2H22, increasing comfort
with Russian supply certainty, more US light-sweet exports, and progress upon or completion of an Iran
deal.
Fig 58 Heavy oversupply seen from Q4 ‘22 onward despite persistent Russia risk
Global S/D Balances [K BPD]
7,177
5,552
1,984
1,695
1,136
1,011
1,487 1,376
463
744
-289
-630
-960
-1,286
-1,894
-2,964
4Q23
3Q23
2Q23
1Q23
4Q22
3Q22
2Q22
1Q22
4Q21
3Q21
2Q21
1Q21
4Q20
3Q20
2Q20
1Q20
4Q19
3Q19
2Q19
1Q19
4Q18
3Q18
2Q18
1Q18
4Q17
3Q17
2Q17
1Q17
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
Source: IEA, Macquarie Strategy, June 2022
Real, Imagined and Misunderstood Drivers Behind Oil Price Strength
• Russia Risk: Mostly Imagined Up to Now but Concerns are Understandable
21 June 2022

We estimate the risk premium related to the potential that Russian exports sharply decline is
approximately $25 per barrel. Given Russia’s status as the 2nd largest oil producer and exporter,
the risk premium is sensible.

To date, waterborne exports of Russian oil appear little impacted, with recent indications from
Russia pointing to only modest supply losses in June, relative to a pre-war baseline.

That said, we expect the risk premium to dissipate over the balance of 2022 and 2023 as the
market gains comfort that Russian crude exports will remain within 80% to 90% of their pre-war
levels, equivalent to 500 K BPD to 1 M BPD of supply reduction.
23
Commodities Compendium

Although European sanctions are set to step up towards the end of the year, we ultimately expect
financing and logistical challenges associated with Russian oil to largely be resolved via discounts
or other mechanisms. That said, a hawkish shift in the US posture towards Russian flows would
represent a risk to this view.
• High Refinery Margins: A Very Real and Very Bullish Driver of Oil Price

The global strength in refining margins is creating a strong pull for light-sweet crudes and it is
limiting how much and how fast crude prices can pull back. To put it simply, it is difficult for crude
oil to retrace to $70 per barrel when middle distillate cracks are $70 per barrel at recent highs.
• US & Global Production Cannot Grow: Imagined, & Misunderstood Bullish Driver

In our opinion, the overwhelming view in the market that US supply growth is constrained by
capital, labor, materials, and equipment is largely narrative-driven and rife with internal
inconsistencies. Although we do not dismiss the pervasive supply chain and labor challenges
observed across industries in this post-COVID recovery period, in an oil-specific lens, we do not
see these factors as structural constraints to growth. Further, looking across long-lead time global
supply, we continue to see a healthy pipeline of offshore projects.
Fig 59 Pumping capacity not seen as structural shale
constraint
Fig 60 Long-lead time oil pipeline still looks strong
Source: Company disclosures, Macquarie Strategy, June 2022
Source: IHS, Macquarie Strategy, June 2022 Note: Ex-KSA & UAE

As such, and pursuant to our increased price deck, we now model US oil production exiting 2022 at
~13 MM BPD and continuing to climb to over ~14 MM BPD by the end of 2023, with the market
eventually needing to send a signal to halt or reverse shale growth. Within these totals, we model
exit/exit L-48 land growth of ~1.35 MBD in ’22 and ~1.09 MBD in ’23. Nevertheless, we see
potential for US oil production growth to be challenged by Permian gas takeaway in 1H ’23,
potentially necessitating a more pronounced back-half loading to growth or re-orientation to other
basins.
Fig 61 US oil supply seen back to peak levels by YE ‘22
Fig 62 Eventual rig declines required to stop shale growth
Source: EIA, Macquarie Strategy, June 2022
Source: Baker Hughes, Macquarie Strategy, June 2022
21 June 2022
24
Commodities Compendium

Likewise, the view that OPEC has run out of spare and even growth capacity does not fit the facts
on the ground. As of May 2022, the IEA estimates OPEC-10 production up ~3 M BPD y/y with core
OPEC producers driving that performance. Further, we see a history of Saudi Arabia flexing its
spare capacity in recent years, and credible long-term programs targeting capacity growth in KSA
and UAE. Yet the apparent sentiment from manifold conversations across the sector is one of
weakness in terms of actual performance and incremental capacity across OPEC broadly.
• China Recovery – A Real Driver but One that is Receiving Too Much Credit

The consensus view is that Chinese crude demand is set to rapidly increase as the country exits
COVID-related lock downs in 2H22. Although we directionally agree with this narrative, we believe
the magnitude of incremental crude purchases is being overestimated.

We believe the consensus view is not accounting for the fact that Chinese crude imports have
exceeded their YTD refinery throughput requirements by 600 to 700 K BPD. We estimate Chinese
demand has dropped somewhere between 1.3 and 1.5 M BPD, which implies Chinese crude
imports will need to increase by 0.6 to 0.9 M BPD, far less than the broad market view that imports
will increase between 1.5 and 2 M BPD.
• Strong Demand

We believe strong demand is one of the better-founded bullish arguments. We are expecting
strong petroleum demand growth through the summer, especially for transportation fuels. Our
channel checks into road mobility, air travel, and freight suggests individual travellers have not
changed their habits much and if anything, the entire world is trying get rid of 2 years of cabin fever
via leisure and adventure travel. We expect this trend to continue through the summer before
economic realities in the form of negative wealth effects, higher interest payment, reduced savings,
and higher credit balances set in.

Nevertheless, while this services-oriented demand pull remains a bullish tailwind, a corresponding
goods-oriented pullback represents a meaningful, if less visible, risk amidst mounting macro
headwinds.
Fig 63 Global Oil Supply and Demand Balance
MACQUARIE GLOBAL S/D MODEL
DemandTotal
OPEC
NOPECUS
US
NGL, etc..
SupplyTotal
Balance
1Q19 2Q19 3Q19 4Q19
99.54 99.69 101.33 101.17
30.81
39.25
11.89
18.07
100.02
0.48
30.24
38.83
12.24
18.84
100.15
0.46
29.65
39.23
12.41
19.08
100.37
-0.96
1Q20 2Q20 3Q20 4Q20
94.75 84.58 93.02 95.13
1Q21 2Q21 3Q21 4Q21
94.40 96.39 98.81 100.76
1Q22 2Q22 3Q22 4Q22
99.31 98.24 101.44 101.63
1Q23 2Q23 3Q23 4Q23
102.16 102.62 104.03 104.21
28.94
39.29
11.61
18.84
98.68
-0.63
31.20
39.57
13.20
19.63
103.60
1.45
29.97
40.09
12.97
18.67
101.69
0.52
28.74
40.34
12.90
18.32
100.30
5.55
25.92
37.30
10.77
17.77
91.75
7.18
24.61
36.72
10.90
18.71
90.94
-2.08
25.42
37.51
10.97
18.27
92.17
-2.96
25.87
38.15
10.82
17.53
92.37
-2.03
26.05
37.83
11.42
18.84
94.13
-2.25
27.46
38.28
11.27
19.38
96.39
-2.42
28.20
38.90
11.80
19.09
97.99
-2.77
29.19
38.44
11.79
19.68
99.09
0.85
30.31
39.25
12.19
20.31
102.06
0.61
31.09
39.51
12.93
20.09
103.61
1.98
31.21
39.29
13.40
20.20
104.11
1.49
31.25
39.53
13.43
20.65
104.85
0.82
31.29
39.93
14.00
20.37
105.58
1.38
NOPECUS
Russia
China
Canada
NorthSea
Brazil
Mexico
Kazakhstan
Qatar
Colombia
Oman
Other
NOPECUS
1Q19 2Q19 3Q19 4Q19
11.34 11.17 11.24 11.26
3.92 3.94 3.91 3.89
4.50 4.61 4.64 4.84
2.68 2.45 2.49 2.83
2.57 2.64 2.90 3.06
1.69 1.69 1.72 1.73
1.95 1.78 1.89 1.95
1.39 1.37 1.37 1.37
0.89 0.89 0.88 0.88
0.97 0.97 0.97 0.97
7.34 7.32 7.22 7.31
39.25 38.83 39.23 40.09
1Q20
11.31
3.98
4.83
2.90
3.04
1.76
1.98
1.40
0.87
1.00
7.26
40.34
2Q20
10.01
3.98
4.04
2.83
2.91
1.71
1.79
1.43
0.75
0.95
6.90
37.30
3Q20
9.74
3.98
4.11
2.64
3.03
1.70
1.64
1.42
0.74
0.91
6.80
36.72
4Q20
10.03
3.92
4.62
2.76
2.79
1.71
1.74
1.42
0.76
0.94
6.81
37.51
1Q21 2Q21 3Q21 4Q21
10.18 10.46 10.55 10.90
4.05 4.08 4.08 4.01
4.66 4.39 4.61 4.78
2.84 2.51 2.68 2.69
2.85 2.95 3.02 2.83
1.76 1.79 1.79 1.81
1.80 1.80 1.66 1.95
1.46 1.46 1.46 1.46
0.75 0.71 0.74 0.74
0.95 0.96 0.97 1.00
6.85 6.72 6.73 6.73
38.15 37.83 38.28 38.90
1Q22 2Q22 3Q22 4Q22
11.03 10.32 10.60 10.20
4.23 4.24 4.25 4.25
4.68 4.66 4.78 5.01
2.66 2.52 2.62 2.85
2.99 2.95 3.05 3.05
1.83 1.83 1.84 1.84
1.94 1.70 1.83 1.97
1.46 1.48 1.48 1.48
0.74 0.73 0.74 0.74
1.04 1.06 1.08 1.09
6.70 6.94 6.98 7.03
39.29 38.44 39.25 39.51
1Q23 2Q23 3Q23 4Q23
10.00 10.00 10.00 10.00
4.30 4.30 4.30 4.30
5.04 4.87 4.95 5.18
2.97 2.92 2.82 2.97
3.10 3.10 3.15 3.15
1.83 1.83 1.83 1.83
1.97 1.90 2.10 2.12
1.48 1.49 1.49 1.49
0.74 0.74 0.74 0.74
1.10 1.10 1.10 1.11
7.04 7.04 7.04 7.04
39.57 39.29 39.53 39.93
OPEC
ALGERIA
ANGOLA
CONGO
ECUADOR
EQUATORIAL
GABON
IRAN
IRAQ
KUWAIT
LIBYA
NEUTRALZON
NIGERIA
SAUDIARABI
UAE
VENEZUELA
OPEC Total
1Q19 2Q19 3Q19 4Q19
1.03 1.02 1.02 1.02
1.43 1.43 1.35 1.35
0.34 0.35 0.34 0.31
0.53 0.53 0.55 0.52
0.11 0.11 0.11 0.11
0.21 0.22 0.21 0.21
2.74 2.41 2.19 2.11
4.70 4.73 4.79 4.63
2.71 2.68 2.65 2.68
0.96 1.15 1.09 1.15
0.00 0.00 0.00 0.00
1.69 1.72 1.81 1.70
10.20 9.90 9.63 10.05
3.07 3.13 3.17 3.34
1.11 0.86 0.75 0.78
30.81 30.24 29.65 29.97
1Q20
1.02
1.39
0.30
0.54
0.12
0.19
2.02
4.57
2.73
0.33
0.01
1.76
9.77
3.23
0.77
28.74
2Q20
0.87
1.27
0.30
0.35
0.11
0.21
1.95
4.13
2.38
0.08
0.10
1.56
9.31
2.87
0.52
25.92
3Q20
0.84
1.24
0.30
0.52
0.11
0.19
1.96
3.69
2.25
0.11
0.13
1.37
8.78
2.84
0.40
24.61
4Q20
0.86
1.18
0.28
0.51
0.11
0.20
2.06
3.81
2.30
0.89
0.20
1.29
8.99
2.52
0.42
25.42
1Q21 2Q21 3Q21 4Q21
0.87 0.89 0.92 0.96
1.14 1.12 1.11 1.12
0.28 0.27 0.27 0.26
0.50 0.50 0.49 0.40
0.11 0.11 0.10 0.08
0.17 0.18 0.18 0.19
2.32 2.40 2.47 2.48
3.88 3.94 4.06 4.24
2.34 2.35 2.44 2.53
1.15 1.15 1.16 1.12
0.23 0.26 0.24 0.28
1.39 1.34 1.27 1.24
8.51 8.56 9.60 9.91
2.65 2.68 2.80 2.90
0.55 0.55 0.59 0.76
25.87 26.05 27.46 28.20
1Q22 2Q22 3Q22 4Q22
0.99 1.01 1.01 1.01
1.16 1.17 1.20 1.20
0.27 0.27 0.28 0.29
0.47 0.48 0.48 0.49
0.09 0.10 0.11 0.11
0.19 0.19 0.20 0.20
2.56 2.55 2.58 2.83
4.29 4.42 4.57 4.64
2.61 2.53 2.56 2.61
1.08 0.74 0.65 0.80
0.27 0.29 0.38 0.43
1.30 1.18 1.35 1.43
10.20 10.39 10.71 10.70
3.03 3.13 3.50 3.64
0.71 0.74 0.73 0.73
28.94 29.19 30.31 31.09
1Q23 2Q23 3Q23 4Q23
1.02 1.03 1.03 1.04
1.19 1.18 1.17 1.16
0.28 0.28 0.28 0.27
0.49 0.49 0.50 0.50
0.11 0.11 0.11 0.11
0.19 0.19 0.19 0.19
3.00 3.00 3.00 3.00
4.60 4.60 4.60 4.60
2.61 2.61 2.61 2.61
0.76 0.74 0.74 0.74
0.44 0.45 0.45 0.46
1.43 1.43 1.43 1.43
10.70 10.70 10.70 10.70
3.66 3.69 3.72 3.75
0.73 0.73 0.73 0.73
31.20 31.21 31.25 31.29
Source: IEA, Macquarie Strategy, June 2022
21 June 2022
25
Commodities Compendium
Copper
Supply underperforming but demand outlook uncertain
Copper prices peaked at $10,426/t in early April before collapsing to a low of $9,019/t by mid-May on
concerns over Chinese demand due to Covid-related lockdowns and rising inflationary pressures that are
stalling global growth. Money manager net long positions on LME significantly decreased as a result and
non-commercial positions on Comex switched to a net short of 23,408 lots but have since recovered to
near zero. Exchange stocks remain depleted but have increased by 57kt since the start of the year, with
LME stocks up 29kt to 118kt. There has also been a lift in bonded stocks (+117kt), taking the total
increase to 218kt. LME stocks in Europe remain low however, with premiums having significantly
increased in May on continued strong demand.
Chinese demand has been relatively weak due to Chinese New Year followed by the Olympics and then
Covid restrictions impacting end users, and net refined metal imports have decreased by 8.6% YTD April
with the arb mostly negative. Preliminary trade data for May shows imports of unwrought and semis were
at a similar level m/m. It is worth noting that Russian metal imports into China are 15% lower y/y.
Fig 64 Exchange stocks remain low but have increased by
nearly 220kt since January
Fig 65 Chinese net refined imports have decreased by 8.6%
YTD on lower demand and a negative arb
Copper stocks, kt
2,000
1,800
LME+CME
SHFE
China social
Price, $/t (rhs)
China refined copper imports (kt)
Bonded
1,600
1,400
12000
Chile
600
10000
500
8000
400
DRC
Russia
Kazakhstan
Japan
Other
Exports
1,200
1,000
6000
800
300
200
4000
600
100
400
2000
0
200
0
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
Jan 22
0
Source: LME, Comex, SHFE, Macquarie Strategy, June 2022
-100
2018
2019
2020
2021
2022
Source: IHS, Macquarie Strategy, June 2022
In the short term, there are two dominant narratives in copper – underperformance of mine supply and
recovery in Chinese demand, with the latter currently dominating.
Mine production is forecast to increase by 3.3% to 22.0Mt this year. This is lower than our prior forecast of
4.9% due to a disappointing Q1, with the majors coming in 6% lower on average y/y and five companies
revising their guidance downwards, effectively removing 175kt of mine supply for this year. This
underperformance is continuing, with Las Bambas in Peru stopping for 52 days due to community protests,
Peruvian mine output down 1.7% and Chilean output down 8.9% y/y in April, a pipeline leak at Los
Pelambres in Chile taking out another 15kt this month and the start-up of Udokan now delayed to 2023.
Next year, mine supply is expected to grow by 7.6% as existing operations such as Escondida and Los
Pelambres increase output, and Grasberg, Kamoa-Kakula, Tenke Fungurume, Quellaveco, Quebrada
Blanca and Udokan ramp-up. Our base case now assumes a slower ramp-up at Quellaveco and
Quebrada Blanca, and we have delayed the start-up of the Chalcobamba pit at Las Bambas. Growth in
mine supply is expected to continue out to 2025 at more modest rates, peaking in 2025 at 25.0Mt. On
average, we expect mine supply growth of 3.2% pa over the next five years although there are downside
risks to this, particularly in Chile and Peru which together account for 35% of global production. In Chile,
the government is planning to announce a new tax regime on 30 June that will increase the tax burden on
companies and the vote on the new Constitution will be held on 4 September. If passed, this will increase
environmental regulations (particularly with regards to water usage) and therefore costs, with the impact of
a ban on mining near glaciers yet to be quantified but potentially impacting 20% of current production
(including El Teniente, Andina and Los Bronces) and some future projects. There is also now the threat of
a nationwide strike at Codelco’s operations starting this week.
We estimate there is around 975kt of new supply that could be approved this year. Since our last detailed
review of the pipeline (Project approvals gaining momentum) we have added Antofagasta’s expansion at
21 June 2022
26
Commodities Compendium
Centinela in Chile (140ktpa) to the list although note that this is dependent on the outcome of the
Constitution and changes to taxes and royalties. The vast majority of approvals year to date have been in
the DRC and Zambia, but the remaining projects are more geographically diverse, with Australian projects
accounting for around a quarter.
Fig 66 Majority of project approvals this year have been in
Africa and brownfield
Project location and type, ktpa
450
Africa BF
Africa GF
Other BF
Other GF
400
350
300
250
200
150
100
50
2022
2023
2024
2025
2026
2027
2028
2029
2030
Source: Company reports, WoodMac, CRU, Macquarie Strategy, June
2022
Fig 67 More approvals could come this year albeit mostly
from a myriad of smaller projects
Ones to w atch
Ow ner
Country
Kamoa-Kakula Phase 3
Ivanhoe
DRC
Start-up
2024
Prod, kt
150
Eva Copper
Copper Mountain
Australia
2024
49
Whim Creek restart
Anax Metals
Australia
2024
39
Florence SxEw
Taseko Mines
USA
2024
39
El Pilar SxEw
Southern Copper
Mexico
2024
36
Ak Sug
Intergeo
Russia
2025
120
Timok Low er Belt
Zijin Mining
Serbia
2025
50
West Musgrave
Oz Minerals
Australia
2025
39
Hillside
Rex Minerals
Australia
2025
38
Skouries
Eldorado Gold
Greece
2025
34
El Espino
Pucobre
Chile
2025
33
Jervois
KGL Resources
Australia
2025
30
Centinela Mill 2
Antofagasta
Chile
2026
140
Yanacocha Verde
New mont
Peru
2026
45
Other
135
Total
977
Source: Company reports, WoodMac, CRU, Macquarie Strategy, June
2022
On the smelting side, we expect Chinese refined output to increase by 4.2% this year, with concentrate
imports having increased by 4.6% YTD April and preliminary trade data showing record imports in May.
Despite mine supply disruptions, spot TCs increased to a peak of $84/t in late April on reduced smelter
buying due to maintenance and Xiangguang’s (400ktpa) temporary stoppage. TCs have since retreated to
$74/t, due to concentrate availability tightening as the Mongolian border shut and Xiangguang restarted at
the end of May. We are forecasting global refined output will grow by 3.6% this year and by 2.8% pa over
2021 to 2026. Recent developments include the start of construction at a 500ktpa blister smelter at
Kamoa-Kakula, with start-up expected in Q4 2024, and an expansion at First Quantum’s Kansanshi
smelter to >400ktpa anodes as part of the mine expansion project; in Chile, Codelco have announced they
will close Ventanas (100ktpa) over the next five years although the refinery (400ktpa) will continue to
operate. In China, the start-up of the expansion at Daye (400ktpa) has been delayed to mid-August.
Fig 68 Chinese concentrate imports were up 4.6% YTD April
China copper concentrate imports (000 dmt)
Chile
2,500
Peru
Mexico
Mongolia
Kazakhstan
Russia
Other
Fig 69 Copper rod production has been weak YTD
Weekly operating rate of copper rod producers
80%
2021
2022
75%
70%
2,000
65%
60%
1,500
55%
50%
1,000
45%
40%
500
35%
30%
Jan
0
2018
2019
2020
Source: IHS, Macquarie Strategy, June 2022
2021
Feb Mar
Apr May Jun
Jul
Aug Sep Oct
Nov Dec
2022
Source: SMM, Macquarie Strategy, June 2022
Global copper demand growth is now expected to be softer this year, rising 1.8% y/y versus strong growth
of 4.7% in 2021 post Covid. We have reduced our Chinese demand forecast for 2022 and now expect
growth of 0.5% versus a prior forecast of 2.2%. Preliminary May economic data for China was weak but
better than expected, indicating that the economy bottomed in April but more stimulus will be required to
return to growth (Low inflation and high unemployment call for more stimulus). May industrial production
21 June 2022
27
Commodities Compendium
was up 0.7% y/y, infrastructure investment was up 7.2% and the contraction in auto narrowed sharply, but
the property sector and retail remain weak and exports are likely to slow due to inflationary pressures
ROW. Operating rates at copper rod producers improved in May before falling then rebounding last week
and have been relatively low YTD due to the weakness in end use sectors.
Our demand growth forecast ROW is slightly lower than our prior expectations at 3.2%, due to ongoing
weakness in the auto sector, with the exception of EVs (Global EV tracker), and weakening retail sales in
Europe and the USA. Industrial production and construction in both the USA and Europe are respectively
vulnerable to an unwind of the recent inventory cycle tail wind and rising interest rates.
Global inflationary pressures are expected to build in H2 and into 2023, with our economists now
forecasting a developed market recession next year. This has led us to revise down our demand forecasts
over the remainder of the forecast period for both China and ROW, removing on average just over 300ktpa
copper consumption. For 2023 we expect global demand to grow by 1.5%, with 2.2% growth in China due
to recovery in the auto and property sectors offsetting a lacklustre 0.8% growth ROW as the impact of high
inflation and monetary tightening take their toll. Given copper’s gearing to the global business cycle and its
position as a macro asset, prices should come under pressure as growth slows.
Longer term, the narrative for copper demand remains positive due to a growing EV market share (~
doubling copper demand to 4.4Mt by 2030) and investment in renewable energy (an additional 2.8Mt of
copper by 2030). Globally we are forecasting demand growth of 2.3% pa for 2021-2026.
Fig 70 EV sales approaching 40 million in 2030, resulting in
a rough doubling of auto copper demand
5,000
Fig 71 Forecast growth in solar will require 3Mt additional
copper by 2030
9,000
Total Automotive Copper Demand (kt)
4,500
8,000
4,000
7,000
3,500
6,000
3,000
5,000
2,500
Copper Demand from Grid + Power Infra (kt)
4,000
2,000
3,000
1,500
2,000
1,000
1,000
500
0
0
2020
2017
ICE
2019
HV
2021
2023
PHEV
2025
BEV
2027
2022
2024
2026
2028
2030
Europe
R.o.W
2029
FCEV
Source: LMCA, Rho Motion, CRU, Company Reports, Macquarie
Strategy, June 2022
China
India
Other Asia
N.America
Source: Bloomberg NEF, CRU, WoodMac, Company Reports, Macquarie
Strategy, June 2022
We estimate a supply gap of 3.3Mt will open up by 2030. This is a hefty 1.3Mtpa lower than our prior
forecast due to a combination of increased mine supply and lower demand. There have been a couple of
project approvals since March - the Kansanshi expansion in Zambia (130ktpa) and the Kinsevere Sulphide
mill in the DRC (80kt) but most of the increase in supply is coming from higher output, assumed life
extensions and some small mine additions of 40kt or lower. The most sizeable additions are from
assumed extensions at Mt Isa in Australia (95ktpa), Lomas Bayas in Chile (61kt) and Cobar in Australia
(45ktpa). A few projects have been added to our database including an underground mine at Timok in
Serbia (50kt), Copper World in the USA (86ktpa) and Reko Diq in Pakistan (200ktpa) as a Possible project.
We have also downgraded Hudbay’s Rosemont project in the USA (127ktpa) to Possible due to the
ongoing permitting issues, with focus having switched to the neighbouring Copper World project.
With the decrease in both mine output and demand for this year, we expect the market to be more or less
balanced with a small refined deficit of 81kt. This assumes that Chinese demand recovers in H2 and
inflationary fears ex-China do not cause demand to roll over immediately. We then expect the market to
enter a period of both concentrate and refined surplus for three years due to high mine supply growth and
more modest demand growth, before returning to balance in 2026 and deficits beyond.
Given the low inventories, prices could rise quickly if demand accelerates but volatility is likely to continue
until high frequency data indicators show a sustained improvement in Chinese activity on the back of
further stimulus. Without this, a strong USD and slowing growth ROW could result in prices moving
towards $8,000/t sooner than our base case forecast.
21 June 2022
28
Commodities Compendium
Fig 72 A theoretical supply gap of 3.3Mt opens up by 2030
Copper mine supply forecast (kt)
32,000
Copper Balances
kt Cu
800
Possible
Probable
Committed after disruption allowance
Forecast mine supply
Actual/required mine supply
27,000
Fig 73 Sizeable surpluses forecast for 2023 to 2025
$/t Cu
11,000
600
10,000
400
9,000
200
8,000
0
7,000
-200
6,000
-400
5,000
-600
4,000
Gap 3.3Mt
2030F
2029F
2028F
2027F
2026F
2025F
2024F
2023F
2022F
2021
2020
2019
2018
Source: Company Reports, WoodMac, CRU, ICSG, Macquarie Strategy,
June 2022
Concentrate Balance
Refined Balance
2026F
2025F
2024F
2023F
2022F
2021
2020
17,000
2019
2018
22,000
LME Cash Price ($/t)
Source: Company Reports, WoodMac, CRU, ICSG, LME, Bloomberg,
Macquarie Strategy, June 2022
Fig 74 Global copper market balance
'000t copper
Mine production
% Change YoY
Concs balance
2018
20,731
2.8%
2019
20,720
-0.1%
2020
20,823
0.5%
2021
21,284
2.2%
2022F
21,994
3.3%
2023F
23,661
7.6%
2024F
24,735
4.5%
2025F
25,023
1.2%
2026F
24,854
-0.7%
334
125
-170
-58
-227
432
703
422
50
Refined production
% Change YoY
23,529
3.4%
23,854
1.4%
23,963
0.5%
24,508
2.3%
25,400
3.6%
26,398
3.9%
27,197
3.0%
27,821
2.3%
28,113
1.0%
Consumption
% Change YoY
23,566
3.6%
23,984
1.8%
23,916
-0.3%
25,034
4.7%
25,481
1.8%
25,870
1.5%
26,699
3.2%
27,408
2.7%
28,040
2.3%
-37
0
-37
-130
0
-130
47
-300
-253
-525
110
-415
-81
0
-81
528
0
528
498
0
498
413
0
413
73
0
73
LME Cash ($/t)
LME Cash Price (¢/lb)
6523
296
5960
270
6077
276
9315
423
9868
448
8650
392
8100
367
8350
379
9050
411
Estimated total stocks
Stocks (w eeks)
3294
7.3
3164
6.9
3210
7.0
2685
5.6
2604
5.3
3132
6.3
3630
7.1
4043
7.7
4116
7.6
Refined balance
SRB sales
Adjusted balance
Source: LME, Comex, SHFE, ICSG, WoodMac, CRU, Company reports, Macquarie Strategy, June 2022
21 June 2022
29
Commodities Compendium
Aluminium
Demand drags
The LME aluminium price has fallen by 26% quarter-to-date, driven by the expected increase in supply and
worse than expected demand (Aluminium: the competition between supply and demand). COVID-19 and
related lockdowns in China caused a sharp dip in demand which is yet to be fully recovered after
reopening, while signs of softening demand have also appeared in Europe and the US, with physical
premiums easing and a faster fall in the LME price versus SHFE.
Fig 75 A big pull-back in Ali price and LME corrected faster
US$/t
4500
Fig 76 Physical premiums in Europe and US are turning
RMB/t
26,000
1,000
24,000
900
LME aluminium price(lhs)
4000
SHFE aluminium price (rhs)
3500
Aluminium premiums ($/t)
Japan CIF
22,000
US M.West del.
NW Eur DDP
800
700
20,000
3000
500
16,000
400
14,000
300
2500
2000
600
18,000
1500
12,000
1000
10,000
200
100
Source: LME, SHFE, Macquarie Strategy, June 2022
Jul 21
Jan 22
Jul 20
Jan 21
Jul 19
Jan 20
Jul 18
Jan 19
Jul 17
Jan 18
Jul 16
Jan 17
Jul 15
Jan 16
Jul 14
Jan 15
Jul 13
Jan 14
Jan 13
Jan 15
May 15
Sep 15
Jan 16
May 16
Sep 16
Jan 17
May 17
Sep 17
Jan 18
May 18
Sep 18
Jan 19
May 19
Sep 19
Jan 20
May 20
Sep 20
Jan 21
May 21
Sep 21
Jan 22
May 22
0
Source: CRU, Macquarie Strategy, June 2022
Chinese demand has weakened since H2 2021, as shown by the fall in our weighted downstream
indicators, slower aluminium semis output growth and lower leading semis producers operating rates.
However, compared with Q1 2020 and the first outbreak of COVID-19 in China, the decline in demand is
not that sharp and semis production remained in small positive growth y/y thanks to strong exports. The
main problem this time is that demand weakened in a period when capacity was ramping up quickly in
China, and demand recovery has been slower than the market expected after reopening.
Fig 77 China demand slowdown is clear, but not as sharp
as 2020
60%
China weighted downstream growth rate YoY%
50%
China ali semis output growth YoY%
40%
Fig 78 Demand is yet to fully recover in China after
reopening
Weekly operating rates of Al leading semi producers
90%
80%
30%
70%
20%
10%
60%
0%
-10%
2020
50%
-20%
-30%
2021
2022
40%
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
-40%
Source: NBS, Macquarie Strategy, June 2022
30%
Jan
Feb Mar
Apr May
Jun
Jul
Aug Sep
Oct
Nov Dec
Source: SMM, Macquarie Strategy, June 2022
We estimate that ~2.4Mtpa of curtailed smelting capacity has been brought back online and ~1Mtpa of
new capacity has been added in China over the first five months of this year. This has increased the
operational smelting capacity from 37.7Mtpa at the end of 2021 to 40.6Mtpa this May (net of some cuts
due to COVID-19 or accidents), with primary aluminium production climbing over 3% y/y in May. We
expect operational smelting capacity to reach 42.5~43Mtpa by the end of this year as capacity restarts and
new capacity additions continue.
21 June 2022
30
Commodities Compendium
Fig 79 Operational smelting capacities are ramping up
quickly…
Mtpa
50
Fig 80 … With continued growth expected over Q3 in China
ktpa
1200
China aluminium smelting capacity
China smelting capacity change (YTD and forecast)
1000
New capacity addtion
Capacity restarts
45
800
Capacity cuts
600
40
400
35
200
Established capacity
0
30
Running Capacity
-200
25
Source: SMM, Macquarie Strategy, June 2022
Dec-22
Nov-22
Oct-22
Sep-22
Aug-22
Jul-22
Jun-22
May-22
Apr-22
Mar-22
Feb-22
Jan-22
Sep 22
Jan 22
May 22
Sep 21
Jan 21
May 21
Sep 20
Jan 20
May 20
Sep 19
Jan 19
May 19
Sep 18
Jan 18
May 18
Sep 17
Jan 17
May 17
Sep 16
Jan 16
May 16
-400
Source: SMM, Macquarie Strategy, June 2022
With rising stimulus and COVID-19 contained, Chinese demand is expected to improve sequentially into
H2 2022, but the near-term strength of the demand recovery may be impacted by the continuing “dynamic
zero” covid policy, financial difficulties among local governments, the weak property market, slower export
orders and reduced metal intensity of infrastructure spending (rising share in water projects, rural
infrastructure, new infrastructure, etc).
Chinese stimulus is expected to increase with low inflationary pressures but a high unemployment rate,
and we expect Chinese demand to accelerate from late Q3 to Q4. Given smelting capacity will continue
growing over Q3 but should stabilise from Q4, the domestic aluminium balance may loosen over the
summer period and improve afterwards. This should coincide with the impact of the warehouse scandals
on spot aluminium demand fading. For the full year, we expect Chinese aluminium output will rise by 5.6%
y/y (faster than our previous forecast of 3.6%) while primary demand will grow by 2.1% y/y (0.9% y/y
growth in domestic end-user demand) thanks to strong semis exports. The domestic deficit (before
imports) is estimated to be ~67kt versus net primary imports of 1.34kt over Jan-May (26.4kt in Jan-Apr).
In Europe, power prices rebounded again in the last week and smelters exposed to floating power prices
still face losses. No capacity restarts from the ~900ktpa idled capacities since last Q4 were reported, but
as power prices are much lower than their previous peak the probability of further curtailments in the near
term has reduced. However, there is uncertainty around energy supply in Europe this winter after the EU
banned Russian coal from August together with restrictions on Russia oil shipments, with the risk that
Russia may further reduce gas supply in retaliation. Any big upside in energy costs, along with an
improved balance in China, would drive up aluminium prices.
Fig 81 European smelters exposed to floating power prices
are still under margin pressure
Aluminium Smelter EBITDA, US$/t
Fig 82 European power prices have fallen from previous
peak but rebounded recently on gas supply disruptions
Rolling one month ahead power price
EUR/MWH
700
1,000
500
600
-
500
(500)
Netherl.
Germany
(1,000)
Germany
Netherlands
France
400
300
(1,500)
France
200
(2,000)
100
(2,500)
21 June 2022
Jun 22
May 22
Apr 22
Mar 22
Feb 22
Jan 22
Dec 21
Nov 21
Oct 21
Sep 21
Aug 21
Jul 21
Jun 21
May 21
Apr 21
Mar 21
Jan 21
May-22
Mar-22
Jan-22
Nov-21
Sep-21
Jul-21
May-21
Jan-21
Mar-21
2020
2018
2016
2014
2012
Source: Bloomberg, Platts, CRU, Macquarie Strategy, June 2022
Feb 21
0
(3,000)
Source: Bloomberg, Macquarie Strategy, June 2022
31
Commodities Compendium
There is still no confirmation of Russian aluminium production cuts, but the ramp-up of Taishet has slowed
and Russia is looking for alternative alumina supplies. We have seen increased imports from China and
Kazakhstan, and also higher imports from Ireland where its own Aughinish refinery is located. We are yet
to see reports of higher alumina exports to Russia from other Asian countries like Indonesia. Meanwhile,
no sanctions or restrictions have been imposed directly on Russia’s aluminium exports.
Fig 83 Ex-China demand remained relatively high until May
but there are downside risks in the near term
kt
4,000
Global apparent aluminium consumption
3,500
Fig 84 Global inventory drawdown continued in Q2 but the
pace may slow
2,000,000
Ex-China apparent consumption
1,500,000
China apparent consumption
1,000,000
Reported aluminum stock change - cumulative
500,000
3,000
0
-500,000
2,500
-1,000,000
Includes 280kt of Chinese SRB
sales in 2021
-1,500,000
2,000
-2,000,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Sep-17
Jan-18
May-18
Sep-18
Jan-19
May-19
Sep-19
Jan-20
May-20
Sep-20
Jan-21
May-21
Sep-21
Jan-22
1,500
Source: IAI, LME, CRU, Macquarie Strategy, June 2022
2020
2021
2022
Source: LME, CRU, SMM, Macquarie Strategy, June 2022
Although market feedback and premiums are starting to show signs of softening demand in Europe and
the US, ex-China apparent consumption remained relatively healthy until May. European demand in
particular is expected to deteriorate in the near term with rising recession risks, which may not be offset by
a recovery in Chinese demand. In Japan, MJP Q3 premiums are still under negotiation, and given the
quarterly premium is usually $10–20 /t above spot, MJP Q3 may be set between $130−140/t, down from
$172/t in Q2 amid reports of continued weak demand and rising supply from India, Overall, we see
downside risk to global aluminium demand in the near term until the recovery in China can gain pace.
Ex-China primary supply dropped by 0.7% YoY in Jan-Apr and 1.4% in Apr according to IAI, slower than
demand growth in the region. We expect ex-China supply to grow by 1.2% y/y in 2022 (slower than our
previous forecast of 1.7%), versus forecast demand growth of 2.8% y/y (slower than our previous forecast
of 3.8%), suggesting continued deficits in the ex-China market. Global visible aluminium inventories have
drawn down by ~500kt with continued destocking in Q2 when the price corrected, versus our forecasted
balance of -700kt for the global market this year, suggesting a slower pace of destocking ahead.
spot cost of production (US$/t)
Fig 85 Marginal producers are losing money at current price
4,000
Fig 86 Including high-cost Chinese smelters
Chinese aluminium production cash costs (RMB/t)
Aluminium cost curve (Q1 2022)
3,500
3,000
spot price
25000
total cost curve
23000
cash cost curve
21000
Self Generated - Inland
Self Generated - Coastal
Grid Power - Inland
Grid power - Coastal
19000
SHFE Price
2,500
17000
2,000
15000
13000
1,500
11000
1,000
Source: Woodmac, Macquarie Strategy, June 2022
21 June 2022
Q1 2022
Q3 2021
Q1 2021
Q3 2020
Q1 2020
Q3 2019
Q1 2019
Q3 2018
Q1 2018
Q3 2017
Q1 2017
Q3 2016
Q1 2016
Q3 2015
Q1 2015
Q3 2014
Q1 2014
Q3 2013
Q1 2013
Q3 2012
Q1 2012
Q3 2011
7000
Q1 2011
cumulative production (kt)
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
9000
Source: Woodmac, Macquarie Strategy, June 2022
32
Commodities Compendium
At a price of $2500/t, 3% of global producers are losing money, most of which are in Europe. In China,
marginal producers are also now loss making due to elevated pre-baked anode prices and energy costs,
with the average profit margin of a Chinese smelter having dropped to Rmb1150/t ($170). The 90th
percentile of the global cost curve is at $~2200/t, meaning prices should find support at $2200~$2300 if
there is an overshoot to the downside, but this price may not be sustainable given the market is not that
oversupplied.
We see aluminium prices struggling in the near term as the market digests the global demand slowdown,
but more upside could be expected after the summer if the Chinese demand recovery coincides with
European energy supply risks, before surpluses hit the market in 2023. Our longer-term view is unchanged
i.e. that prices need to stay relatively high to incentivise ex-China supply additions as Chinese smelting
capacity will cap out by 2024.
Fig 87 Global aluminium market balance
Source: IAI, CRU, Wood Mackenzie, Macquarie Strategy, June 2022
21 June 2022
33
Commodities Compendium
Alumina & Bauxite
Trade reshuffling
Alumina prices have also plunged by 24% quarter-to-date to $365/t (FOB Australia), but a small rebound
was seen over recent days. The price ratio between alumina and aluminium is currently at 14%, similar to
the level at the end of March. Increased Australian alumina availability following its export ban to Russia
triggered the price fall, followed by trade reshuffling in the seaborne market.
Fig 88 Alumina price plunged after Australian export ban
US$/t
800
Fig 89 Price ratio between Alu and Al up from the bottom
Global alumina price
China ex-works
700
35%
FOB Australia Alumina/LME cash aluminium
FOB Australia
30%
600
500
25%
400
20%
300
200
15%
100
Source: Platts, Macquarie Strategy, June 2022
Jun 22
Oct 21
Feb 22
Jun 21
Oct 20
Feb 21
Jun 20
Oct 19
Feb 20
Jun 19
Oct 18
Feb 19
Jun 18
Oct 17
Feb 18
Jun 17
Oct 16
Feb 17
10%
Jun 16
Jun 22
Oct 21
Feb 22
Jun 21
Oct 20
Feb 21
Jun 20
Oct 19
Feb 20
Jun 19
Oct 18
Feb 19
Jun 18
Oct 17
Feb 18
Jun 17
Oct 16
Feb 17
Jun 16
Oct 15
Feb 16
Jun 15
0
Source: Platts, LME, Macquarie Strategy, June 2022
As a buyer and seller in the market, Russia imported 4.75Mt of alumina in 2021, of which 1.52Mt was from
Australia and 1.73Mt was from Ukraine, accounting for 61% of its ex-Russia alumina supply and 40% of its
total alumina demand (for domestic aluminium production). Both these sources were removed from its
supplier list after March, leaving Ireland, Kazakhstan, Guinea, Jamaica and Brazil as other major suppliers.
After the Australian ban in March, alumina imports from China jumped from 1.8kt in 2021 to an annualised
1.8Mtpa (153kt in May), imports from Kazakhstan rose from 378kt in 2021 to an annualised 944ktpa
(77.6kt in April), and imports from Ireland (where Rusal’s 1.9Mtpa Aughinish refinery is located) climbed
from 511kt last year to an annualised 1Mtpa (85kt in April), thereby offsetting ~80% of the losses from
Ukraine and Australia.
Fig 90 Russia relied on Ukraine and Australia for alumina…
Russia alumina import by source, 2021
Brazil
Jamaica 2.9%
3.4%
Others
0.2%
Fig 91 …But China emerged as an alternative supplier
kt
China alumina imports vs. price arbitrage
US$/t
100
600.0
50
400.0
0
Guinea
6.1%
200.0
-50
0.0
Kazakhstan
8.6%
-100
-150
Australia
32.0%
Source: TDM, Macquarie Strategy, June 2022
Alumina Imports
Alumina Exports
May-22
Jan-22
Sep-21
May-21
Jan-21
Sep-20
May-20
Jan-20
Sep-19
Jan-19
May-19
-250
Sep-18
-600.0
May-18
-200
Jan-18
-400.0
May-17
Ireland
10.4%
-200.0
Sep-17
Ukraine
36.4%
Ex-works minus CFR price
Source: TDM, Platts, Macquarie Strategy, June 2022
While Australian alumina is finding buyers in the Asia-Pacific region in India and the Middle East, the
market reported tighter alumina supply to the Atlantic region that helped to drive up seaborne alumina
prices by over $10/t during the past week. Reduced supply from Ireland to European smelters could be
one of the drivers. Although China has become a net alumina exporter it mainly shipped to Russia thus is
21 June 2022
34
Commodities Compendium
not competing in the seaborne market, but negative price arbitrage (-$56/t currently) has significantly
reduced Chinese imports.
Although China shifted to export, its domestic alumina market is yet to tighten thanks to strong refining
capacity growth. Refining capacities in Shanxi, Henan and Shandong province have fully recovered after
cuts during the Winter Olympics, and several big (>1Mtpa) new projects in Guangxi, Hebei and Chongqing
have been added since March. In total ~8.25Mtpa of new capacity is expected to come online in 2022, of
which ~6.4Mtpa will be contributed by Bosai Wanzhou (4.8Mtpa) and Wenfeng New Material (3.6Mtpa).
China produced 6.96Mt of metallurgical grade alumina in May, and established capacity jumped from
88.6Mtpa in January to 93.8Mtpa that month.
Fig 92 Refineries in north China not yet back to full
utilisation rates due to oversupplied local market
%
Fig 93 Average alumina margin is positive but with regional
differences
Rmb/t
Operating rates of north China alumina refineries by
province
100
Shandong
Henan
China average alumina refining full cost vs. spot price
4,500
1,200
Shanxi
95
1,000
4,000
800
90
3,500
85
600
80
3,000
400
2,500
200
75
70
65
2,000
60
(200)
55
Margin (Ave)-RHS
1,500
Source: SMM, Macquarie Strategy, June 2022
(400)
alumina spot price
Jun 22
Oct 21
Feb 22
Jun 21
Oct 20
Feb 21
Jun 20
Oct 19
Feb 20
Jun 19
Oct 18
Feb 19
Jun 18
Oct 17
Feb 18
Jun 17
Oct 16
(600)
Feb 17
1,000
Jun 16
Feb 22
May 22
Nov 21
Aug 21
Feb 21
May 21
Nov 20
Aug 20
May 20
Feb 20
Nov 19
Aug 19
May 19
Feb 19
Nov 18
Aug 18
May 18
50
total cost (wtg avg)
Source: Platts, SMM, Macquarie Strategy, June 2022
While aluminium smelting capacities are also ramping up, growth is mainly in southwest China, thus the
alumina market in north China remains oversupplied and local refinery utilisation rates have not yet
returned to their previous highs. As domestic bauxite supply remains tight, we estimate that Chinese
refineries on average are making ~Rmb300/t(~$45/t) of margin, with many of the refineries in north China
using domestic bauxite losing money due to high ore and caustic soda costs but those in the south or
using imported bauxite making good profits due to higher local alumina prices and / or lower ore prices.
Fig 94 China market was in deficit as a whole
Kt
800
Fig 95 Ex-China was oversupplied due to Chinese exports
Kt
Rmb/t
600
Estimated China alumina balance-LHS
0
Alumina price-RHS (in reverse order)
500
400
US$/t (FOB Australia)
0
Ex-China alumina market surplus/deficit-LHS
300
Alumina price in reverse order-RHS
100
1000
400
1500
200
200
200
300
2000
100
2500
0
3000
-200
3500
-400
400
0
500
-100
600
-200
700
Source: SMM, China Customs, Macquarie Strategy, June 2022
Apr-22
Dec-21
Apr-21
Aug-21
Dec-20
Apr-20
Aug-20
Dec-19
Aug-19
Apr-19
Dec-18
Aug-18
Apr-18
Dec-17
Aug-17
Apr-17
Dec-16
Aug-16
4500
Apr-16
-600
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Jul 16
Oct 16
Jan 17
Apr 17
Jul 17
Oct 17
Jan 18
Apr 18
Jul 18
Oct 18
Jan 19
Apr 19
Jul 19
Oct 19
Jan 20
Apr 20
Jul 20
Oct 20
Jan 21
Apr 21
Jul 21
Oct 21
Jan 22
Apr 22
4000
Source: IAI, TDM, Macquarie Strategy, June 2022
We expect Chinese alumina production to rise by 7.9% y/y in 2022, an even faster growth than last year,
and consumption to grow by 5.6% y/y. However, given exports may jump while imports are down, the
domestic market could have a deficit of ~1Mt this year (though with regional differences) based on
assumed full year alumina exports of 1~1.5Mtpa (exported 189kt over Jan-Apr) and imports of 2Mt (down
21 June 2022
35
Commodities Compendium
from 3.3Mt last year). A deficit would ordinarily drive prices up higher but refineries still have room to lift
their capacity utilisation rates and imports could rise once the price arbitrage opens. Also, we estimate
current alumina inventories in China are ~2.8Mt, which more than offsets the deficit, so exports of
1~1.5Mtpa are still achievable.
The monthly balance shows that the Chinese domestic alumina market was in deficit in April after high
exports, but with regional differences. Weakness in aluminium prices, expectations of further capacity
growth and improved logistics after lockdowns meant the domestic alumina market remained a buyer’s
market and prices kept falling slowly. The ex-China market was oversupplied due to increased Australian
alumina availability and Chinese exports, resulting in the price correction, followed by a trade reshuffle in
the seaborne market.
New refining capacity additions outside China are mostly located in India and Indonesia, including ~1Mtpa
in India (Anrak refinery) and ~2Mpta in Indonesia (Ketapang Hongqiao, Bintan Nanshan). However, due to
the closure of Nikolaev, we expect ex-China alumina production will decline by 1.6% this year, versus
demand growth of 1.2%, and for the global alumina market to have a surplus of 760kt in 2022, smaller than
2021.
Fig 96 New refining capacities are mainly in Asia
Alumina new capacities from 2022 to longer term
10,000
8,000
China
India
Indonesia
Greece
Australia
UAE
Alumina cost curve (Q1 2022)
600
Guinea
Cost of production (spot, US$/t)
kt
12,000
Fig 97 Marginal refineries are losing money but not too bad
6,000
4,000
2,000
500
400
300
spot price
200
total cost curve Q4 2021
total cost curve Q3 2021
100
Cummulative production (ktpa)
Source: Company reports, Woodmac, Macquarie Strategy, June 2022
160,000
Long-term
140,000
2026
120,000
2025
100,000
2024
80,000
2023
60,000
2022
40,000
0
20,000
0
0
Source: Woodmac, Macquarie Strategy, June 2022
At the current spot price of $365/t, 10% of global alumina refineries are losing money, most of which are
located in north China, but we haven’t heard of any plans to cut production apart from lowering capacity
utilisation rates. Another ~$50/t price fall to the 50th percentile of global refining cost curve, which would
result in price parity for China imports or remove Chinese refineries margin if China price follows, could be
the price level if the market overshoots to the downside. We think this is unsustainable though and prices
are likely to follow aluminium prices higher once the global aluminium market gets better later this year.
However, we expect a greater surplus in the global alumina market from 2023 as supply growth outpaces
demand.
In the bauxite market, Chinese bauxite imports jumped by 22% y/y in Jan-Apr as new alumina refining
capacities at ports finally started such as Wenfeng New Materials. Around 55% of China’s established
alumina capacities are using (fully or partially) imported bauxite in June 2022, up from 50% in the same
period of 2021, and we estimate that imported bauxite contributed ~60% of AL units required in Chinese
domestic alumina production last year, up from 30% five years ago.
Within the imports, bauxite from Guinea increased by 14.7% y/y in Jan-Apr and accounted for 54% of total
imports, up from 51% last year. Indonesian bauxite took 20% of import share over the same period, up
from 17% last year as refineries are restocking Indonesian ore ahead of any potential ban while seeking
alternative suppliers such as Guinea. Imports of Indonesian bauxite contributed 9% of China’s required AL
units last year, which remains a meaningful supply source, but we estimate that China currently has ~34Mt
of bauxite inventories, equivalent to two years of Indonesian bauxite imports. Thus, any disruption to the
market from the potential ban is likely to be short lived as China has sufficient inventories (and time) to
source alternative supplies.
21 June 2022
36
Commodities Compendium
Fig 98 China is more independent on bauxite imports now…
Mt
14
Sourcing of bauxite in Chinese alumina production
35
30
25
15
10
5
1
4
9
2
5
2
0
6
5
0
5
12
13
14
6
0
4
8
5
2
7
10
10
0
0
3
8
0
19
-2
Indonesia
21
18
10
Malaysia
Others
8
3
6
17
15
Guinea
11
4
15
2
-2
2021
2020
2019
2018
Ex Guinea and Indonesia import
Source: Trade data, IAI, Macquarie Strategy, June 2022
Indonesia
10
3
-2
2017
2015
2014
2013
2012
2011
2010
Australia
10
-5
Domestic
Guinea
3
16
China bauxite imports by country
12
8
9
2016
20
11
9
…and incremental imports were mainly from Guinea
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16
Aug-16
Dec-16
Apr-17
Aug-17
Dec-17
Apr-18
Aug-18
Dec-18
Apr-19
Aug-19
Dec-19
Apr-20
Aug-20
Dec-20
Apr-21
Aug-21
Dec-21
Apr-22
mt Al in
40 alumina
Fig 99
Source: TDM, Macquarie Strategy, June 2022
Fig 100 Global alumina market balance
Source: IAI, Wood Mackenzie, Macquarie Strategy, June 2022
21 June 2022
37
Commodities Compendium
Zinc
Lower Chinese demand offsets smelter issues
Zinc prices reached $4,530/t in mid-April, slightly below their all-time peak in 2006, before sliding to around
$3,500/t in mid-May with the rest of the complex. Exchange stocks remain depleted with LME stocks
having fallen by 121kt this year to 79kt, with the majority sitting in Asian warehouses before a large jump in
cancelled warrants at Port Klang on 21st June (perhaps destined for the US given relative premiums).
Whilst LME stocks have decreased, bonded and China social stocks (including SHFE) have increased by
104kt to 224kt. This is despite net imports collapsing to just 25kt YT April, compared to net imports of
172kt during the same period last year. As highlighted in our note Wherefore art thou refined zinc?, this
means there should have been around 150kt of “spare” metal primarily from Kazakhstan, Australia and
South Korea that was available to deliver into the European or US markets and yet stocks ex-Asia are still
critically low, in part due to very high container shipping costs. As a consequence, European and US
premiums have soared to record highs due to regional market tightness. Material from Kazakhstan could
be railed across Russia, instead of going to China, but the current backdrop may create difficulties in
shipping it from St. Petersburg.
In the short term, there are two dominant narratives in zinc – the European smelter cuts and potential
recovery in Chinese demand.
Fig 101 Zinc stocks remain critically low on LME but have
been building in China
Fig 102 Chinese refined imports have collapsed this year,
with 18kt metal exported
Zinc stocks, kt
1,800
LME + CME
Bonded
Price, $/t (rhs)
1,600
China refined trade (kt)
SHFE
China social
5000
3500
1,200
1,000
800
600
South Korea
Spain
Other
Exports
120
100
3000
80
2500
60
2000
40
1500
400
1000
200
500
0
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
Jan 22
0
140
Australia
4500
4000
1,400
Kazakhstan
Source: LME, Comex, SHFE, SMM, SHMET, Macquarie Strategy, June
2022
20
0
-20
-40
2018
2019
2020
2021
2022
Source: IHS, Macquarie Strategy, June 2022
European power prices have retreated since our last Compendium, and we estimate that smelters had
been back in positive territory before recent disruptions to Russian gas flows caused prices to jump up
again. The very high metal premia in Europe are significantly lifting revenues, as these fully accrue to the
smelter on 100% of metal sold, versus price participation on “free” metal, which only applies to around
10% of metal produced. Spot premiums are currently at $475/t versus a more “normal” level of $110-120/t
but are vulnerable to any increase in metal availability, whereas power prices remain very volatile from
day-to-day. At current premia levels, the breakeven power price is $250MWh, but if premia halve then the
breakeven power price decreases to $200/MWh.
Trafigura and Glencore have both been vocal about potential smelter cuts, but Glencore’s Q1 results
indicated that whilst Portovesme’s primary line remains idled, output from their three other smelters was
essentially unchanged. We suspect this was also true for Trafigura, although have allowed for a 5%
reduction in output in H1 together with the suspension of Auby for 68 days for maintenance. In total, we
have removed 138kt of output for this year from these operations. Meanwhile, in April Nyrstar said it was
investing $285M at its Hobart smelter in Australia to replace the old electrolysis plant with a new 300ktpa
plant that will improve efficiencies and environmental performance.
Refined production elsewhere has also been disappointing with operational issues reported at
Chelyabinsk, Nexa, Valleyfield, Torreon, Sukpo, a delay in the expansion project at Townsville and
upcoming major maintenance at Trail, all of which we estimate has removed another 100kt of production
21 June 2022
38
Commodities Compendium
for this year. This has resulted in forecast ex China smelter utilisation rates remaining relatively low and
production growth this year of just 0.7%.
Fig 103 European smelter margins had returned to positive
territory but power prices have spiked again
Fig 104 Very high metal premia are offsetting power prices
for now
SHG zinc ingot spot premiums ($/t)
Zinc smelter EBITDA, US$/t
800
900
600
800
400
200
Spain
700
Belgium
600
China CIF
USA MW
EUR ExW
500
-
Germany
Netherl.
(200)
France
Italy
(400)
(600)
400
300
200
100
(800)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Spot
0
Source: Company reports, Bloomberg, LME, CRU, Macquarie Strategy,
June 2022. Base case shown for Netherlands
Source: CRU, Macquarie Strategy, June 2022
Our expectation for Chinese smelter output has been revised lower due to lower concentrate imports with
Chinese output now forecast to increase by 1.0% for the full year following a pick-up in H2 as logistics and
concentrate availability improve. Year to date concentrate imports are down 3.6% y/y (47,000 dmt) with
lower imports from Australia and Peru having been partially offset by increased imports from South Africa.
Import TCs have approximately tripled since December due to the negative price arb whilst domestic TCs
have declined on strong demand for domestic concentrates due to significantly better economics. Notably,
imports from Russia have not increased YTD. Recent developments include flooding in Guangxi province
that has caused power outages and could disrupt smelter production for two weeks (estimated 18kt loss).
Mine production is now forecast to increase by just 0.4% this year after Glencore reduced guidance due to
ongoing ramp-up issues at Zhairem and the suspension of Perkoa following flooding. On the project side,
only the expansion at Gamsberg has been approved in the last few months, adding around 200ktpa from
2024. Mine production is expected to increase by 3.4% next year as output increases at Rampura
Agucha, Gamsberg and Red Dog, and the Neves-Corvo expansion and Zhairem ramp up. On average,
we expect mine supply growth of 2.0% pa over the next five years.
Fig 105 Chinese concentrate imports were down 3.6% YTD
April
Fig 106 Negative price arbitrage and low TCs have impacted
Chinese smelter profitability
China zinc concentrate imports (000 dmt)
Australia
500
Peru
South Africa
Russia
Eritrea
Chinese zinc smelter revenues, RMB/t
Other
4,000
Domestic concentrate
Imported concentrate
3,000
450
400
2,000
350
1,000
300
250
0
200
-1,000
150
-2,000
100
-3,000
50
0
2018
2019
2020
Source: TDM, Macquarie Strategy, June 2022
2021
2022
Source: SMM, Macquarie Strategy, June 2022
Global zinc demand growth is expected to significantly soften this year, rising 0.7% y/y versus very strong
growth of 6.7% in 2021. We have significantly reduced our Chinese demand forecast for 2022 and now
expect a contraction of 1.3% versus a prior forecast of 3.3% growth. Despite the lack of imports, social
21 June 2022
39
Commodities Compendium
zinc stocks (including SHFE) have increased by 104kt this year with galvanising rates down around 18%
and zinc oxide and alloying rates down around 10% YTD. This shows just how weak the Chinese market
has been, and although galvanising rates were starting to pick up, end demand remains lacklustre due to
ongoing weakness in the auto, property and home appliance sectors which together account for around
40% of total demand. Preliminary May data for China indicated that the economy bottomed in April but
more stimulus will be required to get back to growth (Low inflation and high unemployment call for more
stimulus). May industrial production was up 0.7% y/y, infrastructure investment was up 7.2% and the
contraction in auto narrowed sharply, but the property sector and retail remain weak and exports are
inevitably slowing due to inflationary pressures ROW.
Our demand forecast ROW is slightly higher at 2.6% despite ongoing weakness in the auto sector (~10%
total demand) as construction and infrastructure, which account for around 65% of zinc demand, have
been strong in both the USA and Eurozone. Inflationary pressures are increasing though and are likely to
weigh on H2 demand with CRU reporting some construction projects have been delayed, and European
premia eased slightly in May.
Further ahead, global inflationary pressures are expected to build in 2023, with the potential for a
recession in Q2 or Q3 2023 increasing. Despite this, we expect global zinc demand to grow by 1.4% in
2023 due to 3.1% growth in China, primarily driven by non-residential construction, offsetting a 0.1%
slowdown ROW as construction and infrastructure spending reduces under the influence of high inflation
and monetary tightening. Longer term, we expect global zinc demand growth to stabilise around 1.6%
given the demand uplift from renewable energy and battery storage markets is expected to be far smaller
than for copper at ~200ktpa (Will renewables power up zinc demand?). Globally we are forecasting
demand growth of 1.5% pa for 2021-2026.
Fig 107 Chinese demand has been very weak - galvanising
rates are ~18% lower YTD
Fig 108 Zinc demand has been strong in Europe and the
USA due to strength of the construction industry
Weekly operating rates of galvanized producers
100%
2021
EuroZone Construction
2022
140
80%
130
60%
120
40%
110
20%
100
0%
90
Source: SMM, Macquarie Strategy, June 2022
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
-20%
80
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Bloomberg, Macquarie Strategy, June 2022
Longer term, we forecast a supply gap will open up from 2027, reaching 1.7Mt by 2030 without more
project approvals. A few sizeable projects have been added to our database in the last few months,
including Whim Creek in Australia (70ktpa), Las Cruces UG in Spain (50ktpa) and Brskovo in Montenegro
(45ktpa). In terms of potential approvals, our view is unchanged since our recent note (Zinc & lead
projects: don't get carried away), namely that new project approvals will be required, just not yet. That
said, there are around 730kt of new projects that could be approved this year, the largest of which are
Citronen in Greenland (155ktpa), Prieska in South Africa (78ktpa) and an extension at New Century in
Australia (75ktpa). Given zinc’s relatively undisciplined track record and predominantly junior ownership,
there is a risk that continuing high prices encourage more near-term approvals, resulting in a supply glut
hitting the market two to three years hence, well before it is needed.
Given a lower demand forecast but also lower smelter output, we expect the market to remain in a sizeable
deficit this year (-220kt), albeit less negative than we expected in our March Compendium. Our base case
assumes European smelters operate as normal next year including a restart at Portovesme, resulting in a
more balanced market from 2023, with relatively small concentrate and refined surpluses then extending
over the forecast period. Whilst not our base case, there is the potential for European smelter disruptions
to return in winter. If this coincides with a demand recovery in China in Q4 this could lead to a period of
material tightness in the market and prices returning towards recent highs, given inventories will not have
recovered.
21 June 2022
40
Commodities Compendium
Prices remain volatile given the competing drivers of smelter cuts versus lower global demand, although
we expect them to remain supported in H2 if Chinese demand recovers, averaging $3,875/t. With mine
production and smelter output increasing but demand lower than trend in 2023, we expect prices to
weaken as the market returns to balance, eventually finding support around $2,600/t.
Fig 109 Supply gap of 1.7Mt could open up by 2030 without
more project approvals
Fig 110 Market expected to return to balance from 2023 as
supply increases
Zinc balances
Zn mine supply forecast, Mt
18
kt Zn
Concentrate Balance
Committed after disruption
Probable
Possible
Forecast mine supply
Actual/required mine supply
17
16
$/t Zn
LME Cash Price
4100
Balance
800
600
3600
400
15
14
200
3100
0
2600
Gap 1.7Mt
13
-200
12
-400
11
-600
2100
2026F
2025F
2024F
2023F
2022F
2021F
2020
2019
2018
10
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Company reports, WoodMac, CRU, ILZSG, Macquarie Strategy,
June 2022
1600
Source: Company reports, WoodMac, CRU, ILZSG, Macquarie Strategy,
June 2022
Fig 111 Global zinc market balance
'000t zinc
Mine production
% Change YoY
Concs Balance
2018
12,684
2.9%
2019
12,792
0.9%
2020
12,274
-4.0%
2021
12,882
5.0%
2022F
12,935
0.4%
2023F
13,379
3.4%
2024F
13,705
2.4%
2025F
14,135
3.1%
2026F
14,233
0.7%
107
144
-496
111
123
121
179
359
226
Refined production
% Change YoY
13,355
-1.2%
13,553
1.5%
13,706
1.1%
13,745
0.3%
13,857
0.8%
14,373
3.7%
14,670
2.1%
14,956
2.0%
15,198
1.6%
Consumption
% Change YoY
13,852
-1.5%
13,715
-1.0%
13,102
-4.5%
13,984
6.7%
14,077
0.7%
14,280
1.4%
14,570
2.0%
14,810
1.6%
15,048
1.6%
Balance
Government sales
Refined Balance
-496
0
-496
-162
0
-162
604
0
604
-239
180
-59
-220
0
-220
93
0
93
99
0
99
146
0
146
150
0
150
Estimated total stocks
Weeks of consumption
2099
7.9
1937
7.3
2541
10.1
2301
8.6
2081
7.7
2174
7.9
2274
8.1
2420
8.5
2570
8.9
LME Cash Price ($/t)
LME Cash Price (c/lb)
2,922
133
2,532
115
2,229
101
3,008
136
3,865
175
3,200
145
2,800
127
2,650
120
2,600
118
Source: Company reports, ILZSG, LME, WoodMac, CRU, Macquarie Strategy, June 2022
21 June 2022
41
Commodities Compendium
Lead
Demand recovery on Government stimulus for auto sector
Lead prices peaked at $2,471/t in mid-April before falling to a low of $2,033/t in mid-May on the same
concerns over Chinese demand and inflationary pressures. Money manager net long positions on LME fell
to near zero at the end of May as investors exited the market but have since recovered to 4.5k lots. LME
stocks remain depleted having fallen by 16kt this year to 39kt, with virtually all material sitting in Asian
warehouses. Russia exported around 110ktpa refined lead last year with about half of this going to
Europe but in mid-May Russia announced measures “to regulate metal exports” needed for the
manufacture of industrial products. As a net importer of lead acid batteries it is not obvious what they will
do with the lead, but the consequence for Europe is extremely low LME stocks and little chance of them
replenishing until Stolberg restarts in July and shipping costs reduce or the arb widens. Chinese social
stocks (including SHFE) have decreased by just 5kt to 88kt this year. This is despite China having
exported 42kt of metal YT April, pointing to lower domestic demand. The negative arb has narrowed since
May though which could limit exports in the short term.
Premiums in Europe and the USA remain elevated given market tightness but nowhere near as elevated
as zinc premiums.
Fig 112 LME lead stocks remain low with most inventories
sitting in China…
Fig 113 …despite China exporting significant tonnages
Lead stocks, kt
500
LME + CME
SHFE
450
China social
Price, $/t (rhs)
China refined lead imports (kt)
Bonded
4000
3500
400
40
20
300
2500
10
250
2000
0
200
1500
-10
1000
-20
150
100
500
50
0
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
Jan 22
0
Source: LME, Comex, SHFE, Macquarie Strategy, June 2022
Australia
Germany
Other
Exports
30
3000
350
South Korea
-30
-40
-50
2018
2019
2020
2021
2022
Source: IHS, Macquarie Strategy, June 2022
Mine production is forecast to increase by just 20kt this year, or 0.4%, to 4.6Mt. Next year growth should
increase to 2.5% with the start-up of Galena’s Abra project in Australia in Q1 (95ktpa), with the only other
project committed since our March Compendium being the Gamsberg expansion that produces only small
amounts of lead (assuming the circuit is turned on). Over the period 2021 to 2026, lead mine supply is
forecast to grow by 0.9% pa, considerably slower than zinc due to the next generation of projects
containing less lead.
Primary refined output is forecast to increase by 3.9% this year to 4.8Mt, partly due to the expected restart
of Stolberg in Germany (100ktpa) in July and Nordenham in Germany (100kt) operating at full capacity.
Stolberg is currently for sale, with Nyrstar and Aurubis reported to be interested. Chinese primary output is
forecast to grow at 1.0% as maintenance, inspections and power restrictions normalise although YTD
operating rates have been lower, averaging 54% versus 58% last year, due to low margins and shortages
of concentrates. Spot TCs for low-Ag concentrates have more than doubled since January due to the Pb
price arbitrage, whereas the TC of high-Ag concentrates remains stable at $80/t and domestic TCs are at
multi-year lows. Trade data suggests that Chinese lead concentrate imports decreased by 23% YT April
although the data may be inaccurate given the scale of this reduction - concentrate imports from Russia
reportedly collapsed in April.
Secondary refined output is forecast to increase by 1.6% this year, although we have reduced our growth
forecast for China and now expect output to fall by 0.9%. Operating rates at secondary smelters have
averaged 41% YTD versus 52% last year due to a number of factors including the new VAT regulations
and lower margins, with Covid-related lockdowns impacting scrappage rates and scrappage collection.
Scrap availability in North America and Europe continues to be good.
21 June 2022
42
Commodities Compendium
Global lead demand is forecast to grow 2.1% this year which is lower than our prior forecast primarily due
to ongoing weakness in the auto sector, with average China LAB operating rates YTD at 64% versus 74%
in 2021. Chinese demand is expected to grow by 2.0% - the weekly operating rates of LAB manufacturers
have been declining since March due to weak demand and finished goods inventory pressures after the
Covid lockdowns impacted mobility and consequently sales and battery replacement for both auto and ebikes, but May economic data shows that the contraction in the auto sector narrowed sharply (China's
economy in 15 charts). The government’s stimulus package that was rolled out in late May included a
reduction in purchase taxes for certain vehicles, and local governments have been providing additional
incentives. This should lead to higher production and sales over the next few months, thereby increasing
LAB demand. USA demand for replacement auto and industrial batteries remains strong but new vehicle
sales remain depressed, whereas in Europe the auto sector has been weaker due to the war in Ukraine
impacting supply chains.
Fig 114 Chinese smelter operating rates are lower YTD
Fig 115 Chinese LAB operating rates impacted by lockdown
Chinese smelter operating rates
70%
90%
Weekly operating rates of LAB
80%
60%
70%
50%
60%
40%
50%
30%
40%
20%
Primary
30%
Secondary
20%
10%
10%
Source: SMM, Macquarie Strategy, June 2022
0%
Sep 18
Nov 18
Jan 19
Mar 19
May 19
Jul 19
Sep 19
Nov 19
Jan 20
Mar 20
May 20
Jul 20
Sep 20
Nov 20
Jan 21
Mar 21
May 21
Jul 21
Sep 21
Nov 21
Jan 22
Mar 22
May 22
Jun 22
Mar 22
Dec 21
Sep 21
Jun 21
Mar 21
Dec 20
Sep 20
Jun 20
Mar 20
Dec 19
Jun 19
Sep 19
Mar 19
Dec 18
Sep 18
0%
Source: SMM, Macquarie Strategy, June 2022
Given 85% of global lead demand is for lead acid batteries, our long-term outlook is based on three
factors: the overall fleet size; the speed of the transition to EVs and the extent to which BEVs phase out
lead batteries for auxiliary functions; and if this is the case, whether demand from industrial batteries can
grow sufficiently to delay the resulting transition to a market in decline.
Whilst the number of ICE vehicles in the global fleet is expected to start declining from 2025, we expect
lead acid batteries will continue to be used for auxiliary functions in BEVs given their relative cost and
reliability. Some car makers such as Tesla intend to fully phase out LABs, so we have allowed for 15% of
BEVs being totally LAB free by 2040. Given our assumptions on EV penetration in the global fleet, we
expect that by 2031 auto lead demand will turn negative due to scrappage of ICE vehicles generating
more secondary lead than required. This would then result in a steady build in lead surpluses during the
next decade without significant growth from other end-uses such as energy storage.
Global lead demand is forecast to grow at a CAGR of 2.0% for 2021-2026, with total refined output
forecast to grow at 2.2%. Our forecast relies on secondary refined output growing at 2.9%, which is the
level required for battery recycling rates to remain at around 95%. As a consequence, we assume primary
refined production will only grow at 1.1% pa over this period, with no growth forecast from 2024 onwards.
This results in a steady build in concentrates as mine supply continues to grow without additional primary
refining capacity. More than sufficient secondary capacity is available in China to sustain current recycling
rates, and the question is therefore whether China becomes a significant net exporter of lead or the world
ex-China invests in its own recycling capacity in order to maintain recycling rates at 95%.
Lead prices have struggled to recover much since their low in mid-May and investor interest remains tepid.
Ultimately the lead price will have to find support at a level that enables the continued recycling of lead
acid batteries, or this will become a government mandated, loss making industry with the cost passed on
to the consumer. Lead demand should continue to grow until the early 2030s, after which sizeable
surpluses will build without an uplift in demand from industrial energy storage versus our conservative
assumption of 1.2% demand growth pa. But with zinc batteries starting to make inroads in renewable
energy storage as the technology is developed, it is unlikely that industrial LABs will gain much market
share given their low energy density, low charge/discharge rates and short cycle life.
21 June 2022
43
Commodities Compendium
Fig 116 Net auto demand forecast to turn negative from
2031
Fig 117 Secondary output will need to increase to keep
pace with a recycling rate of ~95%
Lead auto demand (kt)
Sales
Vehicle Scrappage
Net total (rhs)
10,000
Lead production growth
10%
Replacement
Battery Scrappage
Secondary
Mine
8%
1,500
6%
1,000
4%
8,000
6,000
Primary
2%
4,000
500
0%
2,000
0
00
-2%
-2,000
-4%
-500
-4,000
-6%
-6,000
-1,000
-8,000
-8%
2016
-10,000
2018
2020
2022F
2024F
2026F
-1,500
2017
2020
2023
2026
2029
2032
2035
2038
Source: LMCA, Rho Motion, CRU, WoodMac, Company Reports,
Macquarie Strategy, June 2022
Source: Company reports, WoodMac, CRU, ILZSG, Macquarie Strategy,
June 2022
Fig 118 Lead is in a structural surplus due to high recycling
rates and falling ICE vehicles
Fig 119 Refined market will have moderate surpluses but
heavily weighted towards China, based on existing capacity
6.0
5.0
Lead metal balance (kt) vs cash price ($/t, rhs)
Pb mine supply forecast, Mt
Possible
Probable
Committed after disruption allowance
Forecast
Required mine supply
850
2400
650
2200
450
2000
250
1800
50
1600
-150
4.0
1400
-350
China
Global
-550
3.0
2019
2021
2023F
2025F
2027F
ROW
LME cash price
-750
2029F
1000
2018
Source: Company reports, WoodMac, CRU, ILZSG, Macquarie Strategy,
June 2022
1200
2019
2020
2021 2022F 2023F 2024F 2025F 2026F
Source: WoodMac, CRU, ILZSG, Company reports, Macquarie Strategy,
June 2022
Fig 120 Global lead market balance
'000t lead
Mine production
% Change YoY
2018
4,652
0.8%
2019
4,683
0.7%
2020
4,405
-5.9%
2021
4,595
4.3%
2022F
4,615
0.4%
2023F
4,732
2.5%
2024F
4,737
0.1%
2025F
4,783
1.0%
2026F
4,794
0.2%
Refined production
% Change YoY
12,279
0.2%
12,261
-0.1%
11,835
-3.5%
12,269
3.7%
12,568
2.4%
13,036
3.7%
13,304
2.1%
13,500
1.5%
13,700
1.5%
Consumption
% Change YoY
12,347
0.4%
12,258
-0.7%
11,756
-4.1%
12,257
4.3%
12,511
2.1%
12,853
2.7%
13,126
2.1%
13,341
1.6%
13,525
1.4%
Refined balance
-68
3
79
12
58
184
178
159
175
Estimated total stocks
Weeks of consumption
513
2.2
516
2.2
595
2.6
607
2.6
665
2.8
849
3.4
1027
4.1
1185
4.6
1360
5.2
LME Cash Price ($/t)
2,242
1,983
1,792
2,205
2,241
1,963
1,900
1,925
2,000
102
90
81
100
102
89
86
87
91
LME Cash Price (¢/lb)
Source: Company reports, ILZSG, LME, WoodMac, CRU, Macquarie Strategy, June 2022
21 June 2022
44
Commodities Compendium
Tin
Looser market ahead, but unlikely to last
Driven by strong tin production coming out of key producers like China, Indonesia and Myanmar, LME tin
prices retracted from its all-time high. China recorded a 3% rise in its production while Indonesia recorded a
jump of ~ 11% in its tin exports. Myanmar’s tin ore exports to China also saw a strong H1 2022. However,
with the rise in supply the downward pressure on the prices has mounted which in turn is now likely to disrupt
smelter operations. According to the International Tin Association (ITA), multiple smelters in China are
expected to reduce their utilization rate in coming months which, against our demand forecasts, we estimate
will lead to a 5kt market deficit for 2022.
Fig 121 China production registered 3% increase during JanMay’22, but should now fall back through summer
kt
19
China refined tin production
Fig 122 China tin ore imports from Myanmar registered
+60% coming from low base of 2021
China tin ore imports
kt
50
45
17
40
15
35
30
13
25
11
20
15
9
10
7
5
Myanmar
Apr-22
Jan-22
Jul-21
Oct-21
Apr-21
Jan-21
Jul-20
Oct-20
2022
Apr-20
Dec
Jan-20
Nov
Jul-19
2021
Oct
Oct-19
Sep
Apr-19
Aug
Jan-19
2020
Jul
Jul-18
Jun
Oct-18
May
Apr-18
2019
Apr
Jan-18
Mar
Jul-17
Feb
Oct-17
Jan
Apr-17
0
5
Others
Source: Antaike, SMM, Macquarie Strategy, June 2022
Source: TDM, Customs Data, Macquarie Commodity Strategy, June 2022
Fig 123 Indonesian exports saw a 11% Y-o-Y rise during
Jan-Apr’22, even with permitting issues in January
Fig 124
3.5
Investors have unwound LME length
LME Tin Positioning
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
Jan-18
Jan-19
Jan-20
Money Manager Short (k lots)
Money Manager Net (k lots)
Source: TDM, Customs Data, Macquarie Strategy, June 2022
Jan-21
Jan-22
Money Manager Long (k lots)
Source: LME, SHFE, Bloomberg, Macquarie Commodity Strategy, June
2022
Underlying demand trends for Tin remain robust and we project CAGRs (2021-16) for autos, semiconductors
and solar PV of 6.9%, 6.3% and 12% respectively. Nevertheless, concerns of a cyclical demand slowdown
also appear to have weighed on market positioning, with investor net-length down ~65% on the LME, albeit
some of this flow is likely to be systematic in nature. In particular, end demand from the consumer electronics
sector which has driven booming semiconductor billings (and Tin usage) does appear to be slowing.
Semiconductor billings which touched an all-time high in Feb’22 have retraced 3.3% since and we expect a
relatively flat sequential profile through 2H22.
21 June 2022
45
Commodities Compendium
For 2023 we therefore forecast a 6kt surplus, as demand cools and supply ramps up. Malaysia Smelting
Corporation’s (MSC) new plant which is expected to be 100% operational by 2023 is likely to enhance total
smelting production of the company to 40kt. Similarly, a ramp up of PT Timah smelting capacity (in
Indonesia) as its Ausmelt project comes online by H2 2022 is likely to increase the company’s production to
50kt by 2023.
Beyond this, however, supply growth appears relatively stagnant, and we expect the market to drift back to
deficit by 2025, with shortages hard to absorb given thin visible inventories (exchange stocks are just 5kt).
Against this structural backdrop, the medium-term question remains where additional supply growth will
come from. Current prices should be sufficient to incentivise it but Tin’s market structure, with few large listed
miners, makes project visibility particularly challenging.
Fig 125 SHFE stocks have seen strong rise amidst the high
production levels from China
12
Fig 126 Global semiconductor shipments
Mn unit
Tin Stocks
Global semiconductor billings (real volumes)
1,000
10
900
800
8
700
6
600
4
500
400
2
300
2015
0
Jan-17
Jan-18
Jan-19
Jan-20
LME Stock
Jan-21
2016
2017
2018
2019
2020
2021
2022
Note: seasonally adjusted by Macquarie;
deflated using US semiconductor import/export prices
Jan-22
SHFE Stock
Source: LME, SHFE, Bloomberg, Macquarie Strategy, June 2022
Source: WSTS, Macrobond, Macquarie Commodity Strategy, June 2022
Fig 127 Global tin market balance
Supply
China
Indonesia
Malaysia
Other Asia
Bolivia
Brazil
Peru
Europe
Other
Total
2016
175
64
27
10
17
13
20
12
12
349
2017
175
78
27
10
16
14
18
14
11
363
2018
175
82
27
10
15
13
18
14
11
366
2019
157
76
24
9
15
13
20
14
12
341
2020
161
65
24
10
11
9
21
12
12
326
2021
176
75
17
10
15
13
27
15
10
357
2022f
177
75
30
11
15
13
28
14
10
372
2023f
184
75
35
11
16
13
27
14
13
388
2024f
184
80
40
12
16
13
26
14
13
398
2025f
185
80
40
12
16
13
26
14
13
398
2026f
184
85
40
13
16
13
25
14
13
403
Demand
Solder
Tinplate
Chemicals
Batteries
Brass & Bronze
Others
Total
2016
179
49
58
23
18
19
345
2017
188
48
53
23
18
27
357
2018
191
47
55
24
17
28
361
2019
184
44
53
24
16
26
348
2020
183
47
48
23
15
23
339
2021
196
48
50
24
16
25
358
2022f
215
47
51
25
16
24
377
2023f
222
44
50
26
16
23
381
2024f
230
44
49
27
16
23
390
2025f
239
45
49
27
16
24
399
2026f
246
44
48
28
16
24
406
Market Balance
3
5
5
-7
-13
-2
-5
6
8
-1
-4
26
4.0
32
4.6
36
5.2
30
4.4
17
2.6
15
2.2
10
1.4
16
2.2
24
3.2
23
3.0
19
2.4
17,991
12%
20,102
12%
20,164
0%
18,670
-7%
17,152
-8%
32,593
90%
38,968
20%
34,000
-13%
30,000
-12%
33,000
10%
35,000
6%
Estimated Stocks
Stocks (weeks)
LME tin cash price
US$/tonne nom.
YoY change
Source: ITA, WBMS,LME, Bloomberg NEF, LMCA, RhoMotion, Macquarie Commodity Strategy, June 2022
21 June 2022
46
Commodities Compendium
Nickel
Over-supply beckons, provided Russian supply continues to flow
LME nickel prices have had a rocky ride following the explosive start to March, when a short squeeze
temporarily drove prices above $100,000/t before the LME suspended the market and cancelled some
trades on March 8th. Since the LME restarted trading under strict controls from March 16th, LME prices
have fallen but continue to trade at a significant premium to nickel pig iron (NPI), ferronickel and Chinese
spot nickel sulphate prices, reflecting the overhang of the, reportedly not yet fully covered, short position
and extremely low liquidity. Our estimate, based on where NPI prices are trading, is that a fundamentally
justified LME price is ±$20,000/t and that is reflected in our price forecasts.
There has been a lot of debate in recent years about the bifurcation or even the trifurcation of the market
between the various segments (nickel-iron class 2 products, nickel metal class 1 and nickel sulphate),
leading us to forecast these prices separately. In 2021, the class 1 metal market was in large deficit,
reflected in the enormous fall in visible metal stocks (of close to 200kt), but there was also tightness in
class 2, leading to NPI trading at a premium to LME prices for a while. In 2022, we predict over-supply in
all market segments as Indonesian production ramps up not just in class 2 (NPI) but also in production of
intermediates (MHP/matte), which will be converted into nickel sulphate and metal. China consumed over
120kt of metal last year to make nickel sulphate, but this usage could fall to ±50,000t this year as sulphate
producers switch to using intermediates. Stainless mills are also reducing their use of class 1 metal in
2022 by around 100,000t, replacing it with cheaper nickel-iron units (NPI/FeNi/scrap). 2022 is seeing
producers start to increase their ability to switch production from NPI/FeNi to intermediates (matte) which
can then be converted into class 1 (metal or NiSO4) – this will help reduce the current wide price
differentials between products towards their relative conversion costs.
Last year’s strong price recovery reflected strong demand from both the stainless steel market and EV
batteries and large supply disruptions. In 2021, global nickel use rose by 17%, while supply grew by 5.3%
and the market was in deficit by 180kt. In 2022, supply is projected to grow by 17.5% (led by 50% y/y
growth in Indonesia where projects come onstream quicker), while use is projected to grow by 5.2%,
pushing the overall market into a surplus of 137kt (mainly in the second half of the year). The surpluses
continue in 2023 and 2024 before the market returns to proximate balance by mid-decade.
Despite some delays, the rise in Indonesian nickel supply remains unrelenting with new announcements of
capacity additions continuing to be made in the battery-related space, with the latest announcements from
CATL and LG Energy Solution including capacity expansions into the production of battery cell materials.
After previously rejecting Indonesia for ESG reasons, many battery and auto makers are realising that
capacity expansions outside Indonesia will only meet a small part of the overall demand growth over the
next 5-10 years. By 2025, Indonesia could reach 60% of global supply compared with 30% in 2020.
Fig 128 Big price divergence after the March LME price
surge
Fig 129 Class 1 nickel stocks fell sharply in 2022 –
returning to balance in 2022
7.5
Monthly change in reported nickel stocks
48000
10
43000
-2.8
-4.6
-0.5
-13.0
-14.8
-15.1
-10.2
-24.2
-29.0
-19.1
-17.4
-27.3
-30
23000
-15.6
-20
28000
-22.2
33000
-9.7
-10
'000t
SHFE Ni: $/tonne
0
38000
-50
-40.8
-40
18000
LME nickel cash
NPI
Jul 22
Jun 22
Apr 22
May 22
Mar 22
Jan 22
Feb 22
Dec 21
Oct 21
Nov 21
Sep 21
Jul 21
Aug 21
Jun 21
Apr 21
May 21
Mar 21
Jan 21
Feb 21
13000
Ni sulphate
Source: LME, Ferroalloynet, SMM, Macquarie Strategy, June 2022
21 June 2022
Source: LME, SHFE, SHMET, Macquarie Strategy, June 2022
47
Commodities Compendium
Fig 130 Massive growth in world primary nickel supply this
year, led by Indonesia
Fig 131 Over 850ktpa of nickel HPAL projects for batteries
announced and more to come
500
Changes in world nickel consumption
Slower in 2022
450
450
109
400
350
400
300
350
300
200
150
100
50
0
254
45
34
25
65
96
79
241
101
200
150
34
15
17
4
48
100
-12
-72
-50
160
250
354
136
'000t Ni
'000t Ni
250
51
-153
-100
-108
0
-150
158
140
50
202
65
5
11
-23
-2
103
17
10
33
11
55
45
-1
-67
-50
-200
2015
2016
2017
Indonesia NPI
2018
2019
Other Ni
2020
2021
2022F
-100
2015
2016
2017
2018
2019
2020
2021
2022F
Total world
Stainless
Source: INSG, Company reports, Macquarie Strategy, June 2022
Batteries
Other
Source: INSG, CRU, Macquarie Strategy, June 2022
Nickel use in batteries grew strongly in 2021 and including secondaries was over 360kt, 160kt higher than
2020. Growth has slowed in 2022, particularly in China, where Ni usage in down over 10% when
compared with 2H 21. We expect a strong recovery in nickel sulphate and ternary precursor production in
the second half of the year to bring growth in 2022 to 103kt. With projections for ~720ktpa by 2025 and
~1.36Mtpa by 2030, the challenge to meet this demand remains large and we think prices have to remain
high to incentivise non-Indonesian supply. Nickel use in stainless steel rose strongly last year and a
shortage of NPI/FeNi unexpectedly developed, eliminating large discounts for these products that were
prevalent at the start of the year. In 1H 2022 stainless production has fallen year-on-year and will only
achieve growth over 2021 if Chinese demand recovers strongly in 2H22. We expect trend growth of 4-5%
a year to return from 2023 onwards.
Marginal production costs (Chinese NPI) are close to $19,000/t due to rising ore costs (partly LME-linked)
and higher electricity costs (due to soaring coal prices). Incentive prices for Indonesian HPAL are close to
$14,000-15,000/t, although this may yet prove to be an under-estimate if history is any guide.
While simple supply/demand fundamentals are bearish, the key to H2 22 and H1 23 price direction is the
removal of the short position overhang on the LME and Russian supply (around 200ktpa). Russian nickel
is not subject to sanctions and most 2022 contracts appear to have been honoured. However, many
buyers may not want to commit to annual renewal of contracts in 2023, which could lead to a scramble for
non-Russian class 1 material at the end of the year. In any event, the downside to prices below $20,000/t
may be limited by increased buying from the EV manufacturing chain’s need to hedge medium-term prices.
Fig 132 Global nickel market balance
Total SS production
% Change
Primary nickel consumption
% Change
2018 2019
52191 53356
6.5% 2.2%
2359 2413
5.2% 2.3%
2020
52335
-1.9%
2418
0.2%
Nickel Supply
% Change
(of which NPI)
2180 2417
2518
6.0% 10.8%
4.2%
(736) (945) (1,117)
World Market Balance
-178
4
Estimated total stocks
596
600
Weeks' world demand
13.1 12.9
LME Cash Price ($/t)
13133 13908
Chinese NPI price ($/t)
13162
Chinese Ni sulphate price ($/t)
15268
2021
59380
13.5%
2831
17.1%
2022f
60523
1.9%
2978
5.2%
2023f
63572
5.0%
3180
6.8%
2024f
66433
4.5%
3412
7.3%
2025f
69311
4.3%
3698
8.4%
2026f
71844
3.7%
3970
7.3%
2651
3115
3329
3496
3704
3955
5.3% 17.5%
6.9%
5.0%
6.0%
6.8%
(1,281) (1,620) (1,691) (1,768) (1,900) (2,062)
100
-180
137
149
720
15.5
13782
13179
14609
539
9.9
18459
17312
21489
676
11.8
26863
21000
25000
825
13.5
21000
18500
22500
84
909
13.9
21000
18500
22500
6
915
12.9
23000
19750
24500
-14
900
11.8
24500
19500
26000
Source: INSG, LME, SMM, Macquarie Strategy, June 2022
21 June 2022
48
Commodities Compendium
Stainless steel
2021 recovery runs out of steam amid slowing demand
The recovery in stainless steel in 2021 was exceptionally strong, with production rising by 13.5% y/y to
59.4Mt. The peak of the growth cycle was reached in mid-2021, with Q4 21 and Q1 22 seeing significant
year-on-year falls, driven mainly by weaker production in China. While we expect a slowdown in growth in
2022 to virtually zero, we do not envisage a sharp decline due to relatively low inventories worldwide,
limiting the potential for destocking, except perhaps in Europe. Given recent developments in Ukraine and
the potentially negative impact on growth, the risks must be on the downside.
After falling by 8% in 2019 and 12% in 2020, non-Chinese/Indonesian production grew by 15% y/y in 2021,
driven by a major recovery in apparent consumption in Europe, India, USA and Japan (all up over 20%
y/y). Production is still dominated by China and Indonesia, which are two-thirds of output. Back at the start
of 2008, these two countries’ share of the global total was just 25%. Indonesian production grew 77% y/y
in 2021. Weaker export demand to China, however, has led to much slower growth in 2022.
Fig 133 Global stainless steel melt production, by area
2020
2020 2020 2020 2021 2021 2021 2021 2022 2022
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2F
626
450
500
568
625
654
552
538
568
640
749
541
493
631
685
679
767
735
690
685
1810 1368 1419 1718 1876 1949 1607 1783 1806 1842
588
456
591
564
606
575
636
597
637
625
221
195
210
233
215
235
256
256
218
215
916
344
950
950
981
931 1020 1031 1050 1050
6182 7655 8756 8898 8631 9023 8274 7653 7807 8748
501
625
735
969 1063 1271 1328 1350 1200 1291
11849 11831 13875 14781 14940 15550 14686 14204 14252 15363
5166 3550 4385 4914 5247 5256 5084 5200 5246 5323
'000t
USA
Japan
Europe
Korea
Taiwan
India
China
Indonesia
Total (inc others)
Total Ex-China/Indonesia
% change yoy
USA
Japan
Europe
Korea
Taiwan
India
China
Indonesia
Total World
Total Ex-China/Indonesia
China+Indonesia
-11% -31%
-3% -26%
-5% -25%
-3% -18%
-12% -27%
-3% -63%
-9%
-2%
-18% 28%
-7.7% -12.8%
-5% -32%
-9%
0%
-25%
-1%
0%
45%
-31% -15%
-9%
26%
-4% 10%
4%
42%
-3%
-3%
3%
26%
-19%
6%
-3%
20%
-5%
4%
7% 171%
7% 14%
40%
18%
21% 73% 112% 103%
0.8% 12.0% 26.1% 31.4%
-11%
2%
2%
48%
8% 18%
45%
24%
10%
56%
13%
8%
22%
7%
-6%
81%
5.8%
16%
1%
-5%
16%
4%
6%
10%
9%
-14%
39%
-3.9%
6%
-9%
-9%
1%
-4%
5%
2%
7%
-10%
13%
-4.6%
0%
-7%
-2%
1%
-5%
9%
-9%
13%
-3%
2%
-1.2%
1%
-2%
Year
Year
2020
2021
2145
2369
2413
2865
6315
7214
2199
2414
859
962
3160
3963
31491 33581
2830
5012
52335 59380
18014 20787
Year
2022F
2258
2835
6862
2472
898
4230
34755
5191
60523
20576
Year
2023F
2213
2835
7019
2497
925
4484
36319
6229
63572
21024
Year
2024F
2257
2835
7400
2522
850
4753
37772
6977
66433
21684
Year
2025F
2302
2841
7610
2547
842
5038
39094
7953
69311
22264
Year
2026F
2314
2827
7840
2572
833
5340
40267
8749
71844
22828
-18%
10%
-19%
19%
-7%
14%
-6%
10%
-14%
12%
-17%
25%
3%
7%
25%
77%
-1.9% 13.5%
-12.0% 15.4%
4.4% 12.4%
-4.7%
-1.0%
-4.9%
2.4%
-6.7%
6.7%
3.5%
3.6%
1.9%
-1.0%
3.5%
-2.0%
0.0%
2.3%
1.0%
3.0%
6.0%
4.5%
20.0%
5.0%
2.2%
6.5%
2.0%
0.0%
5.4%
1.0%
-8.1%
6.0%
4.0%
12.0%
4.5%
3.1%
5.2%
2.0%
0.2%
2.8%
1.0%
-1.0%
6.0%
3.5%
14.0%
4.3%
2.7%
5.1%
0.5%
-0.5%
3.0%
1.0%
-1.0%
6.0%
3.0%
10.0%
3.7%
2.5%
4.2%
Source: WBMS, CRU, ISSF, Eurofer, METI, Macquarie Strategy, June 2022
Fig 134 Global stainless growth peaked in mid-2021: after
weak Q421/Q122, we expect some recovery in China
Fig 135 Stainless apparent consumption was negative again
in late 2021, with large falls in China
World stainless steel production by quarter
% change YoY
Quarterly stainless steel apparent consumption
% change year-on-year
16.0
60%
15.5
50%
25%
15.0
40%
20%
14.5
30%
35%
55%
51%
31.4%
30%
14.0
12.0%
10.1%
10%
13.5
5.8%
5.7%
5%
3.9%
3.3%
1.4%
13.0
% chnage YoY
% change YoY
15%
m tonnes
26.1%
20%
10% 8%
12.5
0%
-10%
-3.9%
-4.6%
-7.7%
-10%
4%
14%
13%
13%
11%
10%
8% 10% 7%
7% 6%
6%
4% 4% 4%
22%
16%
13%
6%
2% 3% 2%
17%
15%
5%
4%
0%
0%
-1%
-3% -4% -3%
-7% -6% -6%
-3%
-5% -6% -4%
1%
11%
4%
12.0
-20%
11.5
-30%
11.0
-40%
-1%
-2% -1%
-7%
-10%
-1.2%
-1.6%
-5%
6%
5%
26%
24%
23%
0%
0.8%
0%
29%
19%
16%
14%
12%
-14% -15%
-8%
-15%
Q119
Q219
Q319
Q419
Q120
Q220
Q320
Q420
% change YoY
Q121
Q221
Q321
Q421
Q122F
Q222
Q322
Q422
Q114
Q214
Q314
Q414
Q115
Q215
Q315
Q415
Q116
Q216
Q316
Q416
Q117
Q217
Q317
Q417
Q118
Q218
Q318
Q418
Q119
Q219
Q319
Q419
Q120
Q220
Q320
Q420
Q121
Q221
Q321
Q421
Q122
-30%
-12.8%
-15%
World level
Ex-China
Source: CRU, ISSF, Macquarie Strategy, June 2022
China
World
Source: CRU, ISSF, TDM, Macquarie Strategy, June 2022
Indonesian exports to China rose 81% y/y in 2021 to 2.5Mt despite the 20.2% anti-dumping duty on
imports of stainless steel slab and hot-rolled coil from Tsingshan’s Indonesian stainless plant. The duties
were imposed on 23 July 2019. The other stainless producer in Indonesia, PT Obsidian, produces billet
21 June 2022
49
Commodities Compendium
which was already exempt from anti-dumping duties. The mix between Chinese and Indonesian stainless
could shift over time towards Indonesia as Chinese policy makers try to decarbonise Chinese industry and,
more importantly, the operating cost advantage of using Indonesian nickel pig iron is overwhelming.
However, there is still a large amount of new stainless steel capacity planned for the Chinese market this
year and next (well over 5Mtpa).
2021’s strong stainless recovery reflected the huge global monetary and fiscal stimulus enacted after
Covid and a shift in global spending away from services to goods. Stainless end-use is mainly in consumer
durables and capital spending, both of which are benefiting from the stimulus. It has less exposure to
building construction than carbon steel in China and continues to perform better than carbon steel.
Nevertheless, Chinese apparent consumption turned negative in 2H21 and remains down in 1H22.
We have downgraded our 2022 growth numbers from 4.3% to 1.9% on the assumption that non-Chinese
demand growth could weaken in the second half of 2022. In stainless steel, the direct impact of the
Russia-Ukraine war is relatively limited as Russia and Ukraine are small consumers and producers of
stainless steel. The indirect effects from massive rises in energy prices are mildly positive from a
resurgence of investment in energy sectors, but this is offset by the likely negative impact on overall
economic growth. The only reason we have growth is by assuming a strong infrastructure spending led
recovery in China by end-2022.
The stainless steel market remained exceptionally tight in Europe and the USA up until recently, but the
price differentials between Asian and Northern hemisphere prices proved to be too enticing and a flood of
exports to Europe has seen a rapid unravelling of the European market in the past month. Incoming orders
at mills have collapsed and pricing is now under sharp downward pressure. Historically, this leads to a
period of heavy destocking and an overshoot on the downside. Chinese prices are also falling due to a
sharp fall in demand, in part due to Covid lockdowns.
Chinese and Indonesian stainless steel producers have achieved strong growth despite trade barriers that
have been erected in all major import markets. Indonesia’s share of global production was still low at
around 8% last year, but it accounted for over 20% of global exports (up from 15% in 2020). Total
Indonesian melt production last year was 5Mt compared with installed capacity of 4.5Mtpa, but real
capacity is probably over 6Mtpa. In China, there are still massive plans to build capacity and in total there
are well over 10Mtpa of additions planned in China over the next five years. Much of this capacity is for
300-series grade (8% Ni). The rationale for building this capacity is the ability to use cheap nickel pig iron.
Medium-term prospects remain bullish for stainless demand growth as it continues to gain market share
against other materials, but all the supply growth is likely to come from China, India and Indonesia. We see
global growth rates remaining around 4-4.5% pa out to 2026.
Fig 136 After a massive bull market in EU/USA, signs of a
turning point emerged in June (especially in EU)
Fig 137 EU 27 + UK imports of stainless steel soar in Q1
2022 leading to growing downward pricing pressures
700000
SS price in main regions
304 CR 2B
650000
6500
600000
550000
5500
500000
tonnes
$/tonne
4500
3500
450000
400000
350000
2500
300000
1500
250000
Source: CRU, SHFE, Macquarie Strategy, June 2022
21 June 2022
External imports
Q122
Q421
Q321
Q221
Q121
Q420
Q320
Q220
Q120
Q419
Q319
Q219
Q119
Q418
Q318
Q218
Q118
Q417
Q317
Q217
Jul-22
Jan-22
Apr-22
Jul-21
Oct-21
Jan-21
Apr-21
Jul-20
China
Oct-20
Jan-20
Apr-20
Jul-19
Asian export
Oct-19
Jan-19
Apr-19
Jul-18
USA
Oct-18
Jan-18
Apr-18
Jul-17
Oct-17
Jan-17
Apr-17
Jul-16
Oct-16
Jan-16
Apr-16
EU
Q117
200000
500
External exports
Source: ZLJSteel, TDM, Macquarie Strategy, June 2022
50
Commodities Compendium
Ferrochrome
SA chrome ore tightness supports ore prices as Chinese ferrochrome
producers get squeezed
2021 and H1 2022 have seen a major recovery in chrome prices and prices now appear to be peaking as
stainless steel production growth slows. The 2021 recovery was more pronounced in Europe with the
quarterly South African charge chrome benchmark rising to an all-time high of $2.16/lb and spot highcarbon ferrochrome prices soaring to $3.50/lb. Chinese price rises for ferrochrome were more subdued
owing to an earlier slowdown in Chinese stainless steel production and a recovery in Chinese domestic
ferrochrome production.
The price rises came off the back of six consecutive quarters of deficit in global ferrochrome, totalling
around 1.3Mt from 2Q20-3Q21. In addition, reported Chinese port inventories of chrome ore have fallen by
1.9Mt since early 2020, aided by ongoing logistical bottlenecks in the South African ports. Inventory
reductions muted the impact of production losses during the Covid lockdown periods and prices would
have risen sooner than they actually did if it were not for the destocking.
There were disruptions to South African, Indian and Chinese supply in 2020 leading to a 10.2% y/y fall in
global ferrochrome production. In 2021, enforced output cuts in Inner Mongolia and power cuts in five
provinces restricted Chinese output from July to September but supply has recovered strongly in South
Africa, leading to a 14.6% rise in global production last year. Ore prices had underperformed due to
weaker ferrochrome production in China, the biggest ore market, and some small South African mines
were forced to make production cuts. However, that has changed in the past six months as ore price
growth has accelerated in part due to logistical issues limiting South African export growth.
Our supply/demand balance suggests that as production rebounds in China in 2022, the market will return
to proximate balance between supply and demand, but lower inventory cover will support ongoing high
prices of ore and alloy, albeit with prices easing from recent highs. There is a limit to the downside in
Chinese ferrochrome prices until ore and other costs start to ease since the marginal production costs
have finally caught up with prices. As demand growth slows and coke and electricity prices could weaken,
prices will retrace in 2H22 and 2023. However, there is more downside to European ferrochrome prices
than there is to Chinese prices.
Weaker Chinese demand (due to FeCr cuts) led to UG2 ore prices falling from a December 2020 peak of
$180/t cfr to just above $150/t in Q221. Late last year prices recovered strongly and recently hit $300/t.
Due to power cuts, many smelters switched to higher grade ores to maximise productivity and premiums
for these ores (vs. UG2) rose sharply (South African 44% was at >$45/t premium to UG2 compared with
$10-20/t in the past). In the medium term, the outlook for chrome prices is stable amid a broad balance
between supply and demand. Continued strong stainless demand growth needs to be supported by steady
(increasingly higher-cost) South African ore supply growth so the risks could be to the upside.
Fig 138 Ferrochrome prices take off in Europe but ease in
China as stainless price weakens
Fig 139 Big fall in Chinese chrome ore port stocks leads to
a strong ore price recovery
Chinese spot FeCr vs. SHFE stainless steel prices,
Chinese ore stocks and ore price
3300
310
5.0
400
3100
160
2100
1900
110
350
4.0
300
3.5
3.0
250
2.5
200
2.0
Ore price: $/tonne
2300
Ore stocks: in months of use
210
2500
FeCr: c/lb Cr. Cr ore: $/t cfr
2700
SS: $/tonne
4.5
260
2900
150
1.5
1700
100
1.0
1500
60
0.5
50
2013
SHFE SS (LHS)
Chinese spot FeCr
Europe FeCr benchmark
2014
2015
2016
2017
2018
21 June 2022
2020
2021
2022
UG2 Ore price
Stocks in months of use
Source: CRU, SHFE, Macquarie Strategy, June 2022
2019
Ore price
Source: Ferroalloynet, CRU, Macquarie Strategy, June 2022
51
Commodities Compendium
Fig 140 Changes in ferrochrome supply – all about Chinese
growth in 2022, which is limited by SA ore supply
Fig 141 Estimated FeCr costs in Inner Mongolia – costs
surge on back of rising Cr ore and energy costs
2,000
1.35
1.30
1.25
741
1,000
229
144
863
971
500
762
1.20
-
1.15
$/lb Cr: price and costs
'000t FeCr
1,500
10
(329)
(69)
(500)
(744)
1.10
1.05
1.00
0.95
0.90
0.85
0.80
0.75
(1,000)
(333)
0.70
(352)
0.65
South Africa
China
Jan-22
Apr-22
Jul-21
Oct-21
Jan-21
Apr-21
Jul-20
Oct-20
Jan-20
Price
Apr-20
Jul-19
Rest of world
Oct-19
Jan-19
Apr-19
2022F
Jul-18
2021F
Oct-18
2020
Jan-18
2019
Apr-18
0.60
(1,500)
Costs
Source: CRU, Company reports, Macquarie Strategy, June 2022.
Source: Ferroalloynet, Macquarie Strategy, June 2022
Fig 142 Actual/estimated world ferrochrome output by
region, 2015-21: 2021 0.5Mt lower than mid-year forecast
Fig 143 Large deficits eliminated stocks in 2021 – deficit
ending as demand growth slows
14,000
'000t FeCr
12,000
10.7mt:
-5.1%
11.1mt:
+4.6%
12.6mt:
+12.7%
13.6mt:
+8.5%
14.0mt:
+2.7%
14.4mt:
+14.6%
15.4mt:
+6.7%
Supply and demand: '000t FeCr
16,000
12.6mt:
-10.2%
10,000
8,000
6,000
4300
550
4100
450
350
3900
250
3700
150
3500
50
3300
-50
3100
Balance: '000t
18,000
-150
2900
-250
4,000
2700
-350
2500
-450
S. Africa
India
Indonesia
Finland
Russia
Market balance
Other
Source: CRU, Industry sources, ICDA, Macquarie Strategy, June 2022
Production
Q422
Q322
2022F
Q222
2021F
Oman
Q122
2020
Q421
2019
Q321
2018
Q221
2017
Kazakhstan
Q121
2016
Q420
2015
China
Q320
-
Q220
Q120
2,000
Consumption
Source: CRU, Industry reports, Macquarie Strategy, June 2022
Fig 144 Global high-carbon ferrochrome market balance
Ferrochrome (kt)
Production
YoY % change
2019
13,990
2.7%
2020
12,561
-10.2%
2021
14,393
14.6%
2022F
15,362
6.7%
2023F
15,919
3.6%
2024F
16,404
3.0%
2025F
17,033
3.8%
2026F
17,695
3.9%
Consumption
YoY % change
13,769
4.9%
13,039
-5.3%
14,430
10.7%
15,039
4.2%
15,577
3.6%
16,279
4.5%
17,010
4.5%
17,449
2.6%
221
(479)
(38)
3,381
12.8
109.5
74.6
155.5
2,902
11.6
110.8
67.2
137.5
2,864
10.3
152.4
108.2
159.4
Balance
Stocks
Weeks of consumption
Euro contract price (list) c/lb
Chinese spot charge chrome c/lb
Chrome ore 42% UG2 SA CFR
323
342
124
3,188
11.0
203.0
113.0
248.5
3,529
11.8
152.5
105.0
220.0
3,654
11.7
145.0
105.0
190.0
23
3,677
11.2
150.0
105.0
195.0
246
3,923
11.7
155.0
110.0
200.0
Source: CRU, Fastmarkets, Ferroalloynet, Macquarie Strategy, June 2022
21 June 2022
52
Commodities Compendium
Molybdenum
By-product supply remains weak in Chile and USA, supporting prices as
demand growth slows
An unexpectedly strong rise in demand and a logistical squeeze (shortage of shipping containers) led to a
major run up in molybdenum prices last year to $20/lb, a level last seen in 2008. Prices are currently
trading around $17-18/lb but appear well supported as by-product production in Chile remains depressed
(down 13% y/y in January-April 2022). Global mine production continued to fall in the first three months of
2022, and we estimate that world production fell 4.3% year-on-year with primary supply rising 4.9% and
by-product supply falling 10%.
The 2021 price rise was supported by a sharp fall in supplies from copper by-product operations due to
natural grade variations and the market required a big destocking of material, especially from China. The
current “squeeze” on supplies should be short-lived as new projects are commissioned and demand
growth weakens but we still see prices staying at higher levels than seen in recent years.
In the medium term, the market remains balanced between supply and demand, assuming some big
projects come on stream and Chinese primary supply continues to grow to fill any gap that emerges
between supply and demand. It appears that the massive swing of China to a net importer in 2020 was a
one-off opportunistic event to take advantage of low prices rather than any structural change in the market.
2021 saw a 12.9% y/y fall in copper by-product production while primary production rose 13.1% y/y (due to
Chinese production recovery after big disruptions in 2020).
The largest changes in by-product supply in recent years have been at a limited number of operations with
swings in Chile (Codelco in particular) and also Kennecott in the USA leading the way. Kajaran in Armenia
also saw a large rise in output in 2020 (almost doubling y/y to 25.6M lbs). It appears to reflect copper
mining moving to moly-rich parts of orebodies in the case of Codelco, Kennecott and Armenia and a mine
expansion at Toquepala (which has now been completed).
Production at Codelco and Kennecot collapsed last year and this led to combined production of the four
operations falling by 29% y/y (-45M lbs) to 112M lbs in 2021. 2022 should see the start-up of two new
operations, BHP’s Spence Sulphides in Chile (9M lbs/year Mo) and Newcrest’s Cadia Hill mine in Australia
(7.5M lbs/year Mo) followed by Quellaveco (10M lbs/year) and Quebrada Blanca (18M lbs/year) in late22/early 23. First Quantum’s 9M lbs/year by-product circuit at Cobre de Panana has been delayed to end23/early 24.
In total, we project a 1.7% y/y rise in by-product production in 2022 to 352M lbs (before a disruption
allowance) and a 1.3% y/y rise in primary production to 236M lbs (mainly in China). Including recycling
from catalysts and after a disruption allowance, we project that global finished supply will be flat at 583M
lbs, after falling 4.5% last year.
After falling in 2020, consumption recovered strongly in 2021 by an estimated 13.4% y/y to 614M lbs, an
all-time high. The rebound was seen in all the major markets following a strong rise in stainless and alloy
steel production. In 2022, in line with slower economic growth, we project consumption growth of only
2.1% y/y to 627M lbs but over the 2023-2026 period we see steady growth of around 3% a year.
The surge in oil prices and growing military spending should be supportive of a reasonable growth rate in
molybdenum demand even as the global economy potentially slows markedly. Chinese molybdenum
demand should benefit from stronger Chinese infrastructure spending and there appears to be a structural
shift in Chinese steel consumption to Mo containing grades.
After the big 2021 rise we expect growth in demand to slow to 2.1% this year but this will still result in a
substantial deficit of 44M lbs, mainly in the first half of the year, made possible by further declines in
Chinese inventories. The market gets closer to balance from 2H 2022 as supply accelerates and demand
growth slows. The risk of further delays in the ramp up of molybdenum production from copper mines
remains large, however.
Following the massive net imports of 100M lbs in 2020, Chinese net imports fell to 5.4M lbs in 2021 and in
Jan-May 2022, China was a net exporter of 6.6M lbs (mainly FeMo). A good part of the 2020 imports
accumulated as inventory and these inventories are most likely to be depleted by end-2022. The low level
of inventories will provide some support for prices for the rest of 2022 and into 2023.
From 2023 onwards, we see a relatively balanced market but small surpluses in 2023-2026 should see
prices easing black towards $13/lb.
21 June 2022
53
Commodities Compendium
Fig 145 Spot prices soared from Q2 21 and have remained
strong for over a year amid lower supply
Fig 146 After rising strongly in 2020, by-product production
from key operations falls away
20
Daily Mo oxide prices
22
2022 YTD: $18.80/lb
16.5
16
20
15.4
14
18
2021: $15.90/lb
16
m lbs Mo
$/lb Mo
18.6
18
14
12
2020: $8.68/lb
10
2.8
12.1
12
11.3
10
9.3
1.9
8
0.6
1.6
2.0
6
1.9
2.6
2.0
4.7
5.3
2
6
Jan
Feb Mar Apr May Jun
Jul
2.7
2.4
3.9
5.1
18.7
2.6
2.6 15.7
3.1
3.3
2.4
2.5
5.1
12.2
2.2
6.4
3.9
6.3
5.9
4.9
6.8
6.8
7.8
6.5
11.1
3.0
5.0
3.6
2.1
4
8
2.2
1.7
2.1
17.3
5.8
1.1
2.7
0.4
5.3
4.9
11.7
11.4
3.0
2.6
2.5
2.5
1.1
1.1
5.0
5.3
0
Aug Sep Oct Nov Dec
Q119 Q219 Q319 Q419 Q120 Q220 Q320 Q420 Q121 Q221 Q321 Q421 Q122
2021
2022
Codelco
Kennecott
Armenia
Tocquepala
Source: Platts, Macquarie Strategy, June 2o22
Source: Company reports, Chile/Armenia/Mining Ministries, Macquarie
Strategy, June 2022
Fig 147 Primary/by-product supply reversal in 2020/21 then
both to recover in 2022, but only marginally
Fig 148 Will higher oil price boost Mo use in oil and gas
investment?
Changes in world molybdenum mine production
Baker Hughes global oil rig count
No. of rigs, Jan 2010-May 2022
60
4500
120
4000
40
100
3500
42
Number of rigs
20
m lbs Mo
28
6
3
-19
3000
80
2500
60
2000
1500
40
1000
-20
20
-51
500
0
-60
2020
2021
Primary
World
2022F
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
0
2010
-40
Price: $/barrel
2020
Oil price (WTI)
By-product
Source: Company reports, Macquarie Strategy, June 2022
Source: Baker Hughes, Platts, Macquarie Strategy, June 2022
Fig 149 Global molybdenum market balance
m lbs Mo
Demand
Europe
USA
Japan
China
Other
Total Demand
Change YoY
Supply
Primary mine production
By-product mine production
Catalysts
Disruption allowance/yield losses
Total Supply of products
Change YoY
2018
2019
Market Balance
Price $/lb Mo oxide
-12
16
11.93 11.40
2020
2021 2022F 2023F 2024F 2025F 2026F
143
135
117
130
60
57
47
60
56
54
45
53
215
221
235
246
109
109
98
126
584
576
542
614
4.6% -1.3% -6.0% 13.4%
131
62
54
251
129
627
2.1%
220
347
13
-9
572
1.6%
246
257 265 271 279
351
406 429 439 453
13
13
13
14
14
-27
-30
-31
-32
-33
583
646 676 692 713
0.1% 10.8% 4.6% 2.4% 3.1%
234
355
13
-9
592
3.6%
215
243
397
346
8
12
-9
-18
610
583
3.0% -4.5%
134 136 138 141
64
66
67
68
56
57
58
59
261 273 281 291
134 138 143 148
648 669 686 706
3.3% 3.3% 2.5% 3.0%
68
-32
-44
-2
7
6
7
8.66 15.77 17.59 15.00 14.00 13.00 13.00
Source: Company and country data, IMOA/SMR, Macquarie Strategy, June 2022
21 June 2022
54
Commodities Compendium
Steel
Ex-China rolls over, China struggles to deliver
Covid-19 restrictions have had a severe impact on Chinese domestic steel demand in 2Q21, and despite
Shanghai’s recent emergence from lockdown, signs of recovery are scarce, with new mass-testing
dampening hopes for the remainder of the quarter. Construction steel sales volumes continue to trend
well-below 2021 levels, in fact averaging lower since the end of Shanghai’s lockdown, while 30 city
property sales remain ~35% below the 10DMA for the previous four years. Meanwhile, four consecutive
cuts to the domestic coke price have reduced steelmaking input costs, allowing steel prices to head lower
without leading to production cuts. Instead, China’s crude steel output has climbed to almost full capacity,
building domestic steel stocks to unseasonably high levels. Hot metal output has been even stronger,
helped by lower scrap rates in both EAF/BOF steelmaking as onshore scrap collection/processing
continues to be impacted by covid restrictions.
Fig 150 War risk premium dissipates as steel demand woes
weigh
$/tonne exworks
Fig 151 China’s reopening has not led to a pickup in
construction activity yet
Monthly hot-rolled coil (HRC) steel prices
China daily construction steel volumes, kt (weekly
average)
300
250
2000
1750
200
1500
1250
150
1000
100
750
500
50
250
2022
2021
2020
2019
2018
2017
2016
0
US domestic
Chinese domestic
World export price
Europe
0
-7 -4 -1
2
5
2019
8 11 14 17 20 23 26 29 32 35 38 41 44 47
2020
2021
2022
20/06/2022
Source: WSDSteelbenchmarker, Macquarie Strategy, June 2022
Source: Mysteel, Macquarie Strategy, June 2022
Fig 152 Chinese mills look at exports as domestic demand
remains weak…
Fig 153 But stimulus is coming– we have raised our 2023
forecast
China finished steel exports, Mt
9
Chinese crude steel and pig iron production, Mt
1150
8
1050
7
6
950
5
850
4
750
3
650
2
1
550
0
Pig Iron production
Source: China Customs, Macquarie Strategy, June 2022
2030F
2029F
2028F
2027F
2026F
2025F
2024F
2023F
2021
450
2022F
Dec
2020
2022
Nov
2019
Oct
2018
Sep
2017
Aug
2016
2021
Jul
2015
Jun
2014
May
2013
Apr
2012
Mar
2011
Feb
2010
Jan
Crude Steel Production
Source: Worldsteel, NBS, Macquarie Strategy, June 2022
China’s delayed recovery in steel demand has also impacted prices ex-China. In both the US and Europe,
steel prices have fallen in recent months, likely partly contributed to by a 47% y/y increase in Chinese
finished steel exports in May (as well as increased output from other exporting market, notably India). This
has helped to offset the loss of Russian supply due to sanctions on finished steel products and reduced
output from Ukraine due to infrastructure damage. In Europe, steel prices should soon hit a bottom now
that prices have returned to pre-war levels; our 3Q22 EU HRC price forecast is only marginally below spot.
21 June 2022
55
Commodities Compendium
We see prices in the US, however, as having more room to fall over the coming quarter. Though our Q322
price forecast is unchanged, the decline has started from a higher base than we previously anticipated
while the recent collapse of seaborne scrap prices is expected to reduce input costs for US EAFs.
Despite cuts across the board to our near-term steel price outlook compared to our last compendium,
Chinese policy has turned decisively more dovish with signs policymakers are prepared to boost property
in addition to infrastructure demand. The risk is that covid will constrain China’s ability to deliver an
effective stimulus short term (and likely, while “dynamic zero covid” is in place) but demand will almost
surely recover from currently depressed levels. We have upgraded our 2023 forecast for China’s crude
steel production to 1,057Mt (+2.6% YoY). Our long-term steel price forecasts remain largely unchanged
and we continue to expect global steel prices and profitability to settle at a higher level than pre-pandemic
levels amid capacity constraints both in China and ex-China.
Fig 154 Plummeting seaborne scrap prices don’t bode well
for US HRC in the near-term
700
Fig 155 We expect steel prices and margins to improve
medium term
Key steel scrap prices, $/t
Modelled spot HRC margins, representive plants
50%
600
40%
500
30%
400
20%
300
10%
0%
Apr-22
EU integrated
Source: worldsteel, NBS, Macquarie Strategy, June 2022
Asia integrated
1Q26
1Q25
1Q24
1Q23
1Q22
1Q21
1Q20
FOB Rotterdam
Shanghai heavy scrap
1Q19
-10%
1Q18
Jan-22
Jul-21
Oct-21
Apr-21
Oct-20
Jan-21
Jul-20
Apr-20
Oct-19
CFR Turkey
FOB East coast
Jan-20
Aug-19
Feb-19
May-19
Nov-18
Aug-18
May-18
Feb-18
200
China integreted
Source: TDM, NBS, Macquarie Strategy, June 2022
Fig 156 Global steel market balance (Mt)
China
Apparent consumption
Real estate
Infrastructure
Machinery
Autos
Other
2016
768
283
107
100
62
215
2017
833
293
115
104
66
256
2018
872
314
115
108
65
270
2019
927
341
121
115
61
289
2020
1,014
357
132
130
62
332
2021
1,005
344
136
136
63
326
2022
973
307
143
140
64
319
2023
1,008
317
151
145
67
328
2024
1,028
321
154
149
69
335
2025
1,045
325
156
153
70
341
2026
1,055
326
159
155
71
345
Net exports
Crude steel production
% growth
106
870
-3.5%
68
894
2.8%
62
949
6.1%
55
997
5.1%
19
1,064
6.8%
55
1,036
-2.7%
57
1,030
-0.6%
49
1,057
2.6%
44
1,072
1.4%
38
1,083
1.0%
34
1,089
0.5%
Pig Iron Production
782
-0.9%
765
-2.3%
789
3.2%
830
5.2%
903
8.9%
865
-4.3%
870
0.6%
880
1.2%
880
-0.1%
876
-0.5%
872
-0.4%
World, ex-China
Apparent consumption
% growth
908
2.5%
919
1.2%
953
3.7%
947
-0.7%
833
-12.0%
928
11.4%
923
-0.6%
944
2.3%
990
4.8%
1,015
2.5%
1,045
3.0%
Crude steel production
EU (27)+UK
United States
India
Total
% growth
162
79
96
820
0.5%
169
82
101
858
4.6%
168
88
109
883
2.9%
159
88
112
871
-1.4%
139
73
100
792
-9.1%
152
87
112
884
11.6%
145
87
117
851
-3.7%
145
84
123
887
4.2%
151
85
131
944
6.5%
150
85
142
971
2.8%
150
92
152
1,004
3.5%
462
-0.8%
469
1.6%
480
2.3%
473
-1.5%
429
-9.3%
482
12.3%
454
-5.8%
473
4.3%
506
6.9%
516
2.1%
526
1.8%
574
356
454
679
488
599
909
538
644
680
489
529
646
496
529
1,739
746
1,100
1,296
687
1,104
754
630
710
760
580
660
775
600
690
810
650
740
Pig Iron Production
% growth
HRC Prices
US
China
Europe
Source: Customs data, worldsteel, NBS, steelbenchmarker, Platts, Macquarie Strategy, June 2022
21 June 2022
56
Commodities Compendium
Iron ore
Inevitable reset, now all eyes on stimulus
The impressive recovery in China’s hot metal production had supported the iron ore price for most of this
quarter with strong direct consumption (especially lower grade products) driving a decline in visible iron ore
inventories (port stocks have fallen to a 10-month low). Underperforming supply has also played a role:
war in Europe has cut ~20Mtpa from Ukraine’s iron ore exports, ~13Mtpa from Russia (based on vessel
tracking data) while combined exports from Australia and Brazil have declined 42Mtpa YTD mainly due to
labour constraints in the Pilbara, wet weather and unexpected ore quality at Vale’s Northern System.
India’s tariff hike in May also threatens to cut a further 20Mtpa from the market.
We warned that strong hot metal production in a still weak steel demand environment was unsustainable
(Iron ore: running out of time): despite lower scrap consumption in both EAF/BOF steelmaking helping
support direct consumption for iron ore, steel inventories remain elevated and mills’ margins have shrunk.
Now, hot metal production cuts have started to materialise and the iron ore price has seen a major
correction – falling ~30% to $110/t at the time of writing.
Fig 157 Port stocks have hit the lowest point in 10 months,
keeping prices supported until recently
Fig 158 Narrow steelmaking margins driving demand for
low-Fe% brands, SSF stocks down 60% from peak
China's total 45 ports iron ore stocks, Mt
Selected iron ore brands at Chinese ports (15), Mt
170
61%
160
59%
14
12
57%
150
10
55%
140
53%
130
51%
120
49%
110
47%
100
Jan-20
45%
Jul-20
Jan-21
Jul-21
Total 45 ports
8
6
4
2
0
Jan 21
Jan-22
% of ore owned by traders
Source: Platts, Mysteel, Macquarie Commodity Strategy, June 2022
Jul 21
Jan 22
PBF
IOCJ
NMF
MACF
BRBF
SSF
FBF
SHFT
JMBF
Source: Mysteel, Macquarie Commodities Strategy, June 2022
Fig 159 Global iron ore market balance (Mt)
Mt wet
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Seaborne Demand
China
Total Consumption
Total Imports (1)
Change in (visible) inventories
Apparent Domestic Production
1,160
1,080
21
118
1,184
1,129
70
146
1,222
1,099
-5
138
1,285
1,123
-15
170
1,399
1,195
-20
211
1,339
1,191
24
197
1,347
1,155
-15
203
1,363
1,188
0
201
1,363
1,186
0
202
1,356
1,179
0
202
1,350
1,174
0
202
Others seaborne imports
408
412
429
405
353
395
389
396
412
419
424
1,488
1,540
1,527
1,528
1,548
1,586
1,544
1,583
1,598
1,599
1,598
328
257
171
313
330
268
169
331
338
274
168
350
327
273
174
286
331
290
180
285
322
284
185
295
318
289
187
295
330
290
183
310
340
290
183
320
340
290
183
333
340
290
183
343
279
284
293
321
325
341
342
366
386
400
395
Tier-3 supply (required to balance the market)
140
158
104
147
138
160
143
104
79
53
47
Market balance (Change in Tier-3 and inventories)
62% Fe, sinter fines price
-13
58
-18
71
49
69
-58
93
-73
109
2
160
2
137
38
120
25
100
26
95
6
105
Total seaborne demand
Seaborne Supply
Rio Tinto
BHPB
FMG
Vale
Tier-2 supply
(2)
LT
80
Source: Customs data, IHS, Macquarie Commodity Strategy, June 2022; note: LT price, 2020$ (real)
21 June 2022
57
Commodities Compendium
We have cut our Q3 price forecast to $120/t but expect prices to find some support around these levels –
the correction in price should help stabilise mills’ margins. Given BF utilisation is close to full capacity
already it is hard to see a major step up in iron ore demand from current levels, but a gradual steel
demand recovery should lead to a drawdown in finished steel stocks, helping steel prices and margins. In
turn, this could support the value in use of index-setting, medium grade iron ore brands (like Rio Tinto’s
PBF) and reduce the demand pull for lower grade ores.
Iron ore supply is also expected to improve at the margin in 2022H2 (though inventories also need to
rebuild, meaning that additional shipments will not necessarily drive a price decline per se). We have cut
our forecast for Vale’s production by 5Mt (315Mt) and also expect Rio Tinto’s production to fall slightly
below guidance (318Mt). However, given the weak 2022H1, we still expect a step up in shipments from
here. Beyond 2022 it is smaller producers that will drive production growth, with Mineral Resource’s
Ashburton project in particular adding 10Mt in supply by 2023 and ramping up to 30Mtpa from 2026.
While we expect only a gradual recovery in Chinese steel demand in 22Q2, recent macro events have
increased the chances of a stronger policy response later this year / next year. We have revised up our
2023 forecast for Chinese production and as a result, our medium-term iron ore balances have improved
(main reason for our 2023 price forecast upgrade).
Fig 160 Supply growth for BHP, FMG and tier-2 Australian
miners, while Brazilian mines and Rio have a weaker year
2022 vs. 2021 iron ore supply, Mt
Fig 161 2H22 surplus dampens iron ore price increase
despite better Chinese economic environment
200
6
5
4
3
2
1
Iron ore seaborne market balance, Mtpa (annualised)
220
150
200
100
180
50
160
0
140
-50
120
-100
100
-150
80
0
-1
-2
-3
Balance (annualised)
4Q22
3Q22
2Q22
1Q22
4Q21
3Q21
2Q21
1Q21
4Q20
3Q20
2Q20
1Q20
4Q19
3Q19
1Q19
-5
2Q19
-4
Iron ore price
Source: Platts, Macquarie Strategy, June 2022
Source: Platts, TDM, Company Reports, TDM, Macquarie Strategy, June
2022
Fig 162 Pig iron production forecast revised down - current
rate unsustainable in our opinion
Fig 163 Balanced market for second consecutive year
Seaborne iron ore market balance (LHS, Mt) vs
benchmark iron ore price (RHS: $/t)
China crude steel production, YoY % chg
3.0%
2.5%
60
2.0%
40
1.5%
170
49
36
150
27
26
130
20
2
1.0%
6
2
110
0
0.5%
90
-20
70
-18
-40
Market balance (Change
in Tier-3 and inventories)
62% Fe, sinter fines price
-60
21 June 2022
50
30
2026
2025
2024
10
2021
-73
2020
-80
2018
Old forecast (March 2022 Compendium)
Source: China NBS, Macquarie Strategy, June 2022
-58
2024
2017
New forecast
2023
2016
2022
2019
-1.0%
2023
-0.5%
2022
0.0%
-13
Source: Platts, TDM, Company reports, worldsteel, NBS, Macquarie
Strategy, June 2022
58
Commodities Compendium
Metallurgical Coal
Off the highs, but still a deficit market
Following a surge at the time of publication of our last compendium, met coal prices have since undergone
a major correction, with prices now $200-$300 below the highs achieved in March and continuing to fall.
Prices rallied initially on supply concerns following Russia’s invasion of Ukraine: however, to date,
disruptions have been minimal with vessel tracking data indicating Russian shipments to Europe in fact
increasing y/y in April and May– a sign of stockpiling ahead of the ban (starting in August).
Fig 164 Met coal prices fall hard as steel demand weakens
ex-China
Fig 165 Russian coal shipments have held up so far, but
disruptions are likely in the second half of the year
800
Millions
700
600
500
Russia coal (met & thermal) shipments, daily tonnes
(2WMA)
0.7
0.6
0.5
400
0.4
300
0.3
200
0.2
100
0
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
HCC
LV-PCI
NEWC 6300cv
NEWC 5500cv
Source: Platts, Macquarie Strategy, June 2022
Jul-21
Jan-22
SSCC
0.1
0
Jan
Feb Mar
Apr May Jun
2020
Jul Aug Sep Oct Nov Dec
2021
2022
Source: Vessel Analytics Desk, Macquarie Strategy, June 2022
Aside the lack of disruptions, prices have corrected as crude steel production cuts have started to emerge
in major met coal importing hubs (ex-China production - which accounts for > 80% of seaborne met coal
imports, declined 7% YoY in April). Meanwhile, in China, the negative import arb has reduced the demand
pull on seaborne material. We think prices are likely to find a bottom at these levels: at ~$380/t at time of
writing, met coal (semisoft and PCI in particular) has started to look relatively cheap compared to its sister
commodity thermal coal, which is likely to see further upside pressure as European gas prices are now on
the rise. China’s import arb has also closed and may soon turn positive following the sharp correction in
seaborne prices.
Structurally, the global met coal market is expected to remain in deficit for the second consecutive year in
2022 (-12Mt) amid underperforming supply: Australian shipments are down 4.7% YTD (-8.3Mt annualised)
and we do not see any significant growth y/y in 2022. For some Australian producers we have raised our
expectations slightly (Yancoal; Kestrel mine) and have added some small new capacity from QCoal’s Cook
mine (first production in April), while continuing to forecast slight growth from Jellinbah and Whitehaven as
high prices incentivise some productivity gains. However, these supply increases are almost fully offset in
our model by y/y declines from Anglo American (lowered guidance), BHP (weaker Q1 sales y/y), and
marginal losses elsewhere.
From Russia, we expect shipments to eventually reveal the impact of war as logistics prevent a full trade
reshuffle in the short term, with -4Mt y/y in 2022. Flows to Europe (excl. Turkey) are starting to show signs
of decline and should eventually grind to a halt by August.Meanwhile, we have reduced our expectations
for land exports from Mongolia to China to 15Mt this year (18Mt previously) as Covid-19 restrictions delay
the recovery of flows across the border.
In the US, we have reduced Warrior’s 2022 outlook following weak Q1 results but see increased volumes
coming from Peabody’s Shoal Creek as longwall production ramps up. Logistics constraints continue to
hamper US producers’ ability to respond to high seaborne prices: YTD shipments are running at a
~40Mtpa rate vs ~60Mtpa seen at the peak of previous cycles. This lack of a supply response is one key
reason why we see met coal prices continuing to trade at a high level despite a slowing demand
environment.
As a result, the only way the market can balance in our view is via seaborne demand destruction (likely
coming from China). For that to materialise, prices will have to settle at a relatively high level: we forecast
HCC index (premium, low vol. HCC) to average $370/t in 2022 H2 ($419/t for the year as a whole).
21 June 2022
59
Commodities Compendium
Fig 166 Mongolian and Russian exports recover from Covid
and war impacts, Australia leads new capacity in 2022/23
Fig 167 Prices set to average record highs this year as
global market remains in deficit
Met coal market balance (LHS) and seaborne HCC
price (RHS)
YoY change in met coal supply (Mt)
25
15
20
10
5
6
3
5
15
450
10
6
0
400
350
-5
10
-6
-10
5
-15
-7
-11
-12
-13
300
250
-20
0
-25
Market
balance
HCC
price
-30
-5
2022
Australia
Canada
2023
Russia
Mozambique
2024
Mongola
-35
Others
-35
-40
200
150
100
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Source: Company Reports, Macquarie Commodity Strategy, June 2022
Source: Platts, TDM, Company Reports, SxCoal, Macquarie Commodity
Strategy, June 2022
Apart from a small surplus in 2023, our balance points to medium/long term deficits as demand growth in
South/Southeast Asia offsets declining imports from China and Europe. As such, our long-term forecasts
across HCC, SSCC and LV-PCI remain unchanged, with prices coming off the highs as China reduces
imports but settling above the past decade average. ESG-related pressures have limited investment by
major miners in the coal sector (although this is most prevalent for thermal coal) and in May BHP
completed a divestment from its South Walker Creek (PCI) & Poitrel (HCC/PCI) mines. One exception to
the subdued supply story is Pembrooke’s Olive Downs mine, which should bring new HCC capacity from
2023. Even with this addition and normalising production from Anglo and BHP, we do not see Australian
production returning to previous highs (pre-cyclone Debbie in 2017) in the medium term.
Fig 168 Internationally traded metallurgical coal market balance
Mt wet
Import Demand
China
Total Consumption
Total Imports (1)
of which, seaborne
Apparent Domestic Production
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 LT
733 726 721 776 789 802 805 813 811 806 801
53
63
58
72
57
46
40
45
50
55
56
35
43
38
48
41
35
25
22
19
24
25
680 662 663 704 732 756 765 768 761 751 745
JKT (Japan, SK and Taiwan)
India
Europe
Others
101
47
66
35
95
51
71
34
100
56
69
39
101
59
65
39
84
56
56
37
97
67
63
46
93
69
55
43
94
73
57
48
94
83
66
54
94
85
66
57
93
83
63
61
Total imports
302
315
323
336
290
318
300
317
346
356
355
Export Supply
Australia
United States
Canada
Russia
Mozambique
Mongolia
Others
189
37
25
22
5
18
5
173
48
27
23
7
20
4
179
54
30
26
7
20
3
183
48
31
25
5
24
3
170
38
28
26
3
16
6
166
41
25
32
4
11
6
167
53
27
28
5
15
6
172
47
29
32
7
23
7
177
61
30
32
9
31
7
179
68
30
33
9
31
7
181
65
30
33
9
31
7
Total exports
301
301
320
319
287
285
300
317
346
356
355
Market balance
5
-11
-6
6
10
-35
-12
6
-13
-7
HCC price
143 190 208 179 125 225 419 248 280 220
Source: Custom Statistics, TDM, SxCoal, Commodity Insights, Macquarie Commodity Strategy, LT price, 2021$ real, June 2022
21 June 2022
3
200 175
60
Commodities Compendium
Thermal Coal
Strong bid for seaborne material
Seaborne thermal coal prices remain at an elevated level, with the Newc index outperforming and rising by
50% quarter-to-date to $390/t. The price has been supported by strong ex-China demand and limited
supply growth.
Fig 169 Seaborne thermal coal prices remain elevated…
Key seabrone spot thermal coal prices ($/t)
500
450
NEWC 6300cv
ARA 6000cv
40
RB 5500cv
NEWC 5500cv
20
…With Newc index outperforming others
API2-NEWC spot price spread, $/t
60
400
350
Fig 170
0
300
250
-20
200
-40
150
-60
100
-80
50
API2-NEWC spread
-100
Source: Platts, IHS, Macquarie Strategy, June 2022
-120
Jan 14
May 14
Sep 14
Jan 15
May 15
Sep 15
Jan 16
May 16
Sep 16
Jan 17
May 17
Sep 17
Jan 18
May 18
Sep 18
Jan 19
May 19
Sep 19
Jan 20
May 20
Sep 20
Jan 21
May 21
Sep 21
Jan 22
May 22
Jan 22
Apr 22
Jul 21
Oct 21
Jan 21
Apr 21
Jul 20
Oct 20
Apr 20
Jan 20
Jul 19
Oct 19
Jan 19
Apr 19
Jul 18
Oct 18
Jan 18
Apr 18
Jul 17
Oct 17
Jan 17
Apr 17
0
Source: Platts, IHS, Macquarie Strategy, June 2022
Europe is rushing to buy coal and build stockpiles ahead of the ban on Russian coal imports from 10th
August. The shipping data we track shows a big jump in European thermal coal imports, and ARA coal
stocks have risen to a two-year high. Recent news on Russia reducing gas supply to Europe, the Freeport
US LNG export terminal accident and a potential ban on oil imports from Russia are all contributing to
boosting coal demand from the region. Europe is continuing to buy coal from Russia at the moment, with
additional imports also coming from Australia, Colombia, South Africa and the USA.
Fig 171 European imports showed a massive rise…
kt
14000
Europe thermal coal import discharge
Fig 172 …As Europe is building coal stocks ahead of the
ban
ARA stocks, Mt
10.0
9.0
12000
8.0
10000
7.0
6.0
8000
5.0
6000
4.0
3.0
4000
2019
2020
2021
2022
2.0
2000
2021
2022
1.0
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov Dec
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
0.0
Jan
Feb Mar
Apr May Jun
Jul
Aug Sep Oct
Nov Dec
Source: IHS, Macquarie Strategy, June 2022
The other rising buying force in the seaborne market is India. Exceptionally hot temperatures in some parts
of the country are leading to another coal crisis there, and despite healthy domestic production growth,
coal inventories remain low with persistent challenges in logistics and strong power demand (Thermal
Coal: India to hike imports), making coal imports the main solution in the short term. A similar big jump in
Indian thermal coal imports was seen in June, and the increased volumes were mainly from Indonesia,
with some growth from Russia too but from a low base.
21 June 2022
61
Commodities Compendium
Fig 173 India also lifted coal imports aggressively…
kt
20000
Fig 174 …But their coal inventories remain low
India thermal coal import discharge
India coal inventory (days of usage)
35
18000
30
16000
25
14000
20
12000
15
10000
8000
10
6000
5
4000
2019
2020
2021
2022
0
Jan
2000
Feb Mar
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
May
Jun
2019
Nov Dec
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
Apr
Jul
Aug
2020
Sep
Oct
Nov Dec
2021
2022
Source: Bloomberg, Macquarie Strategy, June 2022
Demand from Japan, South Korea and Taiwan has also been strong as seen by the shipment data, and
growth of their imports were mainly from Indonesia and Australia, although until recently we heard there
was reducing buying of Australian coal due to the high Newc price. They also continued buying Russian
coal though Japan has announced it plans to ban Russian coal imports but with no clear timetable.
It is reported that Japanese customers are in favour of a floating index price to end the JRP deadlock as
there is over $100/t difference between the two parties’ proposed prices. The suggested index-linked,
contract price is at plus $15.00/t to a Newcastle 6,000 kc NAR thermal coal index. Thermal coal imports by
other Asian countries (except for China) also climbed over the past two months, with the incremental
buying filled by Indonesia, Australia and Russia.
Fig 175 JKT thermal coal demand has been strong too
kt
30000
Fig 176 Other Asia countries are also importing more coal
kt
14000
JKT thermal coal import discharge
Other Asia thermal coal import discharge
12000
25000
10000
20000
8000
15000
6000
10000
4000
2021
2021
2022
5000
2022
2000
0
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov Dec
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
China is the only major buyer in the seaborne market that has shown weaker demand due to domestic
supply growth and negative price arbitrage. It reduced thermal coal imports in May and June, and most of
the losses were Indonesian coal. However, the reduced volumes were offset by rising demand from others.
Price arbitrage for China to import thermal coal is currently -$42/t (5500 kc NAR), as its domestic price is
capped by government. Also, after China ramped up coal mining capacities since last year (China coal
capacity growth: here are the numbers), power plants are sitting with comfortable coal inventories,
reducing the urgency to restock coal for the summer.
However, we learned that a big part of Chinese power plants coal inventories are currently low CV coals,
which means inventory drawdown can be quick if power demand improves materially from current
weakness, thus the requirement for coal imports depends on the sustainability of domestic supply growth.
21 June 2022
62
Commodities Compendium
Fig 177 China is the only major buyer that reduced imports
kt
30000
China thermal coal import discharge
Fig 178 Import price arbitrage remains negative for China
China thermal coal import arb (5500 CFR Guandong), $/t
150
25000
100
20000
50
15000
Domestic > import
0
10000
-50
5000
2019
2020
2021
2022
-100
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
Source: Platts, IHS, Sxcoal, Macquarie Strategy, June 2022
Russian coal continues to flow but is off its peak level in May, and shipments to Europe ex-Turkey have
reduced and been replaced by higher shipments to Turkey, suggesting that Europe is stepping away from
Russia as they have built coal inventories and are preparing for the ban in August. However, if supply of
other energy products becomes a risk, Europe may have to switch back to Russia coal before the ban.
Fig 179 Russian exports continue but are off their peak
Mt
0.7
Fig 180 Europe has reduced buying from Russia
Mt
Russia coal exports (total) , daily tonnes (2WMA)
0.35
0.6
0.3
0.5
0.25
0.4
0.2
Russia coal exports to Europe (exc. Turkey) , daily tonnes
(2WMA)
2020
2021
2022
0.15
0.3
0.1
0.2
2020
2021
2022
0.05
0.1
0
Jan
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Dec
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
Source: Macquarie CGM, Trade Flows and Vessel Analytics desk, June
2022
For the other exporters, we saw a sequential growth in May exports for Australia, South Africa and North
America, but they remain flat to lower y/y. Indonesian coal exports stood high and have been relatively
stable for three months. The latest news shows that the Australian authorities have given themselves the
power to block coal exports if the resource is needed to ease the country’s crippling power crisis driven by
rising energy prices and outages at ageing coal-fired power stations, another potential short-term
disruption though volumes could be marginal.
An improvement in shipments from these countries remains possible. Australia was constrained by
weather and COVID-19 but shipment improved recently and it has the new Carmichael mine (10Mtpa), and
a few mines have started since last year in Columbia (La Francia and El Hatillo, 2Mtpa) and South Africa
(Liberty and Koornfontain, 6Mtpa), but so far supply growth has much lagged demand growth for seaborne
thermal coal due to infrastructure capacity, logistics and labour constraints.
We see a deficit of 13Mt in the seaborne market this year, supporting prices at above $300/t. Before the
recent rally in gas prices, Clean Dark-Clean Spark Spreads had narrowed to just €12/MWh, indicating the
reduced price advantage of coal versus gas. But as gas prices have gone up to €120/MWh recently,
equivalent API2 prices would need to go to $500/t (vs. the current price of $334/t) for both fuels to reach
parity. If gas supply risks materialize, given Europe still needs to build gas stocks for the winter, coal prices
21 June 2022
63
Commodities Compendium
will get support from gas prices and see further increases in demand. For example, Germany is planning
to use coal-fired power stations which would have been idled this year and next as reserve facilities in
case of disruption to gas supplies from Russia.
Downside risks for coal price are demand destruction from the ex-China market due to high coal prices
and slower economic growth, further reduced import demand from China and a correction in gas prices.
We see a nearly balanced seaborne market for next year, assuming lower demand and some
improvement in ex-Russia coal supply, and a bigger surplus afterwards to bring down thermal coal prices
to a more sustainable level that fits with the global energy transition.
Fig 181 Coal regained some price advantage recently
€/MWh
350
Fig 182 EU still needs to build more gas inventories
Clean Dark - Clean Spark Spreads (front month)
90
Coal generation more profitable than
gas
300
EU gas, % storage full
100
80
250
70
200
60
150
50
100
40
2018
50
30
2019
0
20
2020
Germany
2021
10
Jun 22
Mar 22
Dec 21
Jun 21
Sep 21
Mar 21
Dec 20
Sep 20
Jun 20
Mar 20
Dec 19
Jun 19
Sep 19
Mar 19
Dec 18
Sep 18
Jun 18
Mar 18
-50
0
Jan
Source: Bloomberg, Macquarie Strategy, June 2022
2022
Feb Mar
Apr May Jun
Jul
Aug Sep Oct
Nov Dec
Source: Bloomberg, Macquarie Strategy, June 2022
Fig 183 Internationally traded thermal coal market balance (Mt)
Mt wet
Import Demand
China
India
Japan
South Korea
Other Asia, Developed
Vietnam
Malaysia
Other Asia, Emerging
EU28
Other Atlantic
2014
229
149
145
98
68
5
21
38
171
97
2015
156
157
150
101
64
7
20
41
153
104
2016
196
155
146
101
67
12
24
44
126
104
Total Import Demand
985 1,024
953
976
Export Supply
Australia
Canada
South Africa
United States
Indonesia
Colombia
Russia
Others
188
3
73
46
424
74
117
44
201
3
76
31
408
75
132
37
202
2
77
25
366
81
133
26
Total Exports Supply
971
963
-37
85
32
71
(1)
Market Balance
NEWC spot (6300 GAR)
2013
252
127
143
97
69
3
23
34
153
84
2017
201
145
150
116
63
10
27
50
127
109
2018
216
167
146
116
63
17
34
63
117
115
2019
225
188
143
112
62
33
34
58
95
116
2020
232
161
134
96
56
46
36
62
62
106
2021
269
148
144
98
64
41
38
63
75
107
2022
206
163
142
95
63
42
39
64
70
107
2023
216
155
140
93
64
43
39
66
64
108
2024
221
147
137
91
63
44
40
68
55
109
2025
226
138
134
89
60
45
40
69
50
110
2026
231
120
131
87
59
46
41
70
52
111
999 1,055 1,067
991 1,046
992
989
975
961
947
201
2
75
17
369
89
144
32
200
2
83
39
389
83
158
28
208
1
81
51
429
80
172
22
212
1
79
37
456
76
181
27
200
1
75
24
404
52
169
22
199
1
66
36
432
56
178
20
203
1
70
40
441
62
153
22
211
1
75
35
438
65
143
20
210
1
75
35
418
70
148
18
209
1
75
35
402
70
153
16
209
1
75
35
385
70
158
14
912
930
983
1042
1069
947
987
992
989
975
961
947
48
59
4
66
-42
88
-51
107
-14
75
65
58
-39
135
-13
319
7
233
21
123
16
85
17
80
LT
Source: Custom Statistics, CRU, IHS, Macquarie Strategy, SxCoal, June 2022. LT price is in 2020$ (real). Note (1): market balance is defined as the
change in high-cost exports in any given year (mainly US & Indonesia) required to meet import demand.
21 June 2022
64
Commodities Compendium
Carbon
Compliance put
The world’s largest carbon markets have proven relatively resilient despite rising policy pressures amid the
global energy crisis. Front future prices of European Carbon allowances (EUAs) and California Carbon
Allowances (CCAs) have quickly reversed the losses at the start of Russia’s invasion of Ukraine: EUAs are
almost back to pre-invasion levels (>80 euros) while CCAs (~$32/t) are only 10% below their all-time high.
The price resilience is underpinned by opportunistic buying from compliance entities, which have stepped
in and increased buying as prices fell. While a recession in Europe could dent demand especially from the
industrial sector in the coming months, EU power generation is becoming more carbon intensive: we
forecast power emissions to rise by almost ~100Mt y/y (more than offsetting the reduction in industrial
emissions), as many countries including Germany restart idled coal-fired power plants to reduce gas
consumption and meet the 90% inventory target set by the EU by October.
Fig 184 EUAs snap back up on compliance buying
120
Fig 185 CCAs also paired most of losses
EU carbon prices (Dec-21), euros, tonne
40
California Carbon Allowance prices, active future contract,
$/t
100
"Fit for 55"
policy package
80
35
Covid-19
30
60
40
"MSR"
announcement
25
20
20
0
2014
2015
2016
2017
2018
2019
2020
2021
2022
EUA (euro/t)
Source: Bloomberg, ICE, Commodities Strategy, June 2022
15
Jan 21
Apr 21
Jul 21
Oct 21
Jan 22
Apr 22
CCA
Source: Bloomberg, ICE, Commodities Strategy, June 2022
While we think the bull-run which started in Nov-20 is likely over (for now), we maintain our long-term
bullish view on both EUAs and CCAs. In fact, the greater reliance on fossil fuels in the EU short term is
likely to lead to a faster drawdown in banked allowances (>1.3Bnt) and a tighter balance longer term,
which is the main reason why we have upgraded our LT forecast to 100 euros (+25%). However, for the
rest of the year, growing risk of political intervention (especially in Europe) and macro weakness are likely
to cap price upside: extra supply from the MSR (announced in May and discussed below) has also
weakened the balance over 2024-6 (we have trimmed our forecast over the period accordingly).
European Carbon Allowances (EUAs)
After a bull run which has seen prices more than triple in two years, we expect EUA prices to consolidate
around current levels for the remainder of 2022 – with the “compliance put” preventing prices from falling
below 80 euros on a sustained basis and fading spec length (on growing risk of political intervention)
capping price upside. Policy has certainly turned more “hawkish” as the energy crisis unfolded in Europe,
with the Commission’s proposal to auction extra allowances currently sitting in the MSR reserve resulting
in 180-220Mt of supply over the 2024-6 period.
Although we see this as fundamentally “neutral” (extra supply will be withdrawn by the MSR itself later in
the decade), the proposal is an unexpected market development by EU authorities which raises the risk of
further political intervention in the market. Combined with proposals to curb physical market access for
speculators (which are being discussed as part of the ETS reforms), this development has dented
speculative interest in the market: according to CoT data from ICIS, investment funds’ net length has
continued shrinking during the quarter and we estimate that net of ETF holdings, speculators now hold a
net short position on EUAs.
21 June 2022
65
Commodities Compendium
Fig 186 Extra EUA auction supply weakens the front-end
balance
Fig 187 But does not lead to a net change in supply over the
period due to higher MSR withdraws down the line
MSR injections and ejections (Mt EUAs) - CURRENT
legislation
Total number of allowances in circulations, Mt CO2
1,800
TNAC (excl. aviation)
MSR Injection rate
MSR Ejection Rate
TNAC (incl. aviation)
2030
2029
2025
2028
-400
2027
-350
0
2026
-300
200
2024
-250
400
2023
-200
600
2022
-150
800
2021
-100
1,000
2020
1,200
2019
-50
2018
0
1,400
2017
1,600
-450
MSR injections
Source: ICIS, Energy Aspects, Macquarie Strategy, June 2022
MSR ejections
Source: ICIS, Energy Aspects, Macquarie Strategy, June 2022
Fig 188 European carbon market balance, Mt
EUA (excl UK, aviation)
unit
Annual Cap
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
1,831
1,796
1,761
1,726
1,615
1,572
1,529
1,298
1,216
1,134
1,052
970
888
806
745
709
687
618
598
604
613
618
632
523
501
472
343
242
Phase IV
(21-30)
free allocations
Mt
5,146
auctions
Mt
951
916
589
729
588
546
600
771
723
699
671
640
605
566
6,409
total supply
Mt
1,696
1,624
1,276
1,347
1,186
1,150
1,213
1,389
1,355
1,222
1,172
1,112
948
808
11,555
total demand
Mt
1,753
1,680
1,527
1,340
1,354
1,454
1,358
1,381
1,331
1,176
1,162
1,157
1,063
849
12,284
annual balance
Mt
-56
-55
-251
7
-168
-304
-145
8
24
46
10
-44
-115
-41
-729
Mt
Mt
Mt
33
64
-31
31
67
-36
30
68
-38
30
25
5
21
31
-10
20
45
-25
20
39
-19
18
43
-26
12
44
-31
7
44
-37
0
44
-44
0
45
-45
0
45
-45
0
46
-46
-329
Planned Abatem ent
0
0
5
10
30
28
28
8
8
8
(from power)
0
0
5
10
25
25
25
5
5
5
(from industry)
0
0
0
0
3
3
3
3
3
3
EUAA (aviation)
allocation
emissions
balance
Hedging Requirem ents
Mt
442
404
391
400
896
902
868
850
818
787
755
718
652
540
TNAC (incl. aviation)
Mt
1,561
1,531
1,229
1,437
1,300
975
815
802
803
825
810
739
596
526
Price-induced, abatem ent
price
euros
0
0
0
0
0
0
64
35
59
-16
12
24
92
213
6
16
25
25
53
81
90
90
95
110
119
122
126
129
483
Source: BNEF, Energy Aspects, Macquarie Commodity Strategy, June 2022
California Carbon Allowances (CCAs)
We initiated coverage of the Western Climate Initiative (WCI) carbon market in April. Linking California’s
cap & trade program with the Canadian province of Quebec, WCI is the third largest compliance carbon
scheme in terms of GHG emissions covered, and the second most liquid carbon derivative market.
While we are structurally bullish on a shrinking Annual Cap, reduced offset usage and rising investor
demand (partly as a result of policy turns in Europe), we forecast only a gradual price increase ($35/t in
2023; $44/t is our LT) and never see CCA prices converging to European levels this decade. The current
scheme is oversupplied and despite a shrinking cap, the existing market surplus is sufficiently large that
compliance entities could in theory meet their obligations for the rest of this decade by selling accumulated
banked allowances (a total of 321Mt by Dec-21) instead of cutting emissions.
21 June 2022
66
Commodities Compendium
The scheme is undergoing a program review (due by the end of the year), but initial leaks do not point to
significant reforms (comparable to the FF55 package in Europe). In fact, other policy tools – initial plans
seem to rely on the Fuel Standard Policy rather than the ETS in meeting the state’s target of cutting
emissions by 40% (vs 1990 level) by 2030.
On this front, the sharp decline in LCFS credits is the most striking development of the past quarter.
Refiners earn credits when they produce fuel at a lower emission intensity than a set baseline (which
declines every year), which they can then trade in the market. The price of LCFS has declined sharply this
quarter reflecting a surge in biofuels generation.
Fig 10 Fundamental market balance, WCI carbon market
CCA (incl. Quebec)
unit
Annual Cap
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2022-30
358
346
334
321
308
294
281
267
254
241
227
214
201
2,287
free allocations
Mt
114
109
106
96
80
74
70
67
64
58
53
50
47
563
auctions
Mt
341
293
209
296
264
259
249
239
229
221
213
202
192
2,069
7
4
66
14
14
14
14
14
20
20
19
19
18
150
offsets
total supply
Mt
469
406
384
409
358
347
333
320
313
299
285
271
257
2,782
total demand
Mt
-380
-373
-335
-351
-353
-345
-342
-340
-332
-326
-318
-309
-301
-2,966
annual balance
Mt
89
33
49
59
5
2
-9
-20
-20
-27
-33
-38
-44
-184
price (active contract, average)
US$
18
24
33
35
38
40
40
45
45
50
50
Source: California Cap and Trade AB32, AB308, ICIS, Bloomberg, Macquarie Commodity Strategy, June 2022
Fig 189 WCI Annual Cap vs projected emissions (existing
legislation) – market to tighten after years of oversupply
Fig 190 US inflation raises CCA price floor – we forecast
prices to rise to $40/t by 2025
CCA price forecast, US$/t
WCI fundamental market balance, Mt
400
160
350
140
300
250
120
100
Tier-1 Reserve
Tier-2 Reserve
Tier-3 (ceiling)
200
150
Price
100
Price floor
89
33
50
49
59
80
5
2
60
-20
-20
-27
-33
-38
-44
2026
2027
2028
2029
2030
-9
-50
2025
0
Annual Balance
2024
2023
2022
2021
2020
2019
2018
-100
Cumualtive balance
Source: CARB, ICIS, Macquarie Strategy, April 2022. Note: natural gas
suppliers were included in the program in 2015.
40
20
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: CARB, ICIS, Macquarie Strategy, April 2022. Note: fundamental
balance, does not account for hedging requirements.
CCA prices have been more stable, trading in a relatively narrow range of $30-33/t despite a broader sell
off in equity (correlation has declined). CCAs have benefited from a capital rotation away from EUAs as
political risks grew here as well as expectations of a tighter scheme once the coping study is concluded. In
a rising inflation environment, it is also possible some investors see CCAs as an inflation hedge: its
reserve price (a price below which no allowances will be auctioned, so effectively a “price floor” in the
scheme; $19.7/t in 2021) rises every year by 5% + US CPI inflation.
21 June 2022
67
Commodities Compendium
Gold
Risky business
Gold has unwound the geopolitical risk premium which boosted prices in Q1 and early Q2 even faster than
we had anticipated, pulling back towards $1,800/oz. Beyond marking-to-market for this move, however,
our forecasts are unchanged. We remain bearish into 2023, expecting prices to retreat towards $1,600/oz.
Fig 191 Gold’s retreat in keeping with prior shocks
Fig 192 Forecasts remain bearish, effectively unchanged
Spot Gold, Index = 100
120
US$/oz
Spot Avg.
Q1-2022
Q2-2022
Q3-2022
Q4-2022
Q1-2023
Q2-2023
Q3-2023
Q4-2023
115
Index
110
105
100
95
-40
-20
0
20
40
Days
9/11
First Gulf War
60
80
New
1,878
1,875
1,850
1,750
1,650
1,600
1,600
1,600
Gold
Old
-1,950
1,850
1,750
1,650
1,600
1,600
1,600
Change
--3.8%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Russia - Ukraine
Source: Bloomberg, Macquarie Strategy, June 2022
Source: Bloomberg, Macquarie Strategy, June 2022
So far, gold’s pull-back has been consistent with price moves around prior geopolitical shocks but the
extent to which it has outperformed against US 10y TIPS, especially in the face of USD strength, is
striking. We primarily view this as a function of the discrepancy between expected real rates (i.e. TIPS)
and current real rates (i.e. Fed Funds less CPI), with gold prices indicating scepticism over the Fed’s ability
to stay the course and raise real rates (by lifting nominal rates, bringing down inflation) without precipitating
a recession.
In that vein, while the accelerated pace of Fed rate hikes is clearly a headwind for gold – we now expect
75bps in July and a peak rate of 3.75-4% in 1Q23, looking at the 1970s/1980s, gold’s price reversals
followed upturns in real rates, as inflation eased. In this context, the path of inflation is likely to be the key
determinant for gold. In the very short-term the combination of energy prices and stickiness in services is
likely to keep inflation elevated but as the market prices in Fed actions causing it to turn, we would expect
gold to move lower.
Fig 194 Reflecting the divergence between actual and
expected real rates
Fig 193 Gold has dramatically outperformed 10y TIPS
2,100
Gold vs. 10y TIPS Implied "Fair Value"
700
12
3000
US Rates vs. Gold
10
2,000
600
1,900
500
1,800
400
4
1,700
300
2
1,600
200
1,500
100
1,400
0
-6
1,300
-100
-8
2500
8
6
2000
1500
0
-2
1,200
Jan-21
Gold
-200
Jul-21
Jan-22
TIPS Implied Gold Price
Source: Bloomberg, Macquarie Strategy, June 2022
21 June 2022
Difference
1000
-4
500
-10
0
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Real Fed Funds
Real 10y
US 10y TIPS
Gold Real (rhs)
Source: US BLS, Bloomberg, Macquarie Strategy, June 2022
68
Commodities Compendium
Fig 195 Markets pricing in a faster cycle, to a higher peak
4.0
Fig 196 In the 1970s/80s, gold fell when inflation retreated
25
US Interest Rates
3000
US Rates vs. Gold
3.5
2500
20
3.0
2000
2.5
15
1500
2.0
10
1.5
1000
1.0
5
500
0.5
0.0
Jan-21
Apr-21
Jul-21
Fed Funds
Jan'23 Future
Oct-21
Jan-22
Sep'22 Future
Jan'24 Future
Apr-22
0
1972
0
1974
Fed Funds
1976
1978
1980
US CPI
1982
Gold Real (rhs)
Source: Bloomberg, Macquarie Strategy, June 2022
Source: US BLS, Bloomberg, Macquarie Strategy, June 2022
Fig 197 Momentum in services inflation a major challenge
Fig 198 Gold’s correlation with equities is far from stable
30%
US Inflation (3mma annualised)
SPX Index vs. XAU Curncy
100%
25%
80%
60%
20%
40%
15%
20%
0%
10%
-20%
5%
-40%
-60%
0%
-80%
-5%
-100%
CPI
Core CPI
Core Goods
Core Services
Source: US BLS, Bloomberg, Macquarie Strategy, June 2022
Rolling 30d Correlation
Average since 2000
Source: Bloomberg, Macquarie Strategy, June 2022
The yellow metal’s defensive characteristics should see it outperform on a relative basis but it must be
stressed that weakness in equities has not protected gold from absolute downside in the past. Indeed,
gold’s correlation with the S&P 500 is barely negative (average rolling 30d of -4% since 2000) and rising
real rates are likely to be a dominant factor. The major risk to this view would be for the Fed to back off as
asset prices fall and growth slows, even as inflation remains elevated, raising the spectre of stagflation.
While that remains possible, the June FOMC meeting statement’s clear commitment to “returning inflation
to its 2 percent objective” makes us view it as relatively unlikely.
From a financial positioning perspective, net futures and options length is not stretched (~45% of 2020
high) but neither is there a significant short in the market. ETF holdings, however, remain elevated around
105Moz (~95% of 2020 high) and could be vulnerable to liquidation pressure if gold prices do decline as
anticipated.
Recently weak physical demand (China imported 7.6Moz YT April, India 5Moz YT March) should improve
into a price dip but, as we have outlined before, this counter-cyclical buying from physical gold consumers
tends to cushion rather than drive the price action. In contrast, financial flows move consistently with gold
prices, with 3Q2020 the only exception of the past decade as the exit from lockdowns saw a jump in
physical activity. A pick-up in central bank buying would be the other potential cushion and we do expect
trend buying to remain healthy, but recent activity has been limited of late, with few signs that the
sanctioning of Russia’s central bank has caused other reserve holders to increase their gold holdings in
short order.
21 June 2022
69
Commodities Compendium
Fig 199 Gold does not necessarily perform well in a crisis
2008 - 2009 Price Performance
1,250
1,800
Fig 200 Investor length remains elevated
160
2,500
Investor Gold Exposure (Moz)
140
1,150
1,600
1,050
1,400
2,000
120
100
1,500
80
950
1,200
850
1,000
750
800
60
1,000
40
20
500
0
650
2008
600
2009
Spot Gold
-20
2007
S&P 500 (rhs)
0
2009
2011
2013
2015
2017
2019
2021
ETF + CME Combined
ETF holdings
CME net non-commercial length
Spot Gold (rhs)
Source: MSCI, Bloomberg, Macquarie Strategy, June 2022
Source: CME, CFTC, Bloomberg, Macquarie Strategy, June 2022
Fig 201 Physical demand has been lacklustre
Fig 202 Consistent with a high / rising price environment
7,000
500
Gold Trade (koz)
250
Change in Gold Demand (tonnes)
400
200
300
150
5,000
200
100
4,000
100
50
6,000
0
3,000
0
-100
-50
2,000
-200
-100
1,000
-300
-150
-400
-200
0
-500
Q1'11
-1,000
2017
2018
2019
2020
China Net Gold Trade
2021
-250
Q1'13
Q1'15
Q1'17
Q1'19
Q1'21
Jewellery, Bar & Coin, Technology Demand
2022
Gold Price Change q/q (rhs)
India Net Gold Trade
Source: TDM, Customs Data, Macquarie Strategy, June 2022
Source: WGC, Bloomberg, Macquarie Strategy, June 2022
Fig 203 As investor demand tends to drive price changes
Fig 204 No surge of CB gold buying
300
Gold Demand (tonnes)
1,000
250
750
200
150
500
50
0
4.0
3.0
2.0
0
-50
-250
-100
-500
1.0
0.0
-150
-750
-200
-250
Q1'13
ETF + CME
Q1'15
Q1'17
Q1'19
Q1'21
Gold Price Change q/q (rhs)
-1.0
-2.0
-3.0
2016
China
Source: WGC, CME, CFTC, Bloomberg, Macquarie Strategy, June 2022
21 June 2022
Monthly Change in Gold Reserves (Moz)
100
250
-1,000
Q1'11
5.0
2017
Russia
Turkey
2018
Hungary
2019
Thailand
2020
Brazil
2021
India
2022
Poland
Egypt
Source: IMF, Bloomberg, Macquarie Strategy, June 2022
70
Commodities Compendium
Fig 205 Global gold supply-demand balance
2 0 18
2 0 19
2020
2 0 2 1f
2022f
2023f
2024f
2025f
2026f
S upply
M ine pro ductio n
% chg Yo Y
Scrap
Net Hedging/-Dehedging
T o t a l S upply
% chg Yo Y
3,654
2.4%
1,130
-12
4 ,7 7 2
2.6%
3,596
-1.6%
1,274
6
4 ,8 7 6
2.2%
3,477
-3.3%
1,291
-39
4 ,7 2 9
-3.0%
3,581
3.0%
1,143
-21
4 ,7 0 4
-0.5%
3,635
1.5%
1,224
-4 ,8 5 8
3.3%
3,653
0.5%
1,187
-4 ,8 4 0
-0.4%
3,627
-0.7%
1,193
-4 ,8 2 0
-0.4%
3,602
-0.7%
1,217
-4 ,8 18
-0.0%
3,577
-0.7%
1,229
-4 ,8 0 5
-0.3%
D e m a nd
Fabricatio n (including Scrap)
Jewellery
Electro nics
Co in Sales
Other
To tal Fabricatio n
% chg Yo Y
P hysical B ars
Net ETF P urchases/-Sales
Net Official P urchases/-Sales
T o t a l D e m a nd
% chg Yo Y
B a la nc e ( im plie d o t he r inv e s t m e nt )
2,290
268
315
66
2,940
3.0%
775
83
656
4 ,4 5 4
4.1%
3 18
2,153
262
287
64
2,766
-5.9%
579
408
605
4 ,3 5 9
-2.1%
5 17
1,330
249
362
53
1,994
-27.9%
534
874
255
3 ,6 5 7
-16.1%
1,0 7 2
2,229
272
381
58
2,940
47.4%
799
-285
463
3 ,9 17
7.1%
786
2,162
280
343
57
2,842
-3.3%
703
-50
275
3 ,7 7 1
-3.7%
1,0 8 7
2,076
280
349
54
2,760
-2.9%
739
0
200
3 ,6 9 8
-1.9%
1,14 1
2,159
286
332
51
2,828
2.5%
775
400
300
4 ,3 0 4
16.4%
5 16
2,191
292
339
49
2,870
1.5%
814
250
300
4 ,2 3 5
-1.6%
584
2,202
297
345
46
2,892
0.7%
855
250
300
4 ,2 9 6
1.5%
509
G o ld S po t P ric e (annual average; US$ /o z)
% chg Yo Y
1,2 6 9
0.9%
1,3 9 1
9.7%
1,7 6 9
27.2%
1,7 9 9
1.7%
1,8 3 8
2.2%
1,6 13
-12.3%
1,6 5 0
2.3%
1,7 0 0
3.0%
1,7 5 0
2.9%
t o nne s
Source: Company Reports, IMF, WGC, TDM, US Mint, Perth Mint, Bloomberg, Macquarie Strategy, June 2022
21 June 2022
71
Commodities Compendium
Silver
Storm clouds brewing
Three months ago, our base case was for “a Q2 peak, during which prices are likely to remain volatile,
before a correction as policy tightening lifts real rates and, alongside the lagged impact of inflation, leads to
a slowdown in global industrial production growth. We expect this to push prices back towards $20/oz and
possibly below in late 2022, early 2023.” That now seems to be playing out in fast forward with silver’s
reversal lower over the course of Q2 following suit with gold as the Russia-Ukraine risk premium has failed
to sustain elevated prices.
Fig 206 Silver price forecasts
Fig 207 Silver pulls back, as ratio vs. gold widens
150
US$/oz
Spot Avg.
Q1-2022
Q2-2022
Q3-2022
Q4-2022
Q1-2023
Q2-2023
Q3-2023
Q4-2023
New
24.04
22.75
21.50
20.00
19.50
19.00
20.00
21.00
Silver
Old
-25.50
23.50
21.50
19.50
19.50
20.00
21.00
55
Gold / Silver Price Ratio
50
130
Change
--10.8%
-8.5%
-7.0%
0.0%
-2.6%
0.0%
0.0%
45
110
40
35
90
30
70
25
20
50
15
30
10
Au / Ag Spread
Source: Bloomberg, Macquarie Strategy, June 2022
XAG Curncy (rhs)
Source: Bloomberg, Macquarie Strategy, June 2022
In fact, silver has underperformed gold, with the ratio widening towards 85, as silver has suffered from a
sharp decline in financial investor exposure, with CME net length falling ~75%. That this has included
absolute shorts rising 141% creates the potential for a covering rally but overall investor exposure remains
heavily long, with ETF holdings still around 854Moz (~83% of their 2021 high). Moreover, silver’s underperformance versus gold, and our expectation that it will continue, is consistent with the ratio’s relationship
to global growth. Intuitively, as a dual precious-industrial metal, silver should under (out) perform when
global growth is slowing down (accelerating).
Fig 209 Silver’s relative performance vs. gold tends to track
the pace of global growth
Fig 208 Investor exposure to silver largely via ETFs
1400
60
Investor Silver Exposure (Moz)
10%
1200
50
1000
800
Real Global GDP vs. Commodities
8%
40
6%
30
4%
20
2%
10
0%
0
-2%
-60%
-40%
-20%
600
400
0%
200
20%
0
-200
-400
2007
2009
2011
2013
ETF + CME Combined
CME net non-commercial length
2015
2017
2019
ETF holdings
2021
Spot Silver (rhs)
Source: Bloomberg, CME, CFTC, Macquarie Strategy, June 2022
21 June 2022
40%
-4%
1985
1989 1993 1997 2001
Real Global GDP (y/y)
2005
60%
2009 2013 2017 2021
Gold / Silver (y/y, inverse, rhs)
Source: IMF, Macrobond, Bloomberg, Macquarie Strategy, June 2022
72
Commodities Compendium
Although the structural outlook for silver demand remains robust, driven by our forecast for solar PV
demand to reach 205Moz by 2026 (+43% from 2021) and rising EV penetration to boost automotive
demand to 84Moz over the same time frame (+34% from 2022), silver is likely to come under cyclical
pressure if our economists’ call for a global growth slowdown comes to fruition. The double hit from higher
real rates and slowing industrial activity would be a perfect storm.
It is also worth noting that China has continued as a net exporter of silver, with onshore prices regularly
trading at a discount to the international market. Given China’s position as the world’s largest industrial
consumer (~24% market share), it is hard to make a bullish physical case for silver until this dynamic
reverses.
Fig 210 Silver demand from solar trending higher but
thrifting should slow the pace
400
Fig 211 Rising EV penetration lifting automotive demand for
silver
Silver Usage in Solar PV
110
Total Automotive Silver Demand (Moz)
350
100
300
250
90
200
80
150
Implied Silver Demand (Moz)
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
60
2017
50
2016
70
2015
100
50
If no thrifting
2018
2020
No Thrifting
2022
2024
2026
2028
2030
15 % Thrifting to 2030
15% higher loadings to 2030
Source: Silver Institute, Bloomberg NEF, Macquarie Strategy, June 2022
Fig 212 China has been a net-exporter, with the “arb” open
600
Source: LMC Automotive, RhoMotion, Macrobond, Macquarie Strategy,
June 2022
Fig 213 Above ground stocks provide a large buffer to
industrial deficits
2.00
China Silver Trade by Value (US$mn)
500
1.50
400
1.00
0.50
300
0.00
200
-0.50
100
LBMA Vaults - Silver Troy Ounces ('000s)
1,200,000
1,150,000
1,100,000
1,050,000
-1.00
0
-1.50
-100
-2.00
-200
-2.50
-300
2015
-3.00
2016
Export Value
2017
2018
Import Value
2019
2020
Net
2021
2022
XAG Spot less SGE (rhs)
Source: TDM, China Customs, SGE, Bloomberg, Macquarie Strategy,
June 2022
1,000,000
950,000
900,000
850,000
800,000
2017
2018
2019
2020
2021
2022
Source: LBMA, Macquarie Strategy, June 2022
Nevertheless, against expectations for moderate supply growth, we still expect the industrial market to be
in persistent deficit over the coming years. Unlike pure industrial commodity markets, this can be
accommodated – note LBMA vault holdings of 1,021Moz in May 2022 – but it illustrates the potential for
silver to perform strongly whenever investment demand turns positive.
21 June 2022
73
Commodities Compendium
Fig 214 Global silver supply-demand balance
J un- 2 0 2 2
2 0 17
2 0 18
2 0 19
2020
2 0 2 1f
2022f
2023f
2024f
2025f
2026f
M oz
S upply
M ine P ro ductio n
% chg Yo Y
Old Silver Scrap
Net P ro ducer Hedging
t o t a l s upply
% chg Yo Y
D e m a nd
J e we lle ry
C o ins , M e da ls & B a rs
S ilv e rwa re
Indus t ria l A pplic a t io ns
Electrical & Electro nics
B razing A llo ys & So lders
P ho to graphy
P ho to vo ltaic
o ther industrial (incl. ethylene o xide)
N e t E T F P urc ha s e s
N e t O f f ic ia l S e c t o r P urc ha s e s
T o t a l D e m a nd
% chg Yo Y
B a la nc e ( im plie d "o t he r" inv e s t m e nt )
s ilv e r pric e (annual average; US$ /o z)
% chg Yo Y
B alance Scaled to M arket Size
864
-4.0%
147
-2
1,0 0 9
-2.4%
850
-1.6%
149
-8
991
-1.8%
836
-1.7%
148
15
999
0.8%
781
-6.6%
162
9
952
-4.7%
823
5.3%
173
-9
986
3.6%
843
2.5%
181
5
1,0 2 9
4.3%
863
2.3%
179
0
1,0 4 1
1.2%
880
2.0%
182
0
1,0 6 2
2.0%
900
2.3%
191
0
1,0 9 1
2.7%
911
1.2%
197
0
1,10 8
1.5%
195
156
60
539
330
49
35
102
23
7
-1
955
-6.4%
202
165
68
533
321
50
34
93
36
-21
-1
946
-1.0%
200
187
62
531
317
50
33
99
33
83
-1
10 6 2
12.3%
150
205
32
524
304
45
28
117
30
331
-1
12 4 1
16.9%
181
279
43
582
330
48
29
144
32
-4
-2
10 8 0
-13.0%
196
265
53
640
345
49
28
185
33
-75
0
10 7 9
-0.1%
192
212
51
633
338
49
27
186
32
193
222
52
646
347
49
26
192
32
194
227
53
660
353
49
25
201
32
195
228
54
666
356
48
24
205
32
10 8 8
0.9%
1114
2.4%
113 4
1.8%
114 3
0.8%
53
46
-63
-289
-93
-50
-47
-51
-43
-35
17 .0 5
-0%
15 .7 1
-8%
16 .16
3%
2 0 .5 1
27%
2 5 .14
23%
2 2 .0 8
-12%
19 .8 8
-10%
2 2 .0 0
11%
2 3 .2 5
6%
2 4 .5 0
5%
5.6%
4.8%
-6.0%
-23.3%
-8.7%
-4.6%
-4.3%
-4.6%
-3.8%
-3.0%
Source: Company Reports, Wood Mackenzie, US Mint, Perth Mint, Silver Institute, TDM, Bloomberg, Macquarie Strategy, June 2022
21 June 2022
74
Commodities Compendium
PGMs
Rollercoaster ride
PGM prices have continued their 2020-21 rollercoaster ride into 2022, reflected most dramatically in
palladium rallying 76% to a new high of $3,442/oz on potential disruptions to Russian supply, before
collapsing 48% as they failed to materialise, even after the LPPM delisted the state-owned Russian
refiners who process Norilsk’s material. At the same time, full year automotive demand expectations have
been cut by 555koz and 268koz for palladium and platinum respectively, from ongoing supply-chain
disruptions and the impact of China’s lockdowns. Moreover, persistently weak retail spending in China is
also spilling over to platinum jewellery demand, reducing 2022e demand by a further 233koz.
Reflecting this negative demand hit and marking to market for recent price moves, we have cut our 2022
average price forecasts to $2,230/oz for palladium and $1020/oz for platinum. Over our forecast horizon,
we still expect platinum prices to remain relatively steady and for palladium to decline towards $1,200/oz
as it suffers the effects of a looser balance, driven by rising electric vehicle sales penetration, alongside
scrap and primary supply growth. Prices should still firm sequentially as autos recover on reduced supply
chain disruptions – year to date global sales tracking around -11% y/y should finish the year around flat
and expand ~6% in 2023 – and the market is not expected to exit structural deficits until 2024. Platinum,
however, is anticipated to remain in structural industrial surpluses for the forecast horizon through 2026.
Fig 215 PGM prices continuing their wild ride in 2022
3,500
PGM Prices
Fig 216 Autos still suffering from supply-chain disruption
1,500
2,500
1,300
2,000
1,100
1,500
600
Monthly Sales (k vehicles, SA)
3,000
500
2,500
400
2,000
300
1,500
900
1,000
200
1,000
700
500
100
500
0
2015
500
2016
2017
2018
Palladium
2019
2020
2021
2022
0
2015
Platinum (rhs)
0
2016
2017
2018
2019
2020
2021
2022
China Passenger Vehicles
USA Light Vehicles
EU + UK Passenger Vehicles
Japan (rhs) Passenger Vehicles
Source: Bloomberg, Macquarie Strategy, June 2022
Source: Macrobond, Macquarie Strategy, June 2022
Fig 217 Palladium should hold in deficit but platinum
unlikely to get (industrially) tight yet
Fig 218 Hong Kong imports from Russia have fallen
sharply, but this should reflect a demand not supply issue
PGM Market Balance (ex-investment)
1,500
350
Hong Kong PGM Trade (koz) Palladium Sponge & Metal
Imports
300
1,000
250
200
500
150
0
100
-500
50
0
-1,000
2017 2018
2019
PLATINUM
2020 2021 2022f 2023f 2024f 2025f 2026f
PALLADIUM
Source: JM, LMC Automotive, RhoMotion, Company Reports, Bloomberg,
Macrobond, Macquarie Strategy, June 2022
21 June 2022
2018
2019
South Africa
2020
2021
Russia
2022
Other
Source: Customs Data, TDM, Macquarie Strategy, June 2022
75
Commodities Compendium
In the short-term, Russian trade data has not been updated since January, but without any formal
sanctions on PGM purchases there is no indication of significant volumes yet being disrupted. Trade data
is insufficiently timely to verify this view – the only sustained dip has been shipments to Hong Kong (-65%
ytd) but this should reflect weak demand, and the lack of a post Chinese New Year lift – but limited
reaction in lease rates supports this conclusion. Allowing for some friction, we are assuming effective
supply from Norilsk will be ~2,500koz, towards the lower end of 2,451 – 2,700koz guidance. Key to the
market impact, however, will be how much trade reshuffling can occur towards Q4, when annual contracts
are being renegotiated and consumers may try to reduce Russian volumes.
An additional supply concern for 2022 had been the potential for South African labour disruptions, but the
early announcement of a five-year agreement with three of its four unions (covering 90% of unionised
employees) by Amplats has greatly reduced the likelihood of any outages. Even so, South African volumes
have been cut by ~100koz Pt and 90koz Pd given the impact of rains at Mogalakwena, on top of Amplats’
already announced concentrator maintenance, as well as guidance downgrades from Northam and
Implats. Flooding around Sibanye’s Stillwater and East Boulder mines may also reduce US supply this
year but, with guidance not yet updated, we have left volumes unchanged in our balance so far.
Beyond consideration of immediate supply risks, palladium’s primary growth is heavily dependent on the
delivery of Norilsk’s South Cluster ~650koz/yr project, the full ramp up of which we have pushed out
towards the end of the decade.
Fig 219 Palladium supply to benefit from rising scrap
12,000
Fig 220 Platinum production looking stagnant
8,000
Palladium Supply (koz)
Platinum Supply (koz)
7,000
10,000
6,000
8,000
5,000
6,000
4,000
3,000
4,000
2,000
2,000
1,000
-
0
2017 2018 2019 2020 2021 2022f 2023f 2024f 2025f 2026f
South Africa + Zimbabwe
Others
Russia (inc. stock sales)
Autocatalyst Recycling
North America
Source: JM, LMC Automotive, RhoMotion, Company Reports, Bloomberg,
Macrobond, Macquarie Strategy, June 2022
2017 2018
2019
South Africa + Zimbabwe
Others
2020
2021 2022f 2023f 2024f 2025f 2026f
Russia
Autocatalyst Recycling
North America
Source: JM, LMC Automotive, RhoMotion, Company Reports, Bloomberg,
Macrobond, Macquarie Strategy, June 2022
In contrast to palladium, platinum lease rates did spike above 10% in May, before normalising in early
June. The underlying cause of tightness seems to have been another jump in Chinese imports, taking year
to April volumes to 900koz. This follows combined 2021 and 2022 imports of 6.5Moz coming in ~2Moz
above estimated actual demand over the period. Without a clear driver of the purchasing, we assume it
represents strategic stockpiling at, by recent historical standards, relatively low prices for potential
hydrogen related demand.
Hydrogen demand holds out the potential for a much discussed new era for platinum, after ICE vehicle
sales begin to decline. In our modelling, this results in automotive palladium demand peaking in 2024e and
then falling gradually as non-combustion engines rise to ~30% market share by 2030. For platinum, this
also weighs, resulting in demand stagnation, with initial offsets from switching and higher HDD loadings.
It seems extremely unlikely that hydrogen (2022e 70koz) can provide any significant demand boost within
our current forecast window to 2026. Nevertheless, over the course of the 2030s, it has the potential to
pick-up dramatically. Fuel cell vehicles (FCVs) will be the key to this, given uncertainty around the likely
market share of PEM electrolysers and their relatively low loadings – e.g. 5GW of new capacity/year
should only require ~15koz/yr of platinum. For FCVs, numerous scenarios are possible but assuming they
follow S-curve penetration patterns to 35% market share for heavy duty commercial vehicles and 5% light
vehicle market share (e.g. light commercial, large SUVs) by 2050, this would imply platinum demand of
~2Moz in 2040. While potential numbers are large, they are too far off and uncertain to yet be tradeable,
and investors’ focus on current conditions still sees them with limited exposure to either metal at present.
21 June 2022
76
Commodities Compendium
Fig 221 Platinum rather than palladium lease rates have
been tight in 2022
40
Fig 222 With China’s imports of platinum continuing to
surge on price dips
Comparative PGM Lease Rates
800
2,300
SGE volume vs. Monthly Imports
35
2,100
700
30
25
600
20
500
15
400
1,900
1,700
1,500
1,300
10
300
1,100
5
200
900
0
100
-5
2016
2017
2018
2019
Pd 3m Lease
2020
2021
2022
700
0
2017
Pt 3m Lease
500
2018
2019
SGE Pt Volumes (koz/mth)
2020
2021
Imports
2022
Spot Platinum (rhs)
Source: Bloomberg, Macquarie Strategy, June 2022
Source: Customs Data, TDM, Bloomberg, Macquarie Strategy, June 2022
Fig 223 Combustion engine recovery to peak in 2024/25e
Fig 224 Fuel cells hold great potential but unlikely <2030s
110,000
6
World Vehicle Production (k units/year)
40%
Fuel Cell Vehicle Sales (mn vehicles/yr)
35%
5
100,000
30%
4
90,000
25%
3
20%
80,000
15%
2
70,000
10%
1
5%
60,000
0
2015
2015
2020
2025
World ICE + Hybrid
2030
2017 peak
0%
2020
2025
2030
Total World Heavy
2035
2040
2045
2050
Total World Light
Heavy % penetration
Light % penetration
Source: LMC Automotive, RhoMotion, Bloomberg, Macquarie Strategy,
June 2022
Source: LMC Automotive, RhoMotion, Company Reports, Bloomberg,
Macquarie Strategy, June 2022
Fig 225 Investor positioning from subdued to short
Fig 226 As ETF holdings have also been cut further
80
600
Net non-commercial length (klots)
70
Total ETF Holdings (koz)
4,200
580
60
4,000
560
50
40
540
30
3,800
520
20
3,600
500
10
480
0
3,400
-10
-20
2015
460
2016
2017
2018
Palladium
2019
2020
2021
2022
Platinum
440
Jan-21
3,200
Jul-21
Palladium ETF Holdings
Source: CME, CFTC, Bloomberg, Macquarie Strategy, June 2022
21 June 2022
Jan-22
Platinum ETF Holdings (rhs)
Source: Bloomberg, Macquarie Strategy, June 2022
77
Thousands
50,000
2000
2005
2010
World Vehicle Production
Commodities Compendium
Fig 227 Global PGM supply-demand balances
PLATINUM
koz
Supply (inc. stock sales)
South Africa + Zimbabwe
Russia
North America
Others
Aggregate Primary Supply
% chg YoY
2017
2018
2019
2020
2021
2022f
2023f
2024f
2025f
2026f
4,916
720
360
157
6,153
0.1%
4,946
687
359
152
6,144
-0.1%
4,808
721
345
154
6,028
-1.9%
3,620
719
329
125
4,792
-20.5%
5,027
661
256
125
6,070
26.7%
4,562
616
290
125
5,593
-7.8%
4,581
652
342
125
5,701
1.9%
4,839
670
365
125
5,999
5.2%
4,908
687
374
125
6,095
1.6%
4,937
722
385
125
6,169
1.2%
Autocatalyst Recycling
% chg YoY
1,249
10.3%
1,332
6.6%
1,389
4.3%
1,154
-16.9%
1,185
2.6%
1,118
-5.6%
1,123
0.5%
1,329
18.3%
1,301
-2.1%
1,276
-1.9%
Demand
Autocatalyst (gross)
Industrial (net)
Jewellery (net)
Other (net)
Aggregate Demand
% chg YoY
3,188
1,422
1,639
530
6,779
-1.4%
2,952
1,965
1,559
531
7,007
3.4%
2,728
1,792
1,410
542
6,472
-7.6%
2,429
1,843
1,146
417
5,835
-9.8%
2,604
2,257
1,098
446
6,405
9.8%
2,647
1,862
1,089
490
6,088
-5.0%
2,902
1,904
1,067
497
6,370
4.6%
3,133
1,956
1,083
507
6,679
4.9%
3,193
1,989
1,089
517
6,788
1.6%
3,119
2,017
1,094
528
6,757
-0.5%
623
9.2%
469
6.7%
945
14.6%
112
1.9%
849
13.3%
624
10.2%
453
7.1%
648
9.7%
607
8.9%
687
10.2%
Industrial Balance
As proportion of demand
Investment
% chg YoY
Flow of Metal
(investment + industrial stock change)
Platinum price (annual average; US$/oz)
% chg YoY
361
-41.8%
1,131
67
-81.4% 1588.1%
-28
1,022
-9.6% -102.7%
262
402
-186
-910
877
624
453
648
607
687
950
-3.9%
880
-7.4%
865
-1.6%
886
2.4%
1,093
23.3%
1,020
-6.7%
1,025
0.5%
1,150
12.2%
1,200
4.3%
1,200
0.0%
PALLADIUM
koz
Supply (inc. stock sales)
South Africa + Zimbabwe
Russia (inc. stock sales)
of which stock sales
North America
Others
Aggregate Primary Supply
% chg YoY
2017
2018
2019
2020
2021
2022f
2023f
2024f
2025f
2026f
2,933
3,030
250.0
982
131
7,326
8.1%
2,936
3,128
450.0
1,052
135
7,701
5.1%
2,967
3,168
300.0
989
140
7,564
-1.8%
2,176
2,825
0.0
951
120
6,073
-19.7%
3,086
2,616
0.0
857
120
6,680
10.0%
2,748
2,500
0.0
900
120
6,269
-6.2%
2,767
2,648
0.0
1,058
120
6,592
5.2%
2,949
2,719
0.0
1,130
120
6,919
5.0%
3,008
2,790
0.0
1,144
120
7,062
2.1%
3,042
2,933
0.0
1,168
120
7,263
2.8%
Autocatalyst Recycling
% chg YoY
2,357
18.7%
2,624
11.3%
2,916
11.1%
2,686
-7.9%
2,719
1.2%
2,627
-3.4%
2,942
12.0%
3,253
10.6%
3,356
3.2%
3,432
2.3%
Demand
Autocatalyst (gross)
Industrial (net)
Jewellery (net)
Other (net)
Aggregate Demand
% chg YoY
8,423
1,198
146
169
9,936
3.4%
8,837
1,262
136
204
10,439
5.1%
9,653
1,065
116
209
11,043
5.8%
7,980
936
76
170
9,162
-17.0%
7,922
991
82
195
9,190
0.3%
8,105
977
84
193
9,358
1.8%
8,667
973
83
196
9,919
6.0%
9,112
985
83
200
10,381
4.7%
8,926
995
83
204
10,208
-1.7%
8,801
1,006
83
208
10,099
-1.1%
Industrial Balance
As proportion of demand
-253
-2.5%
-114
-1.1%
-563
-5.1%
-403
-4.4%
208
2.3%
-463
-4.9%
-385
-3.9%
-209
-2.0%
209
2.1%
596
5.9%
Investment
% chg YoY
-386
-40.2%
-574
48.7%
-87
-84.8%
of which Visible Physical Holdings
Change in ETF holdings
Change in Exchange Inventory
-471.3
-32.0
-548.7
5.7
-106.0
5.9
-115.5
85.8
36.3
-43.0
117.2
-31.1
13.1
-160.3
23.6
133
460
-476
-213
191
-463
-385
-209
209
596
871
41.7%
1,030
18.3%
1,541
49.5%
2,201
42.9%
2,399
9.0%
2,230
-7.1%
1,925
-13.7%
1,550
-19.5%
1,250
-19.4%
1,200
201.4%
Other Investment inc. Coin & Bar
Flow of Metal
(investment + industrial stock change)
Palladium price (annual average; US$/oz)
% chg YoY
17
-190
118.4% -108.9%
Source: JM, LMC Automotive, RhoMotion, Company Reports, Bloomberg, Macrobond, Macquarie Strategy, June 2022
21 June 2022
78
Commodities Compendium
Cobalt
Weaker demand in China and higher DRC supply sends prices lower
Cobalt prices in China have fallen in the past month as evidence of Chinese demand weakness has
emerged and a surplus of hydroxides in the Chinese market has led to a sharp fall in payables, a lead
indicator of a surplus market. The mood in the market has shifted from fear of shortage to fear of surplus.
In reality, the market remains relatively tightly balanced, and the price fall appears to have over shot on the
downside, especially in China.
Last year, there had been reduced availability of spot cobalt hydroxides (mainly due to shipment delays
from the DRC out of Durban Port). While these constraints remain, more material is now flowing from the
ramp up in DRC production, both from integrated and non-integrated producers.
Chinese cobalt sulphate production rose by 54% YoY in 2021 to 60kt Co according to SMM data, while
cobalt use in ternary precursors (PCAM) rose by just over 80% y/y to an estimated 65kt Co. Growth rates
have slowed in 2022 in part due to weaker than expected EV sales but also due to a further shift to LFP
batteries in China (no cobalt) and a move towards higher nickel (and lower cobalt) chemistries. There are
also reports of thrifting of cobalt use in NCM811 well above the 8:1 ratio (to as much as 15:1).
Data for the first four months of 2022 show a marked contrast between the electric vehicle market and the
total vehicle market. EV light vehicle sales in Jan-Apr were up 65% y/y, while total global light vehicle sales
fell 11% y/y. Logistical constraints are negatively affecting sales of both vehicle types, including shortages
of parts (including micro-chips) and the Covid lockdowns in China led to a mini collapse in vehicle sales in
April and May. We have slightly reduced our 2022 EV sales forecasts to reflect ongoing supply issues in
China and Europe but still foresee global sales (of all vehicle classes) growing 43% y/y to 9.5M vehicles
(10.1M previously). We have slightly lowered our projections out to 2030 but see the medium-term outlook
remaining strong.
Since our last Compendium we have raised our short- and medium-term projections for the LFP share in
total EV sales from 25-30% to 30-35% and this has lowered our cobalt use projections. The move to higher
nickel chemistries in NCM batteries remains intact and this means that cobalt will grow at a slower rate
than nickel.
We continue to foresee steady and strong growth in cobalt supply. In total, there are a large number of
DRC mine projects which could add 90ktpa+ to supply by 2026 from around 120kt last year (10kt higher
than our previous forecast). In addition, there have been further announcements of by-product cobalt
supply increases from Indonesian nickel production - we can identify 80ktpa+ of new cobalt coming from
Indonesia out to 2028 with around 35-40kt additional supply by 2026.
Our model suggests a large deficit last year and more balanced market this year (in raw materials and
finished products). We continue to foresee surpluses from 2023 onwards. By the end of our forecast
period, we see prices trading in the $25-30/lb range.
Fig 228 Chinese cobalt prices roll over amid weakening
demand and increased supply
Fig 229 Amid strong LFP and NCM811 growth, cobalt use
weakens in Chinese PCAM in 2022
40
7000
35
6000
5000
'000t Co
$US/lb Co
30
25
4000
3000
20
2000
15
1000
10
0
Cobalt metal
Cobalt sulphate
NCM111
Source: SMM, Macquarie Strategy, June 2022
21 June 2022
NCM523
NCM622
NCM811
NCA
Source: CIAP, SMM, Macquarie Strategy, June 2022
79
Commodities Compendium
Fig 230 Sharp fall in payability for nickel hydroxides
(intermediates manly from DRC) indicates panic selling
Fig 231 Cobalt mine supply dominated by DRC & Indonesia
100
Cobalt mine supply (kt)
300
95
250
% of metal price
90
200
85
150
80
100
75
50
70
0
2016
65
2017
2018
2019
Indonesia
Philippines
New Caledonia
60
2020
2021 2022f 2023f 2024f 2025f 2026f
Congo DR
Cuba
Australia
Canada
Zambia
Other
Source: Fastmarkets, Macquarie Strategy, June 2022
Source: Company and national government reports, Macquarie Strategy,
June 2022
Fig 232 Global EV sales doubled last year and could
average 30% a year to 2030, if there is enough raw material
Fig 233 Battery type in EVs – LFP revised up but still lots of
room for Ni-rich (lower but not zero Co) batteries
100%
Electric vehicle passenger car sales forecast by region - Includes
BEVs and PHEVs
36.7
35
Millions
80%
32.4
50%
40%
20.7
20
30%
17.4
14.3
20%
11.5
10%
9.3
6.5
5
2019
2020
China
2021
Europe
22%
2%
4%
9%
14%
35%
38%
38%
35%
35%
2022F
2023F
2024F
2025F
2026F
9%
0%
5%
12%
0%
7%
6%
8%
0%
8%
22%
18%
1%
15%
2%
7%
0%
3%
9%
20%
0%
24%
2021
2.1
0
2018
25%
9%
17%
0%
3.1
1.9
4%
8%
0%
1%
9%
60%
25
10
12%
5%
7%
0%
1%
8%
12%
24.3
15
12%
23%
27%
70%
28.4
30
2%
90%
40
2022F
2023F
USA
Canada
2024F
Japan
2025F
2026F
Korea
2027F
2028F
2029F
2030F
Rest of world
Source: Rho Motion, Macquarie Strategy, June 2022
LFP/Na ion
NCM 9½½
NCM 811
NCM 712
NCM 217
NCM 307
NCA
NCM 523
NCM 622
NCM 111
Source: Rho Motion, Macquarie Strategy, June 2022
Fig 234 Global cobalt market balance
000t Co
2018
2019
2020
2021
2022F
2023F
2024F
2025F
2026F
Mine production
145.1
139.7
140.7
162.2
183.8
207.1
230.8
249.5
271.9
27.3%
-3.7%
0.7%
15.3%
13.3%
12.7%
11.4%
8.1%
9.0%
% change YoY
Refined production
131.8
138.4
140.7
159.4
177.7
198.1
221.2
243.8
265.6
10.5%
5.0%
1.6%
13.3%
11.5%
11.5%
11.7%
10.2%
8.9%
Batteries
63.7
68.1
80.6
104.3
115.0
121.0
133.9
151.9
165.6
Non battery
58.7
60.7
57.8
61.3
62.9
65.3
67.8
70.5
73.4
Total
122.3
128.8
138.4
165.6
177.9
186.2
201.7
222.4
239.0
% change YoY
4.4%
5.3%
7.5%
19.6%
7.4%
4.7%
8.3%
10.2%
7.5%
9.5
9.6
2.3
-6.2
-0.2
11.9
19.5
21.4
26.5
2.0
3.0
% change YoY
Demand
Balance
SRB stocking
Adjusted balance after SRB stocking
Price ($/lb) 99.8% free market
9.5
9.6
0.3
-9.2
-0.2
11.9
19.5
21.4
26.5
36.8
16.3
15.8
24.3
35.6
28.5
27.8
27.0
27.0
Source: CI, DRC Customs, TDM, RhoMotion, NBS, Macquarie Strategy, June 2022
21 June 2022
80
Commodities Compendium
Lithium
Constructive outlook
• Spot lithium carbonate prices in China maintained its upward trend and reached a record high of
Rmb497,500/t (non-VAT adjusted) in early 2022, reflecting the market deficit in upstream raw materials
and strong downstream EV demand. Prices corrected down to Rmb457,500/t (non-VAT adjusted) in
April as EV supply chains were disrupted by COVID lockdowns in multiple parts of China which was
further impacted by soft consumer confidence.
• The recent resumption of production and ramp-up of capacities in Chinese EV OEMs have supported
the lithium price recovery. According to Macquarie Global EV tracker May update, total plug-in sales in
China rebounded by 53% MoM to 427k units, reflecting supply chain recovery and improving vehicle
demand. Major EV automakers have reported higher sales MoM, with Tesla sales rebounding strongly.
According to media reports (source: Reuters), China is also in discussion with automakers about
extending EV subsidies that were set to expire in 2022.
Fig 235 Chinese spot lithium prices have remained
elevated despite the recent correction
70,000
Asia LCE (US$/t)
US LCE (US$/t)
Europe LCE (US$/t)
China LCE (US$/t)
Chile LCE (US$/t)
Fig 236 Material price increase in 2022 to date for regional
lithium prices
180%
2022YTD
160%
60,000
140%
120%
50,000
100%
80%
40,000
60%
40%
30,000
20%
20,000
0%
10,000
0
Source: Bloomberg, Macquarie Research, June 2022
Source: Bloomberg, Macquarie Research, June 2022
• While 2022 Global light vehicle sales growth is expected to slow YoY, we anticipate Internal
Combustion Engines (ICEs) to continue losing market shares to electric vehicles. We estimate EV
penetration rates to reach 24% globally in CY22, led by the European and Chinese market. Plug-in
adoption in both China and Europe is at an inflection, expanding beyond early adopters to early
majority. US plug-in adoption could also be a tailwind this year, supported by new model launches.
Fig 237 Global electric vehicle sales forecast
Fig 238
by 2030
Light vehicle EV penetration rates could reach 50%
Battery EV
Hybrid EV
Internal combustion engine
Plug-in hybrid EV
Mild hybrid EV
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2021 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
Source: Macrobond, Macquarie Strategy, June 2022
21 June 2022
Source: Autodata, CAAM, KBA, CCFA, OFV, Macquarie Research, June
81
Commodities Compendium
• We continue to anticipate supply growth, with near term volume increases dominated by spodumene
producers. This includes Mt Marion’s production capacity expansion and accelerated Wodgina restart at
MIN, the ramp up of the Kemerton and Kwinana lithium hydroxide plants at Greenbushes and the
P1000 project at PLS. Over the medium term, we forecast additional supply to come from brine lithium
producers, including ALB’s Salar de Atacama expansion in Chile and growth from SQM.
Fig 239 Spodumene and brine supply has responded to
rising prices since the beginning of 2020 (LCE Equ.)
Fig 240 We expect spodumene to dominate supply growth
in the near term (LCE Equ.)
Spodumene (kt)
180.0
Spodumene (kt)
Brine (kt)
Other (kt)
Brine (kt)
Other (kt)
Recycling (kt)
3,000.0
160.0
2,500.0
140.0
120.0
2,000.0
100.0
1,500.0
80.0
60.0
1,000.0
40.0
500.0
20.0
0.0
0.0
Source: Company data, Macquarie Research, June 2022
Source: Company data, Macquarie Research, June 2022
• In our recent Lithium and Rare Earths Market Outlook update, we revisited our demand and supply
model and a market deficit remained our base case in the medium term. We expect the lithium
shortages to reduce in CY22 as incumbent producers ramps up their production rates. The deficit is
expected to expand again from CY24 through to CY26 as demand from EVs outpaces supply growth.
We anticipate recycling to become a more meaningful lithium contributor from CY27 onward which is
enabled by the retirement of EV fleets and improvement in recycling technologies.
• We note the speed at which new entrants can enter the market presenting a key risk to our base case.
The market deficit in the longer-term also suggests that more new sources of supply will be required to
meet the shortfall.
Fig 241 Macquarie global lithium market supply/demand outlook
Y/E December
Supply (kt)
Spodumene
Brine
Other
Recycling
Total Supply
Demand (kt)
Chemical/industrial
EV battery
Consumer battery
ESS (fixed) battery
Other
Total demand
Balance
Surplus/(Deficit) (kt)
CY21
CY22e
CY23e
CY24e
CY25e
CY26e
CY27e
CY28e
CY29e
CY30e
307.8
219.5
23.0
0.0
550.3
360.8
316.3
28.0
0.0
705.0
505.0
366.0
33.0
0.0
904.0
593.6
430.5
43.5
0.0
1,067.6
838.1
460.8
57.5
0.0
1,356.4
1,025.4
517.5
77.5
0.0
1,620.4
1,174.4
610.0
106.0
15.9
1,906.3
1,315.1
671.7
160.0
17.5
2,164.2
1,380.5
725.1
197.0
19.0
2,321.6
1,442.5
783.6
258.0
37.8
2,521.8
147.5
295.3
60.2
45.7
25.5
574.3
154.9
412.6
63.2
66.6
25.5
722.8
170.4
572.3
72.7
80.8
25.5
921.7
170.4
766.8
76.3
95.8
25.5
1,134.9
178.9
1,010.6
84.0
109.7
25.5
1,408.7
187.9
1,249.0
92.4
129.1
25.5
1,683.8
197.3
1,477.3
97.0
145.2
26.8
1,943.5
207.1
1,662.0
111.8
161.3
39.1
2,181.3
217.5
1,851.1
107.4
177.4
30.1
2,383.4
228.3
1,991.8
112.8
193.5
31.6
2,558.1
(24.1)
(17.7)
(17.7)
(67.2)
(52.3)
(63.4)
(37.3)
(17.1)
(61.8)
(36.2)
Source: Bloomberg, Company data, Macquarie Research, June 2022
21 June 2022
82
Commodities Compendium
Rare earths
Mixed rare earth price performance
• NdPr (Neodymium / Praseodymium) prices have rebounded in May after a brief correction in April
caused by lockdowns in China. We note NdPr prices are up 7% this year and over 100% in the past 19
months. Other rare earth prices have been mixed since the start of 2022. Terbium spot prices are up
22% in 2022 to date while Dysprosium prices are down 17% over the same period. Gadolinium prices
have also been strong, rising ~20% in 2022 YTD.
Fig 242 Neodymium and Praseodymium prices have
rebounded following the recent correction
NdPr Oxide (US$/kg)
Fig 243 La and Ce prices have been depressed since 2015
and continue to weaken
Neodymium Oxide (US$/kg)
Lanthanum Oxide (US$/kg)
Cerium oxide (US$/kg)
La/Ce
Praseodymium Oxide (US$/kg)
250.00
35.00
3.50
30.00
3.00
25.00
2.50
20.00
2.00
15.00
1.50
10.00
1.00
5.00
0.50
0.00
0.00
200.00
150.00
100.00
50.00
0.00
Source: Bloomberg, Macquarie Research, June 2022
Source: Bloomberg, Macquarie Research, June 2022
• According to Global Wind Energy Council (GWEC), 2021 was the second-best year for wind power
capacity growth, with new capacity of ~94GW, only 1.8% lower than the record year of 2020.
Interestingly, offshore new installations recorded the best YoY growth, with market share increasing
from 7% in 2020 to 23% in 2021. The development is consistent with our view that the demand for rare
earth magnets would be supported by growth in accelerating offshore wind power capacity installation,
as the world is moving towards its climate change goals.
Fig 244 NdPr demand underpinned by growth in EV and
winder turbines
160.0
140.0
Fig 245 Increasing offshore wind turbine penetration rates
tailwinds for NdPr demand
Electric Vehicles
Wind Turbines
(GW)
Conventional automotive
Medical & Electronic
120
Automation & Appliances
Other
Onshore
Offshore
100
120.0
100.0
80
80.0
60
60.0
40.0
40
20.0
20
0.0
0
2017
Source: MIIT, Macquarie research, June 2022
2018
2019
2020
2021
Source: GWEC, Macquarie Research, June 2022
• The EV adoption momentum remains strong, despite EV supply chain disruptions in China in April and
May. We estimate the market share for NdPr demand for Electric Vehicles has grown from ~24% in
2021 to 28% in 2022 and we forecast further growth to 30% in 2023. Offshore wind turbine capacity
growth is the other key driver of global demand for NdPr.
21 June 2022
83
Commodities Compendium
• China Northern Rare Earth (600111 CH, Not Rated) is the major light rare earths producer. At the
1QCY22 result update released in April; the company’s rare earth oxide inventory decreased over 30%
from 91kt to 61kt over the last 12 months. We believe solid demand growth, combined with limited
inventory build, could continue to support NdPr pricing in the near term. We highlight the NdPr price
rebounded quickly in late May when lockdowns were eased in China.
Fig 246 NdPr market remains in deficit despite production
quota increase
Global NdPr demand (kt)
180.0
Surplus/(deficit) (kt) - (RHS)
Fig 247 Other light rare earths remain in surplus,
particularly lanthanum and cerium
Global REO production (kt)
25.0
160.0
20.0
140.0
15.0
Surplus/(deficit) (kt) - (RHS)
450.0
30.0
400.0
10.0
120.0
300.0
5.0
100.0
60.0
20.0
250.0
0.0
80.0
25.0
350.0
15.0
(5.0)
200.0
(10.0)
150.0
40.0
(15.0)
100.0
20.0
(20.0)
50.0
0.0
(25.0)
0.0
10.0
5.0
Source: Company data, Bloomberg, Macquarie Research, June 2022
0.0
Source: Company data, Bloomberg, Macquarie Research, June 2022
• In our recent Lithium and Rare Earths Market Outlook update,, we updated our rare earth price
forecasts. We maintained our NdPr price forecasts which reflect the current tight supply/demand
fundamentals. Our longer-term forecasts also remained unchanged at US$95/kg. We updated our
short-term dysprosium, holmium, erbium, and lutetium price forecasts to reflect current spot prices. Our
CY22 forecasts for dysprosium fell 8% while our holmium and erbium price assumptions dropped by 7%
and 9%, respectively. Our CY22 yttrium price forecast rose 17% and lutetium estimates fell by 10% with
changes to our CY22 estimates for other rare earths move <10%.
• We only made minor changes to our longer-term forecasts for rare earths outside of NdPr. Our CY22
price forecast changes reflect current spot price movements. We adjusted our medium-term estimates
for some heavy rare earths due to changes in market fundamentals. Long term price assumptions for all
rare earth prices remained unchanged.
Fig 248
Rare Earth Oxide (REO) price forecasts
Y/E December
Light Rare Earths
Neodymium / Praseodymium Oxide (US$/kg)
Neodymium Oxide (US$/kg)
Praseodymium Oxide (US$/kg)
Lanthanum Oxide (US$/kg)
Cerium oxide (US$/kg)
Medium Rare Earths
Samarium Oxide (US$/kg)
Europium Oxide (US$/kg)
Gadolinium Oxide (US$/kg)
Heavy Rare Earths
Terbium Oxide (US$/kg)
Dysprosium Oxide (US$/kg)
Holmium Oxide (US$/kg)
Erbium Oxide (US$/kg)
Ytterbium Oxide (US$/kg)
Lutetium Oxide (US$/kg)
Yttrium Oxide (US$/kg)
Other Rare Earths
Scandium Oxide (US$/kg)
CY19
CY20
CY21
CY22e
CY23e
CY24e
CY25e
CY26e Long-term
44.13
44.38
54.70
1.79
1.79
45.03
48.70
46.73
1.54
1.53
91.90
97.70
93.09
1.38
1.45
147.46
153.50
149.26
1.26
1.34
157.50
158.50
160.50
1.20
1.30
150.00
151.00
153.00
1.15
1.35
130.00
131.00
133.00
1.10
1.30
110.00
111.00
113.00
1.05
1.25
95.00
96.00
98.00
0.95
1.10
1.81
34.33
25.38
1.81
30.96
26.99
1.94
30.63
42.90
1.93
29.55
94.33
2.00
28.00
82.50
2.10
26.00
63.75
2.20
23.00
55.00
2.20
22.00
60.00
1.90
20.00
55.00
505.7
237.36
50.26
23.55
15.78
603.95
2.88
670.6
262.02
58.32
22.50
14.64
618.67
2.83
1,352.3
410.47
136.71
34.49
16.21
807.06
6.22
2,083.7
415.93
218.80
53.12
17.30
776.53
12.65
1,962.5
392.50
187.50
50.00
17.50
750.00
10.50
1,900.0
420.00
175.00
50.00
17.00
775.00
8.75
1,812.5
482.50
180.00
50.00
16.50
800.00
7.75
1,725.0
460.00
175.00
45.00
17.00
825.00
6.75
1,500.0
400.00
150.00
40.00
15.00
800.00
6.00
1,017
936
892
831
800
850
900
950
850
Source: Bloomberg, Macquarie Research, June 2022
21 June 2022
84
Commodities Compendium
Important information:
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This publication was disseminated on 21 June 2022 at 17:44 UTC.