BofA - Commodities Outlook - As of 3Q21.

Edward L. MorseAC
Global Head | Commodities
ed.morse@citi.com
+1 212 723 3871
Aakash DoshiAC
Director
aakash.doshi@citi.com
+1 212 723 3872
Anthony YuenAC
Managing Director
anthony.yuen@citi.com
+852 2501 2731
Oliver NugentAC
Vice President
oliver.nugent@citi.com
+44 20 3569 4309
Commodities Market Outlook 3Q’2021
*with thanks to Viswanathrao Kintali, April Wang, Andee Cao, Isfar Munir
Maximilian LaytonAC
Managing Director
max.layton@citi.com
+44 20 7986 4556
Eric G. LeeAC
Director
eric.g.lee@citi.com
+1 212 723 1474
Judy SuAC
Assistant Vice President
judy.su@citi.com
+852 2501 2701
Commodities Could Have a Record Run into 2022
But Supercycle for Some, Oversupply for Others
Tracy LiaoAC
Vice President
tracy.liao@citi.com
+852 2501 2799
Maggie LinAC
maggie.x.lin@citi.com
+1 212 723 3873
Francesco MartocciaAC
francesco.martoccia@citi.com
+39 02 8906 4571
Kenny Xunyuan Hu, CFAAC
kenny.x.hu@citi.com
+852 2273 6926
Commodities Strategy | 18 July 2021
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See Appendix A-1 for Analyst Certification, Important Disclosures and Research Analyst Affiliations.
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Andrew HollenhorstAC
andrew.hollenhorst@citi.com
+1 212 816 0325
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Dear Client:
As you know, the Institutional Investor Survey on Fixed Income Research has begun and is expected to run until Friday, 30th of July.
This year our entire Commodities research team has worked hard to deliver the most commercially relevant research we could develop to
help navigate through these unprecedented times. We have been on top of the impact of the COVID pandemic from early on, anticipating
changes in global economic conditions and the multiple ways they affect rapidly changing supply/demand dynamics. We have dived deeply
into changing geopolitics, whether by looking at the impacts of the US-China trade dispute, the dangers of the failure of several petro states,
or the potential consequences of a Biden victory on the world of commodities. We were out front in anticipating changes in the prices of
gold, oil, copper, palladium,grains. We proposed relative value trades, including the gold : silver ratio, a bullish view of the 2021 oil and gas
markets, and a host of other ways to invest in the commodities sector. We also introduced a series of reports on clean energy, including
primers on the three most critical pricing mechanisms in the world – the EU ETS system, both cap and trade and carbon credits in California
(and the rest of the US), and on China’s Green Energy plans, along with reports on hydrogen as we help others navigate the rapidly changing
elements of the path toward net zero. As a team we are issuing a daily commodities volatility Chartpack, a new weekly on Clean Energy and
timely reports on seasonal weather changes and their impacts on fuel demand.
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Table of Contents
● 1. Macro (p.5)
● 2. Energy (p.23)
● 3. Industrial Metals (p.52)
● 4. Bulks (p.74)
● 5. Precious Metals (p.86)
● 6. Agriculture (p.97)
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1. Macro – Commodity Boom: partly a function
of robust global recovery, partly a function
of rapidly changing global dynamics –
– It’s super, but not a super cycle
– How long will it last?
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Pandemic recovery may be fostering the longest commodity boom ever…
● What is surprising at first glance about the current commodities boom is not that it is occurring but that it has been
so robust and durable such that some analysts conclude that what is unfolding is a new supercycle. Five consecutive
quarters of growth appeared to have paused as 2Q’21 opened (See Commodities Flows - June AUM dip unlikely to derail
positive commodities uptrend). Three factors in particular appear to be slowing the recovery: an apparent slowdown in Chinese
economic growth, the spread of the delta strain of COVID-19, and indications that central banks – including the US Federal
Reserve Bank – are considering raising interest rates to counter the inflationary tide that has accompanied the recovery,
especially the rebound in commodity prices affecting CPI and PPI globally. We believe each of these factors are bumps in the
road, while it is clear that the rebound in COVID infections might for a while be bifurcating the global economy as between
countries with significant vaccination rates and those without, moderating the pace (but perhaps extending the duration) of the
current global economic recovery. China appears to be potentially seeing GDP slowing somewhat, yet most forecasts put this
year’s growth at above 6%. Meanwhile central bankers have become cautious on rates, just as the BIS (Bulletin #43, July 15,
2021) attributes the bulk of inflation today to base effects from 2020 levels and sees reflation awaiting longer term labor costs.
● Even so, there are a number of analysts who believe strongly that a new commodity supercycle, similar to what
occurred post-2003, is in the works, due to both demand and supply factors. Citi believes these forecasts are
misleading and unlikely (See Global Commodities Quarterly: 2Q 2021 Commodities Market Outlook: Commodities Rebound
Strongly, but Don’t Expect a New Supercycle).
– As for demand, the supercycle argument is based on a fundamental change in the long-term trend that has seen the
commodity intensity of GDP falling for almost a century. They argue the commodity intensity of GDP is likely to grow
due to: (1) a global political effort to reduce wealth inequalities within economies and to promote a larger middle class;(2)
urbanization rates growing, especially in East and South Asia (ex-China, ex-India); and (3) unusually high demographics in
Africa seeing a bulge in 0-18 year olds creating massive commodity intensive demand over at least the next 18 years in a
part of the world with limited power generation today (less than 5% of global demand). Citi’s view, on the other hand, is that
the global trend to reduce carbons is more likely to reduce than enlarge the energy and other commodity intensity of GDP.
– On the supply side, the supercycle theorists place emphasis on lack of capital spending on commodities, including
on metals whose use should grow as a result of decarbonization trends, but also on fossil fuels. Our view is that on
fuels the world will be confronting a potential stranded asset problem exacerbated by the radically increased capital
efficiencies in producing fossil fuels and other commodities as well as on the efficiencies in metals resulting from recycling.
6
Starting with the 2Q’21 v-shaped demand recovery, commodities have outperformed other asset classes for five
straight quarters. We expect this outperformance to continue at least through year-end, as the pace off recovery
slows and at least some commodities demand growth peters out while some supply constraints are alleviated
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…But like all good things, it too will end, probably starting at year-end
● Fossil fuels constitute perhaps the most controversial of all commodities when it comes to short-, medium- and
longer term outlooks. The IEA and OPEC have raised concerns over the lack of capital spending on new resources,
and there are many who see the US shale boom as over. Citi’s view is that oil and natural gas will continue to be
plagued by oversupply, even with our call for Brent reaching $85 or higher this year. In our view, demand’s relationship
to GDP will likely trend sharply lower as decarbonization policies proliferate within and beyond the three largest economies –
China, Europe and the US, while on the supply side, the vastly increased efficiency of capital (even in the face of higher interest
rates and other headwinds for fossil fuels) will see oil prices fall from a high in the $80s/bbl this year to the $60s next year and
the low $50s thereafter. Were it not for OPEC+ discipline and sanctions on Iran, supply right now could be 10-m b/d higher. In
natural gas, we see US, Asian and European prices also on a secular decline after averaging respectively $3.2mmBtu, $11.4
and $10.1 in 2021 and $2.5, $3.9 and $3.6 in 2025. In the longer run, oil and gas should be confronting the pull and push of
policies inhibiting supply investments and policies promoting demand reduction. Meanwhile, lower prices spell more failure of
more petro-states and more geopolitical instability.
● There is little doubt that the surging prices in bulk commodities – iron ore (and steel), thermal and coking coal – will
be short-lived and result from temporary supply constraints and in all likelihood bulk commodities will be the first to
start a longer secular price decline. Steel’s constraints today are a function of China’s anti-pollution policies. Iron ore’s prices
reflect supply chain/inventory losses that are largely a function of the pandemic and are rapidly easing. Thermal coal’s recent
demand growth has been a function mostly of higher natural gas prices and supply limitations due to lower production of high
carbon-content coal. Similarly coking coal prices reflect surging steel production to meet recovery related construction needs.
We see iron ore prices falling from a high in the $230 trange to $160/t by year-end ‘21 and $110/t by end’22. We see thermal
coal falling from the $120-130/t range to $90/t early ‘22 and below $80 by mid-year. Meanwhile coking coal should be peaking
at under $200/t this year falling to $170/t by year-end ‘21 and below $150/t by end ‘22.
7
The length and strength of the current commodities boom has spawned concerns, especially about its
inflationary impact on both CPI (via food and fuel and, in EMs via the strengthening US$ vs. local currencies)
and PPI. Many of these concerns will likely be temporary, whether its inflation or dollar strengthening. More
critical is gaining an understanding of those commodities likely to see oversupply and those with a more
persistent higher cost outlook.
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Yet seasonality, external factors and a potential metals supercycle loom large
● We believe that gold prices peaked last year and will fail to reach $2000/oz this year, but are also unlikely to crash any
time soon, with an overall market seeing low volatility and a modest decline. Renewed upward pressure could once again
follow another US Treasury rally plunge in real yields and a flattening rates curve, with real rates and the US4 being the
primary drivers of gold prices. Meanwhile, the huge investor holdings accumulated before and during the early stages of the
pandemic (sometimes at a monthly rate of more than 100t) continue to unwind with monthly net outflows. On the other hand,
lower gold prices are stimulating retail investment and central bank gold holdings are growing along with post-pandemic central
bank balance sheets, especially in emerging markets.
● The metals complex is the only one for which we believe the term “supercycle” applies, and even there our
expectations on duration are fairly limited. We are especially bullish aluminium and copper, in part because of their
durability from a long-term demand perspective (power generation and distribution, light weight cars, EVs, consumer
products) and their supply constraints. Hence we see aluminium rising from $1705/t last year to an average of ~$2450 this
year and ending 2022 at $3200. We are only slightly less bullish copper, which averaged ~$9680 last quarter, and ending the
year at $10-k/t. Battery metal should also see persistent gains in demand but confront uncertainties, including especially over
the growth of recycling of lithium batteries.
● Noteworthy as well are palladium and platinum which should see prices recovering along with global automotive
demand, now confronting headwinds from the lack of chips due to supply chain issues. This should keep palladium in a
deficit for at least the next two years, driving prices from ~$2800/oz to $3200/oz in 2H21. By 2023/24 higher prices could
facilitate substitution by platinum in gasoline vehicles. Platinum has recently been pricing at ~$1180/oz and is unlikely to
confront a deficit before end ‘22, at which point prices could rise to well above $1300/oz.
● Like fossil fuel markets, many agricultural markets have seen a 1H price spike, with higher average prices looking
sticky, with food prices following suit and comprising a significant amount of recent inflation prints and perceived
future risks. But we see another price spike as unlikely. In particular, corn, which outperformed in 1H is more likely to
underperform, especially on a relative base, against soybeans and perhaps even wheat. Chinese buying and gasoline demand
growth (translated into ethanol/RINS and high biofuel credits) should both be supportive. We remain bullish soybeans, with a
tight supply/demand balance, continued Chinese buying and potential weather problems in S America.
8
Other commodities are likely to see their price paths following their own fundamentals. We believe gold has or
will peak soon and gold’s major determinants – rates, growth rates, the US$ and geopolitics – argue for lower
prices ahead. Ags will confront weather trends and China’s stocking policy, while the only questions about
metals relate to how long the supercycle(s) will last and when will recycling kick in meaningfully.
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High conviction views
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Energy
● Brent and WTI could hit $85 in 2H’21, which should favor going long 4Q’21 flat price or timespreads:
this summer should continue to see strong stock draws, most visible in the US, but also in observable
inventories worldwide, as seasonal and pent-up demand outperforms, while OPEC+ maintains a gradual
return of oil to market, even as Iran sanctions relief remains slower to come. US supply is moving back to
growth mode, but can remain lower, level-wise, until more clearly moving higher before end-2021. Downside
risks remain from COVID-19 variants and a faster return of supply from OPEC+ or Iran, but this is not
expected to slow down inventory draws much, and levels are looking low ex-China, especially on a days of
demand cover basis. (WTI could outperform Brent as US crude balances remain tighter than ex-US crude
balances before converging in 2022+, though financial positioning looks more overextended for WTI, while
positioning in Brent looks cleaner.)
● The TTF-Henry Hub and JKM-Henry Hub spreads should narrow in 2Q and 3Q22: First, JKM and TTF
prices should come off from near the diesel price ceiling next year. An increase in LNG supply and Nord
Stream 2 being able to flow at capacity next year should start to loosen up the global natural gas market.
The coal supply shortage that has led to the thermal coal price surge, and which also pushed up natural gas
prices, should also ease next year. Second, Henry Hub prices should stay elevated for longer as long as
natural gas producers continue to maintain their capital discipline, until producers announce or demonstrate
otherwise by raising the natural gas rig count. Two new US LNG export terminals coming online next year,
as well as the economic recovery that strengthens power and industrial demand, should keep overall US
natural gas demand elevated. Current futures are pointing to such low projected inventories that the market
should price in higher prices to make more natural gas available for storage. Together, with looser
fundamentals expected in global LNG and Europe, and with the supply-demand balance remaining tight in
the US, the TTF-HH and JKM-HH spreads should narrow.
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High conviction views (continued)
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Energy (continued)
● We remain bullish outright EUAs: The European Commission is amending the legislation of the
European Emissions Trading System (EU ETS) to align it with the newly adopted, stricter decarbonization
targets for the next decade, as part of the comprehensive “Fit for 55” package under the European Green
Deal. Our analysis shows that the revised EU ETS fundamental balance over its Phase 4 (2021-2030) may
get even shorter than our original analysis, further supporting the price rally of European carbon emissions
allowances (EUAs), potentially into mid-€60/Mt or even higher if EU policymakers opt not to trigger Article
29a if prices move above €74/Mt.
● Constructive California carbon allowances (CCAs): This Nov’21 sees final surrender of compliance
obligations for the 2018-20 compliance period, and there is expected to be little compliance pressure as the
bank of compliance instruments is more than adequate to cover allowance demand, given lower emissions
in 2020 due to the COVID-19 shock. In fact, there is expected to be ~300mt in the bank of allowances after
Nov’21. However, CCA prices should continue lifting off the price floor, given 1) the price floor itself is rising
more quickly given stronger CPI, 2) investor positioning is rising for auctions and futures, 3) annual
balances should move negative by 2022-24, 4) the 2022 Scoping Plan policy process likely tightens the
market, and 5) Washington state linkage should be net bullish. Given limited downside with the rising price
floor (rising at 5% per year plus CPI, likely at just under $20/t for 2022 auctions), and potential to reach
$60+/t in the next few years given marginal abatement costs of CCS for industry and power, this suggests
good risk-reward for buying dips, and outright long positions, where liquid, in 4Q’21, 4Q’22, or 4Q’23, etc.,
with inflation-protection properties. With a regime-shift from the 2013-20 period, which saw prices hugging a
price floor, to periods of upside breakout going forward, long vol could be attractive too. Downside risks can
come from weaker macro or faster emissions reductions, but prices remain close to the floor.
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Metals & Bulks
● We are short term bullish nickel and forecast prices reach $20.5k/t in the next 0-3m (+10% from
spot). Multiple indicators are signalling that physical tightness is brewing in the nickel market – not least a
very rare backwardation in LME spreads, and falling exchange stocks. At the root is surging demand from
stainless steel which looks set to get seasonally stronger in 3Q’21, and the EV industry is restocking too.
We expect this will drive nickel prices up amidst our broader bullish commodities view for 3Q’21. In fact
nickel’s resilience over the last month despite ETF selling and US dollar strength provides evidence of the
markets underlying physical strength. We do remain directionally bearish on a 2022 view however owing to
strong supply growth.
● We are bullish aluminium over the medium to long term, and note that in prior bull markets prices
reached $3,500-4,000/t in today’s dollar terms. Aluminium is the supply side way to get exposure to the
decarbonization thematic. Aluminium has an extremely high carbon value to marginal cost ratio, meaning
that carbon taxes would certainly drive up marginal costs and prices, disincentivizing producers from
building coal fired aluminium capacity over the coming years (regardless of China’s capacity limit), and
driving supply deficits, assuming global demand growth.
● We see copper retracing its 2021 peak during the 2H’21, reaching $11,000/t, on an end to de-
stocking across the supply chain (equal to around 5 percent of consumption) as well as higher
demand from the automotive sector as the chip shortage eases (another 2 percent of demand).The
preference shift towards metals-intensive activity in North America (and likely Europe) shows no signs of
rolling over, given the NAHB home remodeling index rising q/q to reach all-time highs in 2Q’21, despite the
US service sector reopening last February. The main short-term limiting factor for copper is the global
container shipping shortage, which is severely restricting global trade and metals consumption.
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Metals & Bulks (continued)
● We are bullish palladium over the next 3 months and expect prices to hit $3,200/oz (+13% from spot).
Palladium is levered to the sequential recovery in automotive output, which should drive up palladium
consumption by around a third by 4Q’21, compared to May 2021. The recovery in automotive output reflects
an improving outlook for microcontroller availability, which should return to late 2020/early 2021 output
levels by late July. Our quarterly balance points to a widening underlying deficit in 3Q’21 to 274koz from
83koz in 2Q on improved autos offtake as well as lower refined supply from Russia.
● We are constructive global steelmaking margins into 2H’21, during which the Chinese government
will likely unveil a plan to curb nationwide steel output. This should trigger a major increase in Chinese
steel prices relative to steel raw materials such as iron ore and coking coal. We estimate that marginal
Chinese HRC producer’s cash profit is currently close to zero and will likely expand to RMB500-1000/t ($75
-150/t) within the next three months. Rising domestic prices should hurt China’s net steel exports and in turn
lift global steel prices relative to raw materials, as there is not enough spare steel capacity outside China to
fill the supply gap immediately.
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Agriculture
● We are bullish the soy/corn price ratio and think a spike to 2.8x is possible in the next 0-3m or at
least a normalization to ~2.5x, following the multi-year trough below 2.0x at the end of 2Q. Weather
risk premiums should favor soybeans versus corn in 3Q given later pollination and development. In
addition, while fundamental balances for both crops are tight, the risk of inventory draws and shortfalls in
soybeans appears greater at the moment given the normalization of Chinese buying, a seasonal slowdown
in Brazilian sales, and tailwinds from the BD/RD biofuel sector for oilseed feedstock. While lack of strength
in meal prices are a risk to soybean prices, so too are cheap wheat prices in Russia and Australia that
could displace some corn exports for feed-use.
● We are neutral Arabica coffee in the short-term but bullish in the longer term, with prices reaching
1.75/lb in 2022. We expect a structural deficit in the global coffee balance, as a rebound in retail activities
should prompt consumption growth through 2H’21 and 2022, while stocks could plateau with production
falling short.
● We are neutral cocoa for 2021 but bullish for 2022. The old-crop surplus has reached the highest level
since 2016/17 but new-crop balance should tighten as production falls while consumption picks up with
economies reopening, particularly in Europe and North America. These factors combined could flip the
2021/22 balance to slight deficit, supporting prices again.
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● Cumulative YTD net commodities ETF and index flows flipped into a net outflow in late June. As of the COT
report ending July 6th, YTD net outflows totaled ~$2.2Bn, after three weeks of consecutive outflows following
the June FOMC. Stripping out the hefty ~$8.7Bn YTD outflows from the precious metals sector (mainly driven
by gold outflows), cumulative flows for all other commodity sectors stood at a net inflow of ~$6.5Bn YTD.
Our estimate for commodities AUM (ex-OTC) retreated from the May record high of ~$723Bn to ~$693Bn,
following the hawkish June FOMC. We remain bullish commodities as an asset class and expect prices and
investor sentiment to regain momentum in 2H as the world continues to recover from the COVID recession.
Source: Bloomberg, Citi Research, *biased to US/Europe trading activity, subject to revision
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Institutional and Retail Commodity AUM*
Managed money combined long/short ratios
for major commodities tracked by CFTC & ICE
Commodities AUM should continue to climb in 2H despite the recent pullback
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Commodities outperform all major other asset classes YTD
● Precious metals, the best-performing commodity sector in
2020, remains the worst-performing sector in 1H’ 2021, with
the BCOM precious metals total return sub-index down ~6%
in 1H’2021, driven by YTD losses in gold and silver.
● Energy, the worst-performing sector in 2020, is now the best-
performing sector YTD, with solid gains in all parts of the
petroleum complex as well as natural gas. The BCOM energy
TR sub-index is up ~45% in 1H’2021.
● Agriculture and industrial metals also have sizeable gains
YTD, with the BCOM industrial metals and agriculture TR
subindices up 18% and 20% YTD respectively in 1H’2021.
15
Commodities have outperformed the other major asset classes by far in 1H’ 2021, a trend that started in 2Q’20
and should continue in 2H. The broad-based BCOM total return index was up ~21% in 1H’2021, while the
energy-heavy GSCI total return index was up ~31%, both outperforming global equity and bond benchmarks.
US$-denominated asset market returns 1H’2021*
Source: Bloomberg, Citi Research, *not risk adjusted
Commodities price changes 1H’2021
BCOM index and sector subindices returns 1H’2021
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Commodity volatility and intersector correlation advanced in late 2Q
16
Realized vol of BCOM index reached a 1-yr high while average cross-sector correlation surpassed COVID highs
as commodities traded more as one asset class during the rally. We expect sporadic vol spikes in 2H related to
monetary policy, COVID variant, etc. and more divergence insector returns favoring energy and base metals.
Source: Bloomberg, Citi Research
BCOM index realized volatility vs average inter-sector correlation
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Stronger US$ would weigh on commodities, but when? And by how much?
● The June FOMC saw a hawkish Fed pivot via an adjustment in the dots for 2022 (7 members signaling a hike vs. 4 in
March) and 2023 (median +50bps), with slightly improved near term inflation and labor market forecasts. Since then, the
USD dollar index is ~2% stronger, while BCOM is up ~1% after an initial ~4% dip.
● Citi’s global macro team does not envisage significant appreciation in the USD over the next 6-12m. Firstly, Citi’s data
momentum indices point strongly in favor of Europe, in large part thanks to the swift catch-up in vaccine roll-out. This indicator
has been reasonably reliable in signaling broad EUR/USD directionality, and it is hard to see a strong broad-based move higher
in the USD. Secondly, whilst the Fed may normalize before the ECB/ BoJ, it is still expected to lag many other major Central
Banks in tightening. This means that USD gains vs the hawkish central banks may be more tepid. In the near term (0-3m), DXY
seems to have overshot where rates markets imply FV. US real yields continue to fall, and if this dynamic persists, it is
unlikely that the USD can continue to appreciate.
17
The negative correlation between dollar strength and commodity prices has normalized from the extreme levels
at the height of the pandemic, but remains highly negative. The next move of the Fed is crucial for commodities
and a sharp appreciation of the greenback would create price headwinds and dampen investor sentiment.
BCOM index vs USD index 6-month rolling correlation BCOM Index vs US Dollar index (inverted)
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US Economy – Robust growth should continue to support global commodities
18
Consumer demand has surged back as the economic reopening continues in the US. However, this demand has
created key input shortages in commodities and labor, which in turn is helping to drive inflation.
Source: BEA, BLS, Citi Research
Supply constraints are creating price pressure
Jobs are being steadily regained but shortages remain
Spending has surged past pre-pandemic levels
● Consumer spending has roared to new highs as demand for
goods remain elevated while service spending has recovered
back to pre-pandemic levels
● Strong spending has been facilitated by government income
support and should continue to be held up by excess savings
– demand is unlikely to fall soon
● Jobs are being steadily regained, but not nearly as fast as
demand is rising.
● Between a labor shortage and supply chains under pressure,
input supply has remained very constrained, best seen in the
elevated inflation reports of late
● The labor issue may not resolve until enhanced
unemployment benefits expire in the fall
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We expect China to maintain its central role in the post-COVID global recovery, after being the first major
economy to find and finance a way out of the pandemic-led economic shock. Commodities demand should find
support from strength in the property sector and goods exports and a less hasty monetary tightening process.
● Doubts about China’s continued growth should not point to an
end of the global recovery, but a new phase, with growth slowing
from a significantly higher base.
– China’s credit tightening itself is not bearish for commodities.
Previous credit cycles suggest that China typically tightens during
periods of strong economic recovery in order to prevent overheating.
The recent RRR cut confirms PBoC’s intention to keep interbank
liquidity ample while broad-based credit growth slows.
– We expect fixed-asset investment (FAI) to continue finding
support from improving manufacturing investment and solid
property-related spending. Infrastructure spending has been weak
year to date, but will likely speed up in 2H’21 thanks to accelerated
local government bond issuance in order to fill full-year quotas.
– Household spending, particularly on durable goods, will likely
remain a weak link of the Chinese economy, given slow growth
in personal income. China’s passenger car sales dropped 8% y/y
and 7% m/m in June according to CPCA.
● Beijing’s price cool-down measures, among a host of other
factors, have so far slowed the rally in industrial metals, however
we do not think the rally is over. The Chinese government has
unveiled a series of measures, including the release of strategic metal
reserves and enhanced scrutiny of futures market positions. We do not
think these actions would fundamentally shift the broad domestic
supply/demand balances over the coming weeks, partly because local
metals and bulk commodity supplies have also suffered from
administrative cuts and power shortages. Thus, supply from reserves
only helps to make up for supply losses due to production cuts.
Pockets of weakness in Chinese demand should not derail constructive outlook
China’s credit impulse fell 3.7% y/y in May
Growth in property sales slowed to 9% y/y in May,
though levels remain close to all-time highs
19
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● We expect growth in Chinese goods exports to slow over the next 1-2 months due to short-term supply challenges,
before rebounding later in the year, as end-use demand in Europe and the US remains solid. In the short term, issues
along supply chains are the main challenges to exports. These include ongoing chip shortages, rolling blackouts in Southern
China due to strong power demand and weak hydro generation, and port congestions in Guangdong province among other
places in the world due to strict COVID containment measures. Moreover, surging raw material prices have hit exporters’
profitability and made manufacturers reluctant to take new export orders in May and June. However, we expect strong end-use
demand in the US and Europe and the debottlenecking of supply chains to end the current destocking trend and prompt a
rebound in Chinese goods exports.
● Synchronized US and Chinese economic recovery means that the pace of US-China trade growth will have potential
implications for the pace of global growth in the year ahead. A pragmatic approach by the two economic giants could
accelerate global recovery while a more politicized and mercantilist approach could cause more supply chain
disruptions, enhance global inflation and create headwinds for global growth. We expect the US and China to continue
trade talks in 2H’21. China’s imports of US agricultural and energy products, including LNG, should remain solid in2H’21, owing
less to the political pressure of following the trade agreement, but more to China’s needs to meet domestic demand.
Growth in China’s total goods exports slowed due to an ongoing destocking process along parts of the global
supply chains, partly resulting from chip shortages and a tight container ship market. An end to destocking
should support China’s export-oriented sectors. Commodity imports should remain robust in 2H’21.
Source: Bloomberg, China Customs, Wind, Citi Research
China’s goods exports should recover once current supply chain issues ease
China’s key commodity trade summary (Jan-May 2021 y/y)
20
A 400% surge in Shanghai Containerized Freight Index
points to an extremely tight container ship market
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Data for PMI data is until May-2021, container throughout index until Apr-2021 and trade
data until Mar-2021.
Despite COVID caveats, trade growth should continue to support commodities
● The bounce in goods traded should remain past full recovery, but could moderate once demand rotates back to the
services sector, as vaccinations accelerate, economies reopen and activity normalizes. A pickup in the services segment
could support overall trade growth but challenges remain due to COVID-related uncertainties. Supply disruptions, mixed
trends in business investment and further waves of the virus could pause or soften the recovery, as some economies re-impose
lockdowns or delay reopening. Also, the favorable base effects in H1-2021 could wear off inH2 without EM growth momentum.
● Recovery in consumer-facing services trade largely depends on vaccinations. Peculiar COVID-induced patterns have
emerged in goods trade. As the labor force moved to a work-from-home scenario, demand for tech products increases. In
some economies, demand for automobiles surged, causing shortages of semiconductor supplies and an increase in trade.
Accumulated household savings from last year and fiscal stimulus measures implemented and scaled
up or extended to support households enabled purchasing power and boosted demand for consumer goods in some countries,
though there are exceptions. In economies where government support is gradually dissipating, there are indications of a pickup
in consumer lending. Also, though fiscal timetables vary across regions, policy support to aid economic recovery could bode
well for trade growth for the remainder of the year.
21
Recent data show a sharp rebound in global trade, but its sustainability depends on the extent that recovery
spreads globally as vaccinations accelerate and economies reopen. The rotation of demand back to services
could soften the rebound in goods trade, but trade growth should remain robust at least one more year.
Source: IMF, Oxford Economics, Markit, Ifo Institute, CPB, RWI/ISL, Macrobond, Haver Analytics, Citi Research
Global Trade Recovery in Sight,
Services Yet to Revive
Global - Merchandise Trade Balance (% of Global
GDP), 2020 and Change in Trade Balance (pp, %
of Global GDP), 2020 vs 2021F
Note: Bubble size determined by nominal GDP in 2020. For more details, see: Global Economics View:
Prospects for 2021: Will Trade be an Engine of Growth?
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Citi Commodities Price Outlook*
22
Source: Citi Research, *as of mid-July 2021, subject to revision
0-3M Forward Outlook* (versus spot/nearby forwards)
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2. Energy:
Oil: One way or another, crude likely to
breach $80s, but do not expect a new
supercycle
Natural gas: Globally constructive
Carbon: Both traded and voluntary markets
look bullish for years to come
23
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24
Source: Bloomberg, Citi Research estimates *as of July 13, 2021.
OPEC+ should feel pressure to increase output, but it is too late to prevent oil markets from tightening further, near-
term. Higher oil prices provide a chance for producer hedging, fueling prospects of higher shale output in 2022,
while ample spare capacity and a flat, long marginal supply curve damp the thesis of a new bull supercycle.
Markets should remain strong through 2021, with weaker prices ahead
Citi oil price outlook ($/bbl, 2021-26E)
Citi Brent price deck vs. futures prices* Global oil stocks in days of demand cover vs. Brent
time spreads
Days
USD/bbl
J
a
n
-
1
1
J
u
l
-
1
2
J
a
n
-
1
4
J
u
l
-
1
5
J
a
n
-
1
7
J
u
l
-
1
8
J
a
n
-
2
0
J
u
l
-
2
1
45
50
55
60
65
70
75
80
85
90
0
5
10
15
20
-5
-10
-15
Days of Forward Demand Cover Brent 1-12 Spread (RHS, inv.)
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25
Source: OilX, Energy Intelligence, Bloomberg, Citi Research
The summer season for petroleum markets should be stronger than usual this year on pent-up leisure demand.
Thus, we see global oil inventories in days of forward demand cover sliding below the five-year average at 57 days
in 3Q’21. New coronavirus variants remain a risk to demand, but refinery appetite for crude oil keeps rising.
Summers are rarely dull for oil and this year should be the same…
Estimated observable commercial oil stocks (on-
land + floating), absolute
Estimated observable commercial oil stocks (on-land
+ floating), days of demand cover
Brent, WTI and Dubai prompt spreads Platts Brent CFD First Week
Thousands
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5,000
5,250
5,500
5,750
6,000
6,250
6,500
6,750
2015-2019 Average 2015-2019
2020E 2021E
Days
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
2015-2019 Average 2015-2019 2020E 2021E
USD/bbl
Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
Brent Spread WTI Spread Dubai Spread
USD/bbl
Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
0.00
1.00
2.00
3.00
-1.00
-2.00
-3.00
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26
Source: OilX, Energy Intelligence, Bloomberg, Citi Research
Petroleum inventories have already normalized across OECD and other key regions. The overhang is concentrated
in China, which is building a permanent, higher petroleum reserve to cover 180 days of net oil imports: should its
net oil imports normalize at 11-m b/d, it could still look to add a further 80 days or 900-m bbls of additional reserves.
The market looks a lot closer to point of rebalancing than what OPEC+ thinks
OECD observable product stocks (historical from 2015
-20, m bbls)
China’s oil reserves could expand to cover 180 days
of imports, implying 900-m bbls could still be added
OECD observable crude oil Stocks (historical from
2015-20, m bbls)
Thousands
1,000
1,050
1,100
1,150
1,200
1,250
1,300
2015-2019 Average 2015-2019
Non-OECD observable crude oil stocks (historical
from 2015-20, m bbls)
Thousands
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2015-2019 Average 2015-2019
2020E 2021E
Thousands
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
1,700
2015-2019 Average 2015-2019
Thousands
300
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2015-2019 Average 2015-2019 2020 2021E
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Light ends’ demand accelerates, while trade supports diesel, but jet fuel lags
27
Source: BTS, BLS, FGE, JODI, EIA, IEA, Bloomberg, Citi Research estimates
After falling by 8.5-m b/d y/y in 2020, demand may jump by 6.5-m b/d in 2021 and by 3.8-m b/d in 2022. Globally,
we should experience a gasoline summer boost on pent-up leisure demand, while growing global trade should lift
diesel demand too. The rollout of vaccination campaigns could eventually reinvigorate tourism and support jet fuel.
Annual global demand growth by product (m b/d) Global demand growth by product vs. 2019. Pent-up
demand should materialize through the summer (m b/d)
Regional demand growth for light ends vs. 2019. Asia may
overcome 2019 levels in 2Q’21 on pent-up demand (m b/d)
Regional demand growth for middle distillates vs. 2019
Jet fuel lags, but global trade boosts diesel (m b/d)
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28
Source: OilX, OPEC, Citi Research
While Saudi-UAE negotiations could mean a higher UAE baseline of 3.65-m b/d (still below its likely production
capacity of >4-m b/d) in return for the framework being extended to an end-date of Dec’22, there should still be
month-to-month meetings, keeping supply return somewhat unpredictable rather than gradual.
OPEC+ deal is key for the stability of markets, but supply risks loom
Production from the “Fragile Five” could easily swing
± 2-m b/d from their current 9-m b/d…
However, OPEC+ sits on a comfortable ~8-m b/d of
spare capacity that leaves the markets well supplied
OPEC compliance may fade on high oil prices, even if
the group decides to bring back 2-m b/d before Dec’21
Non-OPEC members of OPEC+ may remain in line
with quotas on heavy maintenance this year
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k-b/d
Jan-15 Jul-16 Jan-18 Jul-19 Jan-21
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Crude oil Condensate Products Total Oil
29
Source: OilX, EIG, Bloomberg, Citi Research * Cargoes from Indonesia, Iraq, Malaysia, Oman, UAE
There is still uncertainty over Iran nuclear negotiations and sanctions relief, but even with the potential now
September lifting of all sanctions on as much as 1.3-m b/d (vs. our 500-k b/d base case), 3Q’21 remains in deficit
and 4Q’21 would likely be in deficit too. In any case, logistical bottlenecks in Iran should prevent a swift ramp-up.
A new Iran deal could further hit the supercycle thesis, again in vogue
Iran total petroleum exports are already higher than
some in the market may think
Tehran is holding ~67-m bbls of oil in floating storage Iran could have some 54-m bbls in on-land storage
with 70% light sour oil, and 25% light sweet
Number
of
Vessels
Thousands
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
-
10
20
30
40
50
60
70
-
10
20
30
40
50
60
70
80
90
Iran VLCC Floating Storage Iran Aframax Floating Storage
Floating Storage (RHS)
Iran total liquids output
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Shale production can accelerate with higher prices, driven by privates
30
Source: EIA, Wood McKenzie, Citi Research estimates
The US shale industry is seeing signs of recovery, which should weigh on deferred oil prices. We see US oil output
growing by over 1-m b/d next year. Yet, relatively tighter US crude balances should still keep the Atlantic arb in a
narrower range, with ample takeaway capacity compressing inland-to-Gulf Coast differentials.
US oil production could see upside if higher IP
holds going forward (m b/d)
US crude oil production projections at various
sustained WTI price levels
Producers should focus on drilling the best wells,
as they seek to maximize returns in a low-price
and low-capex environment
Oil production per rig generally rose in the aftermath of
the oil price plunges in 2015 and 2016, as producers
high-graded their drilling
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While public E&Ps may be cautious, privates are responding to prices quickly
31
Source: Enverus, Citi Research
US shale has been dealing with the capital discipline narrative since the 2014 oil price crash and now COVID-19.
However, with prices rising, rig counts are too, particularly privates, whose share of rigs shot up from 45% in
Dec’19 to 58% in Jul’21. Rigs covered in these data rose from a nadir of 239 in end-Jul’20 to 524 in early Jul’21.
US oil rig count by company type, end-Dec’19 US oil rig count by company type, Jul’21
US oil rig count by company type, end-Feb’20 US oil rig count by private companies, vs. WTI price,
line graph
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Mismatched crude supply trajectories and refinery appetites drive crude diffs
32
Source: Bloomberg, Citi Research estimates
Brent-WTI narrowed as refinery runs recover (and pull on light sweet barrels given medium sour shortage) even as
shale output is still low; ex-US balances are also loosening faster than the US (with ample pipeline takeaway and
Capline reversal). Brent-Dubai has widened as OPEC supply (and Iran wildcard) comes back ahead of the US.
US vs. ex-US regional crude balances (m b/d) US refinery runs vs. US crude output
OPEC crude oil production by API gravity (m b/d) Brent-Dubai and Brent-WTI (monthly averages, $/bbl)
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The downstream recovery has begun, but should take time and could be messy
33
Source: IEA, FGE, IIR, OilX, Citi Research
The downstream sector is still facing a product stock overhang, endemic overcapacity and increasing ESG
pressures. The next few years see 6-m b/d of CDU expansions vs. a permanent loss of two years of demand
growth. Margins are picking up, but unlike the pandemic, structural overcapacity is a long-term headwind.
Selected refinery margins: US FCC margins are the sole
bright spot in a gloomy downstream environment
Global outages: Arctic cold halted 1.7-m b/d of USGC
refinery capacity, but is now almost entirely back online
US runs: Refineries across other PADDs picked up some
of the slack at the expense of their Texas peers
Globally, refinery runs are now expected to jump by 3.6-
m b/d to 79.9-m b/d in 2021, still 1.8-m b/d below 2019
Thousands
-
5
10
15
20
25
2015-2019 Average 2015-2019 2020 2021E
Thousands
12
13
14
15
16
17
18
19
2015-2019 Average 2015-2019 2020 2021E
Thousands
65
70
75
80
85
2015-2019 Average 2015-2019 2020 2021E
USD/bbl
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21
0
20
40
-20
Singapore Dubai HDCK Margin NWE Forties HDCK Margin
NWE Urals HDCK Margin USGC WTI FCC Margin
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Investor sentiment remains divergent as the US oil market rebalanced faster
34
Source: Bloomberg, Citi Research * Gasoil and Gasoline
Crude oil money manager long-short ratio (ICE Brent +
NYMEX WTI) vs. Brent prices
Money manager net long positioning across crude (ICE
Brent + NYMEX WTI)
Money manager net long positioning and share of
open interest across refined products futures*
Investor sentiment remains divergent, with financial flows highly skewed toward WTI, where the long-short ratio
stood at 14.9x last week, compared to a short-ish 3.7x for Brent. Though paper liquidity on WTI is larger, 90% of
physical crude oil is priced against Dated Brent and light positioning could provide room for further Brent upside.
Thousands
Jul-16 Apr-17 Jan-18 Oct-18 Jul-19 Apr-20 Jan-21
-
100
200
300
400
- 100
0%
5%
10%
15%
20%
25%
-5%
Money Managers Products Net
Money Managers Products % OI (RHS)
Ratio
USD/bbl
0
5
10
15
20
20
30
40
50
60
70
80
90
Total Crude Long-to-Short Brent Price (RHS)
Thousands
-
200
400
600
800
1,000
1,200
Jul-16 Sep-17 Nov-18 Jan-20 Mar-21
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
NYMEX WTI Long-to-Short ICE Brent Long-to-Short
NYMEX WTI long-short ratio vs. ICE Brent long-short
ratio - investors have favored the US benchmark
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Global oil supply demand balances (short-term, m b/d)
35
Source: Citi Research estimates
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Global oil supply demand balances (medium-term, m b/d)
36
Source: Citi Research estimates
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Natural gas: constructive in all major regions
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Natural gas: markets remain tight in all major regions through 2H21
38
Source: Citi Research
● Citi is constructive global natural gas prices in all major regions in 2H21, due to tight fundamentals, a slow comeback
of US production and elevated oil prices, where fuel oil and diesel are competitive fuels to LNG in the global market.
– In the US, our new Henry Hub price forecasts through the rest of 2021 are now higher than prior forecasts by
$0.5/MMBtu to $3.7 for 3Q21, up by $0.7 to $3.9 for 4Q21. Despite resilient production, a slow rise in natural gas rig counts
due to a lack of appetite from producers to drill should limit US production growth in the months ahead. Oil rig counts have
also been slow to rise, so that the rebound of associated gas production should be moderate. These all keep the market tight.
– In Europe and Asia, TTF prices should average $12.1 in 3Q21 and $12.9 in 4Q21, while JKM LNG prices should
average $13/MMBtu in 3Q21 and $13.9 in 4Q21. In 2H21, a very tight market, due to high LNG and coal demand in Asia,
some LNG supply disruptions and limited exports from Russia, should keep prices close to the historical diesel price ceiling,
but there are a number of factors that should limit any further price upside. Thus, prices should be more range-bound for now.
● In 2022, while US Henry Hub prices should remain supported, Asian and European markets should loosen up due to
more LNG supply and the expected full operation of the Nord Stream 2 pipeline.
– We lift the 2022 Henry Hub price forecasts by $0.5/MMBtu to $3.4 on limited production growth. If higher prices were to
trigger a more rapid increase in natural gas rig counts and a stronger-than-expected production response, prices could fall
more than our forecast in 2H22. But so far US natural gas producers have shown no signs of changing their capital discipline.
– Our forecasts for 2022 JKM LNG prices are lower than this year’s prices and below next year’s futures curve, with an
annual average of $8/MMBtu. Similarly, TTF prices should average $8.8 in 1Q22,and around $6 in the rest of the year,
thereby driving the annual average down to $6.7. Two major US LNG export terminals should come online in 1Q22. The
full capacity of the Nord Stream 2 pipeline should be available as well, allowing Gazprom to send more gas.
● In 2023, Asian and European markets could tighten up a bit once again amid a slowdown in LNG supply growth and
steady increase in demand. Yet in the longer term until 2025, natural gas prices in all major regions should fall because
demand growth should be weak amid strong expected growth of renewables.
US Henry Hub, Asia’s JKM LNG, and Europe’s TTF forecasts ($/MMBtu)
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Bull-bear price scenarios: even tighter markets possible, but not likely
39
US Henry Hub
($/MMBtu; 4Q20-4Q22)
● For the Asian and European markets:
– The bull price case essentially assumes that the global natural gas market continues to stay tight, so that JKM prices
would be close to diesel pricing throughout this coming winter before easing somewhat to fuel oil pricing.
– The bear price case essentially assumes that the global natural gas market would loosen up more quickly, thereby
leading to a more stepwise drop in prices from near the diesel price ceiling to being competitive with fuel oil. If the market
is even looser, then natural gas prices would fall further along the coal-to-gas switching curve/mechanism before hitting the
soft price floor coming from the US LNG delivery cost to Europe. Further out, the 2024 and 2025 markets should become
more oversupplied that JKM and TTF prices could fall closer to the Henry Hub-plus-cost levels.
● For the US market:
– Our bear Henry Hub price case is primarily a function of high oil prices, which should encourage more oil-directed
drilling and eventually bring on more associated gas. However, note that bull price cases for JKM LNG and TTF natural
gas also assume the high case of oil prices, because a tight global gas market in a bull case would push global natural gas
prices toward fuel-switching levels, which could be fuel oil first and potentially even up toward diesel. But since in this
situation, US LNG exports would have hit capacity, then even higher global LNG prices won’t enable the US to export more.
Without extra US natural gas exports as a form of demand, the US won’t be able to tighten more to offset rising production.
– Our bull Henry Hub price case is primarily a function of low oil prices, based on similarly structured but opposite
arguments as the bear Henry Hub price case. Thus, with lower production, the market would be tighter.
European TTF
($/MMBtu; 4Q20-4Q22)
Asian JKM LNG
($/MMBtu; 4Q20-4Q22)
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Regional price spreads: European, Asian prices linked by US LNG export arbs
40
JKM and TTF natural gas prices are linked by the US
LNG export arbitrage (mid-2016 to present; $/MMBtu)
...As the JKM-TTF price spreads tend to fluctuate around
the shipping cost differential ($/MMBtu; Oct'16 to present)
The TTF-HH spread should compress
more in 2022 as TTF prices could fall
more but HH should stay elevated
($/MMBtu; 4Q20-4Q22)
The JKM-HH spread should similarly
narrow more in 2022, but the 2H21
spread looks more fairly priced
($/MMBtu; 4Q20-4Q22)
The JKM-TTF spread should narrow
based on the shipping differentials,
unless the market expects wider diffs
($/MMBtu; 4Q20-4Q22)
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Fundamentally, the US market is tight due to slow pace of supply recovery…
41
Source: Baker Hughes, EIA, Citi Research
US natural gas production was resilient during 1H21 partly
due to the clearing of DUCs…
(Bcf/d; 3-year ranges and levels)
…Yet natural gas rotary rig counts fail to keep up with the
strong momentum in futures prices in recent months
(Prices in $/MMBtu; Rig count in numbers; Jan’13 to now)
…Thus, natural gas production growth this year should be
very modest, with Haynesville on the Gulf Coast being most
well-positioned to benefit from higher prices…
(Bcf/d; 2019-2024)
… nonetheless, production could reach pre-COVID levels
in 1H22 at currently elevated futures as natural gas rig
counts rise, unless producers’ capital discipline is strict
(Bcf/d; Jan’18 to Dec’23)
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…Amid a robust demand rebound, including strong US LNG exports…
42
Source: EIA, Citi Research (*demand = the sum of industrial, residential, commercial and power generation demand for natural gas; **In the chart, Forecast (14D) denotes forecast
based on 14-day temperature outlook from EARTHSAT, and Fcst (Normal temp) denotes forecast based on 10-year average temperatures)
Overall domestic US natural gas demand* has so far been
resilient in 2Q21, mainly driven by industrial demand…
(Bcf/d; 3-year range from 2018-2020, plus 2021)
…Industrial demand is higher y/y thanks to a strong
economic recovery amid a rapid COVID vaccine roll-out
US LNG exports should stay at capacity, much above last
year’s level, due to both new capacity and no curtailment
this year, as global LNG demand recovers and prices high
Power demand for natural gas over the summer could
be lower y/y assuming normal temperatures, as high gas
prices drive gas-to-coal switching**
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43
Source: EIA, Citi Research
…Leading to low projected US storage: gas balance based on current futures
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In the global gas space, EU storage remains low but supply not coming through
44
Source: Bloomberg, Poten via Bloomberg, Citi Research
European gas storage, a proxy for relative tightness of the
global gas market, has dropped below the 5-year range…
(Bcm; 5-year range from 2016-2020, plus 2021)
…But Russian pipe flows to Europe (sum of export points in
mcm/d) have not ticked up, as Gazprom has not contracted
extra pipe capacity but wait for Nord Stream 2’s completion
Meanwhile, LNG exports haven’t not risen much…
(Bcf/d; Jul’16 to now)
…LNG demand in Asia has so far been strong, thereby
tightening the market
(Bcf/d; Jul’16 to now)
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…Strong LNG (and coal) demand is a result of very strong power demand
45
Source: Bloomberg, Citi Research (*Chart is showing y/y changes to rolling 30-day moving averages)
European power demand has been up big y/y for 1H21
despite the recent dip*
(%; Jul’20 to Jul’21)
Current Chinese power demand (TWh) shows a sizable
jump from prior years (2016 to present)
Japanese power demand (GW) looks at least flat to last
year, despite a much higher number of COVID cases (2020
and 2021 YTD)
Current Indian power demand (GW) looks very resilient
vs the past (past 24 months), despite COVID case surge
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Meanwhile, EUA carbon affects TTF, mainly through the fuel switching channel
46
* The y-axis is truncated as the price spike in the 2020-2021 winter was too large
TTF gas price changes due to different levels of incremental
changes in EUA prices, starting at €40/ton carbon and
different TTF price starting points
TTF gas price change due to different levels of incremental
changes in EUA prices, starting at €50/ton carbon and
different TTF price starting points
Estimated gas demand impacts due to EUA price changes,
with higher EUA prices leading to stronger gas demand
Estimated coal demand impacts due to EUA price changes,
with higher EUA prices leading to lower coal demand
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Thus, high coal, carbon prices help lift TTF, affecting JKM through US LNG arb
47
High coal prices lift marginal generation costs of coal
power, which help to raise power prices…
(German peakload in €/MWh; Apr'16 to present)
…While higher (TTF) natural gas prices could certainly lift
power prices, higher coal prices, by supporting power
prices, also create more natural gas demand for power gen
(German peakload €/MWh; Apr'16 to present)
Separately, high EUA carbon prices have raised TTF
natural gas prices, by making coal-fired generation less
competitive and gas-fired generation more so…
(EUA in €/t; TTF in $/MMBtu; Jan'15 to present)
Higher power prices show how all these commodities –
natural gas, coal and carbon – interact with each other
to drive prices
(German peakload €/MWh; Jul'18 to present)
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Overall, diesel serves as price ceiling now, but price plunge in 2022 possible
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…Seen in another way, the JKM/Diesel price ratio has
never really spike above 0.9 except this past winter
(JKM in $/MMBtu; JKM/Diesel ratio; Apr’12 to now)
On the high side, JKM prices have almost never breached
the diesel price ceiling, as diesel is a competitive fuel…
(competitive fuels in gas equivalents ($/MMBtu; 1Q12 to now)
● On the low side, our forecasts expect a ~50% price fall, from
~$14/MMBtu for JKM and ~$13 for TTF in 4Q21 to ~$7 for JKM and
~$6 for TTF by 3Q22. How common is it? Such declines are common:
– Fundamentally, when the market is in shortage, natural gas prices would
surge to levels close to where prices of substitution fuels are, so that
fuel switching could free up more natural gas. As soon as there isn’t a
need to get expensive substitution fuels, natgas prices could plunge.
– In this past winter, some LNG cargoes traded close to $40/MMBtu but
by the end of winter, prices had fallen to the $6 range.
– The JKM price collapse from 4Q18 to late 1Q19 was also spectacular,
from the $11 range, at times higher, to the $5 range by the end of winter,
due to strong supply, excess floating storage and a mild winter.
– The JKM plunge from $14 in Sept’14 to $7 in Apr’15 was more of a
function of the oil price collapse. Just several months prior, JKM prices
also declined from $19 in Jan’14 to $10 in July’14.
Global natural gas prices, particularly JKM and
TTF, could be quite volatile
($/MMBtu; Jan'12 to present)
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Carbon: market pricing and voluntary markets
are both bullish
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Commission’s “Fit for 55” plan could send EUAs over the hills and far away
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Source: European Commission, Eurostat, ICIS, FGE, OilX, Bloomberg, Citi Research Estimates
On top of the new 55% decarbonization target, a
rebase of 117Mt would further tighten the cap
Industrial stationary and non-stationary emitters'
carbon emissions balance
Economic costs for the European refineries
The European Commission is amending the legislation of the EU ETS regulation to align it with the newly adopted,
stricter decarbonization targets for the next decade. Our analysis reveals that the revised EU ETS fundamental
balance over the next decade the fundamental balance may get shorter, further supporting the price rally of EUAs.
Free allocations will fall over the Phase 4 of the EU ETS,
increasing the financial burden for European industries
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California carbon lifts off the price floor, could reach $60+ to cover CCS costs
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Source: CARB, EFI/Stanford, Citi Research
California emissions cap vs. emissions by sector
(million mtCO2e)
CCA prices have surged in 2021 – CCA auction prices
and futures vs. auction price floor ($/t, 2014-21)
Cost curve for CCS projects in California (with $50
45Q and $100 LCFS) could see up to 60mt of
reductions in the money with a $60+ CCA price (if a
CCS Protocol is added to CA-QC C&T Program)
There is no compliance pressure come Nov’21 when instruments are surrendered for 2018-20, with a >300mt
allowance bank likely remaining. However, annual balances could move negative by ~2022-24, while the price floor
is moving higher as inflation rises, and 2022 Scoping Plan policy risks skew bullish for CCAs.
California carbon allowance price scenarios (CCAs,
$/tCO2e, 2021-33E, base case is Case 3) vs. price floor
and price ceiling
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4. Industrial Metals: bullish the entire space for
2H’21, very bullish aluminium long term
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Metals – constructive in the near term, long term aluminium bulls
The level of metals consumption remains strong relative to 2019, and would be stronger if consumption and
offtake were not being held back by a shortage of ships and chips (container and microcontroller, respectively),
which is reducing the ability of end users to buy the cars, consumer products, machinery and electronics that
they presently demand. The alleviation of these ‘consumption constraints’ should act to smooth and prolong the
demand cycle, and together with an end to de-stocking across the copper supply chain is set to drive metals
price strength over the next 6-12 months. Broadly,we see globally policymakers remaining supportive while
downside risks relating to the spread of delta variant may impact both the supply and demand side of the market.
Metals price forecasts – new versus old
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Metals – palladium and copper have risks skewed to the upside in 2H’21
54
We have largely common macroeconomic scenarios across our base metals forecasts. Our bull case across
most metals (20%) is characterised by a shift to an easy China policy stance in response to downside risks to
growth (rather than weak growth materializing), Fed curve control and ECB easing. The bear case (20%) is that
policy support wanes at the same time as the delta variant restricts global activity. Meanwhile, we see copper
and palladium risk skew being to the upside during 2H’21 (30% bull vs 20% bear case), for idiosyncratic reasons.
Metals price forecasts – bull, bear and base case forecasts through 2022
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Source: Citi Research estimates, Bloomberg, NAHB
Copper positioning has returned to 2017/18 levels, aluminium still elevated
Copper positioning has nearly halved over the year
to date, albeit from record high levels
Copper net speculative positioning has fallen by around 1.5mt since its February 2021 peak, though it is still
elevated at present, at around its 2017/18 bull-market highs. Copper has held up well in the face of a period of
broad based selling, considering that the net speculative positioning reduction, the physical de-stocking across
the supply chain, the China SRB selling, and the domestic positioning reductions, saw almost $20bn of selling
over the past 4 months (well over a quarter of the value of copper consumption over that period). Aluminium,
meanwhile, has seen its positioning remain around record highs, backed by physical refined tightness globally.
Aluminium positioning has been resilient, and
remains around record high levels
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Source: Citi Research estimates, Bloomberg, NAHB
COVID-19 related consumption preference shifts have been metals intensive
US and European manufacturing orders are high and inventories are extremely low
New orders and production expectations in the US and Europe, respectively, remain extremely high by historical
standards. At the same time, manufacturing inventories are extremely low. We believe that the preference shifts
that have resulted in these strong orders are set to persist for the next 6-12 months at least. Further, supply chain
re-stocking should further boost metals consumption through 2H’21 but more likely during 2022, given that the
container shipping shortage is unlikely to ease significantly until then.
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Source: Bloomberg, S&P Global Platts, LME, Citi Research estimates
A declining China credit impulse has tended to be extremely bullish
The supposed leading relationship between
credit tightening and cyclical bear markets is
spurious
China tightens into strength and metals bull markets continue for 1-2 years under tightening Chinese credit
conditions…until the next global shock comes along. Bull markets continue throughout the tightening period and
during the period of tight credit conditions. The reasons for this is that metals demand continues to grow
sequentially in levels throughout the tightening cycles and during periods of tight policy. The recent easing
reflects fine tuning and is required to stop the credit impulse from getting too much of a headwind.
Bull markets continue because consumption
levels continue to rise throughout the tightening
and during periods of tight credit conditions
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Copper – physical tightness set to drive the next leg higher in prices…
Aluminium, steel, coal and oil markets have all the hallmarks of tight markets, suggesting that copper’s problem is
not end use consumption, but rather offtake being temporarily subdued by massive supply chain de-stocking. We
find substantial evidence of this de-stocking and think the end of it will drive copper offtake up by more than 5%
over the next 3-6 months, resulting in a refined deficit, tighter spreads and higher refined prices.
Source: Wood Mackenzie, ICSG, Company Reports, Citi Research
● Our base case is for copper to trade up to $11,000/t during the 2H’21 (50% indicative probability), and we model that
equilibrium copper prices are around $10,000/t. Though we remain bullish, our near term point price forecast has been
lowered following unanticipated SRB selling and larger than expected consumption constraints in the form of container shipping
shortages. Our global copper end use tracker is moving in line with our forecasts for this year, however offtake is materially lower
than this owing to massive supply chain de-stocking, which should end during 2H’21, raising offtake, but also, delaying and
potentially destroying some demand (there is potential for goods shortages in Europe and North America during 2H’21).
● In our bull scenario (30% probability) – the Fed provides dovish guidance regarding tapering, China accelerates its copper
intensive decarbonisation push and stimulates growth more aggressively, and the delta variant disrupts copper supply growth.
● In our bear scenario (20% probability) we see global policy support waning and positioning unwinding further.
Copper price forecasts and scenarios
World refined copper supply and demand balance, 2019-2025F, ‘000t
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…further developing our equilibrium copper pricing framework
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Source: Citi Research, Wood Mackenzie, Bloomberg
A recovery in global end-use copper consumption has driven up the ‘call on (relatively price elastic) scrap’, to an all-
time record high of 10.8mt. The ‘call on scrap’ can be decomposed into price insensitive new and low cost End-Of-
Life (EOL, or old) scrap, and price sensitive EOL scrap. The price sensitive EOL scrap as a share of the scrap pool
has a strong relationship with real copper prices historically. This allows us to forecast equilibrium copper prices of
around ~$10k for 2021, and ~$9,000/t for 2022. Prices may overshoot this if scrap bottlenecks arise, or if the
historical relationship includes scrap de-stocking that overstates scraps responsiveness to price.
Underlying copper consumption has boomed
relative to mine supply over the past year, driving
up the call on scrap to all time high levels
The old scrap cost curve, empirically, has a
very steep tail, related to the labour costs of
reclamation
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Source: Citi Research, Bloomberg
Automotive scrap values may have doubled
from pre-pandemic levels
Air conditioner scrap values may have
doubled from pre-pandemic levels
For a full explanation these scrap dynamics please see this Metals Weekly
Scrap and substitution set to rebalance copper, albeit high prices still required
Copper is likely to rebalance in 2022 on the back of higher mine supply, higher scrap supply, and at the margin,
substitution to aluminium. It is not just copper prices that are incentivising scrap output capacity to be expanded,
it is also record high PGMs basket prices, steel prices, and strong aluminium prices. Together strong metals
scrap prices have seen the value of scrap in vehicles and air conditioners double from pre-COVID levels.
Critically though, high prices are required to stay, as without them the required copper scrap would not be
recovered.
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Our base case assumes a sequential consumption decline from recent levels
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Source: ICA, Bloomberg, Citi Research
Citi’s global and ex-China copper end-use tracker on Bloomberg: CIGMGCET Index, CIGMGET3 Index, CIGMECET Index, CIGMEET3 Index
2021 end-use copper consumption and the implied call on scrap in our base case and using different
scenarios for end use consumption
Our ‘call on copper scrap’ forecasts incorporate a sequential decline in global copper consumption from late 2020
and early 2021 levels, and a modest increase in mine supply. This is broadly in line with what has happened so far.
We forecast that consumption will be around 5% higher in 2021 relative to 2019 levels, led by an 8.0% increase in
Chinese consumption and a 2.6% increase in ex-China consumption.
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Source: CRU, Bloomberg, Citi Research
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Aluminium – we expect prices to reach $3,000/t by end-2022
● We recommend buying aluminium on any dips over the next 6 months, as we expect LME aluminium to rise from
today’s $2,470/t to $3,000/t by the end of 2022. End-use aluminium demand in Europe and the US is finding strong support
from a persistent shift in household spending preferences in home re-modelling and durable goods upgrading. China’s offtake
remains solid. Ongoing power shortages in Yunnan Province and China’s energy controlmandates are likely to continue to
cause delays in project construction and output curtailments.
● Global balances have begun a shift into multi-year deficits, starting this year. Our base case (60% probability) is for
>7% y/y demand growth in 2021, followed by +~4% y/y growth in 2022. This reflects our expectation for sustained strength
in automotive, construction and appliance consumption in the advanced economies and in China, as well as a material
acceleration of primary aluminium use in energy-transition related sectors such as solar frames, distribution grids and electric
vehicles. We expect global refined aluminium supply to rise only 5.3% y/y in 2021 and 2.6% y/y in 2022, as China’s policy curbs
should prevent a major supply response.
● Our bull case (20%) accounts for more intense Chinese supply restrictions and sustained strength in global end-use
demand thanks to aggressive fiscal expansions in major economies. This would allow the physical market to tighten more
quickly than in our base case, sending aluminium prices to $3,000/t over the next three months and over $3,000/t in 2022. Our
bear case (20%) assumes an early monetary and fiscal policy tapering by major governments and a reversal of China’s
capacity discipline (including allowing coal output to ramp up aggressively). Aluminium prices could fall back to <$2,350/t.
Citi aluminium supply demand balance Aluminium price forecasts
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Source: Citi Research, Bloomberg
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Aluminium – ‘all-in’ backwardation points to a very tight NA/European market
Sharply rising convenience yields point to a significant decline in ex-China inventories over the past 6-12 months.
With the major caveat that container freight availability issues may be making the US and European markets
‘islands’ and thus less representative of ex-China inventories as a whole, the latest convenience yields indicate that
inventories have fallen to <7 weeks of consumption. Thanks to the development of premium futures we can now use
‘all-in’ implied convenience yields for the US and Europe to help us figure out changes in the aluminium supply and
demand balance (i.e. inventory changes and levels).
The physical aluminium market is already the tightest it
has been in years (Citi physical balance indicator = y =
‘all-in’ convenience yield)
Convenience yields (y) and their relationship with total
inventories
For details please see: Metals Weekly - Aluminium’s New Era (…continued)
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Source: Citi Research, IAI, Bloomberg
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We are still expecting a paradigm shift in the aluminium market
● Constrained supply and solid demand growth is set to drive aluminium deficits from 2022 onwards. China is set to
reach its capacity limit of 45Mt/y next year, with production peaking around a year later, and potentially sooner. Outside of
China there are insufficient projects to meet annual demand growth of 2-3% over the next 5-10 years. During prior bull markets
aluminium prices rose to $3-4k/t in today’s dollars (please see the charts on the next slide), with $4k/t needed to incentivize the
build out of the scrap supply chain during the 2000’s.
● In a $50/t carbon tax world aluminium’s marginal cost would increase by over 50%, the highest across the metals and
energy complex. It is not certain that oil’s marginal cost would increase, as the tax could be levied on emitters, which would
mean oil consumers not producers. The prospect of potential carbon taxes may thus disincentivize future coal based projects.
Aluminium is extremely carbon intensive and the world’s decarbonisation push is set to put paid to low cost
Chinese coal-fired power-based supply growth, which has resulted in negative producer margins for much of the
past decade. Aluminium is set to be constrained on the supply side for the first timein almost 30 years, since the
Memorandum of Understanding between producers to restrict output post the collapse of the Soviet Union in
1994, and probably only the second time in the history of the market.
Aluminium has a very high carbon emission value relative to marginal cost and price
For more contents please see: How European carbon tariffs reshape aluminium and steel markets
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Source: Citi Research, IAI, Bloomberg
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Aluminium – the ongoing rally is cyclical, but it is set to become structural
The strong price rally to over the past year has so far been broadly in line with the global cyclical upswing. Normally
these periods of strong pricing unwind owing to a supply response. However, this time aluminium supply growth is
set to be constrained, likely sustaining high prices for years to come. For context, during prior bull markets
aluminium prices rose to $3-4k/t in today’s dollars (please see the charts on the next slide), with $4k/t needed to
incentivize the build out of the scrap supply chain during the 2000’s.
Real ‘all in’ aluminium prices and marginal costs Real producer margins and the global economic cycle
For details please see: Metals Weekly - Aluminium’s New Era (…continued)
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● Base Case (70% probability) – We expect the US Midwest Premium ‘MWP’ to hit 35c/lb and the EU Duty Unpaid
Premium (DUP) to reach $350/t in the next 3 months as a 15% Russian export tax ends up shared between consumers
and Russian producers. We expect the tax gets significantly reduced in 2022 and that the MWP will fall below 25c/lb
before 2023. What could have been just a tax on Russian producers is already being passed on in part to consumers (EU
+$60/t, MWP +2c/lb since June 24th) who are paying more to secure metal amidst deep regional aluminum deficits. A ~170-day
queue for LME stocks in Port Klang is delaying relief. Our base case is that trader and consumer destocking amidst the high
premia will prevent a full pass through of the tax. A brewing LME backwardation between Oct-Nov may trigger traders to sell
stock. A more permanent export tax (i.e. into 2022) would likely be at much lower rates though high freight costs would remain.
● Bull Case (20% probability) – A full pass through of the Russian export tax to consumers could drive MWP to 45c/lb
and EU DUP up to $575/t. Another bull case would be if Moscow maintains similarly high export taxes in 2022.
● Bear Case (10% probability) – High MWP levels prompt increased opposition lobbying to section-232 tariffs, resulting
in duty removals. If duties were removed MWP could fall to ~25c/lb during the Russian tax, and ~13c/lb in 2022.
.
Aluminium premiums – Russian export tax to result in fresh highs in 2H’21
Source: S&P Global Platts, CME, Bloomberg, OECD, Citi Research estimates
Consumers are already ‘breaking rank’ and partly
compensating Russian producers for the export tax
Midwest premiums expect to rally above forwards
amidst the Russian export tax
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● Nickel demand looks primed for a strong 3Q’21 with emerging signs of physical tightness. We target $20.5k/t in 0-3m.
Stainless steel production in China is seasonally strongest in 3Q’21 and is already +12% y/y through 5M’21, with ex-China
producers capacity utilisation at high levels. At the same time the EV supply-chain appears to be restocking. A very rare
backwardation in LME spreads is an indication of refined tightness brewing, which we expect to drive nickel prices up amidst our
broader bullish commodities view for 3Q’21. In fact nickel’s resilience over the last month despite ETF selling and US dollar
strength provides some evidence of the markets underlying physical strength.
● However, we remain directionally bearish in 2022 as we anticipate strong supply growth from Indonesia. We expect
prices will fall to $15k/t in 4Q’22 (up a touch from $14kt previously), owing in large part to a 160kt y/y increase in NPI in 2022.
● Our bull case (20% probability) for prices to stay at $20k/t during 2022 depends on a derailing of the supply side, which
could occur if Indonesia were to announce limits on NPI/matte production (see Reuters). Our base case is this theme will
do more for sentiment than fundamentals as it is most likely that the large producers will be exempt from any new legislation.
● Our bear case (20% probability) is ~$13k/t in 2H’22 and this scenario assumes Tsingshan meets its production targets, and
that more matte conversion is announced, and finally that Tesla publicly reduces its nickel use further.
Nickel – near-term bullish, 0-3 month point price forecast $20.5k/t (+10%)
Source: WBMS, Wood Mackenzie, LME, INSG, Bloomberg, ISSF, Citi Research. *Subject to revision
We expect to see peak prices over the next 3
months
Nickel supply-demand estimates, 2019-2025F,‘000t
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Nickel – Four (near term) bullish charts
Source: Citi Research, Wood Mackenzie, Company reports
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Nickel positioning is considerably cleaner than 1Q’21
given the big drop in long dated open interest
A very rare LME backwardation and falling exchange
stocks point to emerging tightness
Strong stainless production is being matched by strong
demand. Stainless prices have vastly outperformed nickel
and SHFE stainless is also backwardated
Chinese stainless steel production is surging and is
set to get stronger in 3Q’21 (at least seasonally)
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● Base Case (60%) – We think prices are set to rally to $3,150/t over the next 3 months, and average $3k/t in 3Q’21.
Thereafter we forecast a slow grind lower as the tightness in the concentrate market gradually unwinds. Strong steel
(galvanizing) and consumer goods demand (die-casting) have been supportive for zinc and we are seeing this translate into
some bright spots in the refined markets such as rising US premiums, drawing LME and Chinese visible stocks, and a SHFE
backwardation. A balanced refined market in 3Q’21 should allow zinc to participate alongside our forecast gains across the most
liquid commodities (oil, copper). We expect prices to grind lower during 2022 and 2023.
● Our bull case (20%) is for ~$3,300 average zinc prices in 2H’21, which could occur if Chinese mine supply disappoints,
power restrictions on Chinese smelters resurface, and/or if a faster easing of freight allows for a global restock in global
consumer goods and steel trade – bullish for die-cast and galvanizing-related zinc consumption.
● Our bear case (20%) would see prices fall to the marginal cost of ~$2,400/t in 2022, with potential catalysts including a
more rapid rise in mine supply than we anticipate, a harsher clamp down on construction by Chinese policy makers, larger than
expected SRB selling, and a bearish shift in global macroeconomic sentiment, all or any of which could trigger investor selling.
Zinc – near term bullish, but a looser concentrate market awaits in 2022/23
Source: WBMS, Wood Mackenzie, ILZSG, LME, Bloomberg, Citi Research. *Subject to revision
Prices expected to average around current
levels in 2H’21 before drifting through 2022
Global refined zinc balance, 2019-2025F, ‘000t
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Zinc – concentrate stocks should build off a low base during 2H’21
Source: ILZSG, WBMS, Wood Mackenzie, BGRIMM, Citi estimates, * Woodlawn risk adjusted to 50%
Quarterly mine supply estimates suggest the zinc concentrate market will be in surplus in 3Q’21
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The zinc concentrate market has gone through an extended period of destocking during the 2020-1H’21 period,
and is only just returning to balance. As concentrate stocks are replenished during 3Q’21, we expect that higher
mine supply will not flow through to higher refined supply. Mine supply growth is only enough to see a gradual
increase in TCs during the 3Q’21. Indeed most of the quarterly delta is the seasonality in Red Dog shipping, which
are pre-booked. Limited gains in spot TC’s will be important to maintain investor sentiment over the next 6 months.
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Cobalt – our top pick of the EV battery metals, taking a 12-month view
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● An end to de-stocking and strong electric vehicle demand and global growth over the next 12 months are set to drive
cobalt prices to ~$60,000/t (~$27/lb),~13% higher than spot prices. This is our most bullish 12-month target relative to spot
across the main battery metals. We recommend buying at current price levels, and for physical clients to maximize hedges/fixed
price agreements before the EV battery supply chain returns to the market. For more please see: Global Commodities: Cobalt:
Our top pick among EV battery metals, on a 12-mo view
● A sharp rise in EV sales this year has brought forward the strong demand growth outlook for the battery metals.
European penetration is set to be around 13% in 2021, up from 8% last year, and penetrations in China are set to rise
to ~11% from 6% over the same period. Each of the battery metals is facing a strong supply side response but cobalt supply
side is the most restrained in our view, even accounting for the re-opening of the Mutanda mine now expected in late 2021
(~20% of 2020 supply at full capacity). Cobalt is therefore the most likely battery metal in our view to go into deficit in the next 2-
3 years, and our base case is for deficits in 2022 and 2023 which each exceed 1.5% of annual consumption. However, the
restart of the Mutanda operations is likely to cap the upside in prices over the next 1-2 years. Our long-term price outlook for
cobalt is unchanged at ~$55k/t as we raise our already bullish base case outlook for EV sales (40% up from 33%), which offsets
the incremental reductions in cobalt content in our base case.
Source: Bloomberg, LME, CDI, Platts, BNEF, Woodmackenzie, Citi Research
Global cobalt supply and demand balance (tonnes) Cobalt prices expected to continue
rising in our base case
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Lithium – Neutral following the massive price rally
Source: Bloomberg, Roskill, Woodmac, Citi Research
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We maintain our neutral view on lithium for both the carbonate and hydroxide markets. Despite an extremely
strong demand growth outlook we expect supply to largely keep pace as higher prices are encouraging a
sufficient supply response. Initially this is set to come from brownfield and latent capacity restarts, but greenfield
activity is also picking up.
● Lithium demand is expected to grow by ~25%pa through 2025, the fastest of any EV metal. EV sales are rising sharply in
China and Europe and we have raised our global penetration targets to 18%/40% in 2025/2030 (from 15%/33%) on account of
growing public OEM targets and our increasingly bullish views on China’s EV penetration. Lithium consumption growth
outpaces other battery metals due its central role across battery chemistries and the larger starting exposure of EV’s relative to
total lithium consumption (~45% of total).
● However, lithium supply growth is also ample at the right price, and we have reached the incentive price levels
required. Indeed, we discount new supply significantly and still project balanced markets 2022-25. The largest recent
capacity addition is SQM’s expansion to 180kt LCE capacity by year-end (vs 60kt sales in 2020). The ~40kt projected increase
in China’s supply between 2020-2022 is also significant. The restart of the Ngungaju Plant (Altura) with potentially 180-200ktpa
spodumene supply was approved this quarter. Beyond brownfield and restarts lithium drilling activity was up 95% y/y in 1H’21
which should keep the greenfield pipeline full over the next three years.
● For more please see: Australia & New Zealand Base Metals: Lithium: Supply responding to higher prices
Lithium supply-demand 2020-2025F (t) Base/Bull/Bear price forecasts for Li-carbonate
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Electric Vehicle battery recycling set to grow exponentially 2025+
Source: Bloomberg, BNEF, Woodmackenzie, Citi Research
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Growing circular policy and process innovation fuel our optimism for the future supply of battery metals from the
recycling of spent EV batteries. Since the typical EV battery warranty is ~10 years, we don’t expect the pool of
returning batteries becomes a meaningful addition to supply until 2025+, but importantly the infrastructure is
being established now. The potential for recycling to keep EV metals balances and prices in check will be
essential for maintaining the long-term economics of the EV revolution, as well as its sustainability agenda.
● Our base case is that by 2030 EV battery recycling contributes
19%, 8% and 5% of EV cobalt, nickel and lithium demand
respectively. This is based on 10-year EV battery lives, and China’s
mandated recovery rates of 85% lithium, and 98% Ni/Co by 2030, with
a 70-85% range in collection rates. We think this is achievable given
that EU and China dominate the first wave of EVs set to return as
scrap and both countries have mapped out the firmest regulation.
● We are most bullish on the contribution of EV battery scrap to
cobalt given its higher market value and higher weightings in
earlier generation EV battery chemistry. The variation in recovery
values as chemistries change, and particularly as we forecast cobalt
BEV content to drop 60% in 2020-2030, are also, however, a challenge
for the longer term economics of the battery recycling sector,
highlighting the need for ongoing cost reduction, innovation, and policy
support.
● The EU’s updated battery directive mandates total collection of EV
batteries and certain recycled content per battery by 2030. Initially
the minimum recycled content required is 12% cobalt, 4% lithium, 4%
nickel increasing to 20% cobalt,10% lithium, 12% nickel by 2035.
● Policy in China specifically puts the liability on battery producers
to bear the cost of recycling programs. In 2020, this was also
extended to a credit record system for the prevention and control of
solid waste pollution (including waste Li-ion batteries).
Forecast supply from EV battery recycling 2025
-2030
Forecast 2030 EV battery recycling supply as
% of EV demand
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4. Bulks: Surging demand sent iron ore and
thermal coal prices to all-time highs; we
expect a bumpy downtrend into 2022
74
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Iron ore: we expect a downturn in iron ore prices after the 3Q’21
● Uncertainties surrounding steel demand and Chinese policies see us project a wide range of iron ore price outcomes
across the bull, base, and bear case scenarios. China’s planned nationwide steel output curtailments for carbon reduction
purposes should effectively cap seaborne iron ore demand while creating major spikes in steel prices, givena lack of spare
blast furnace capacity outside China that can ramp up over a short period of time. The full rollout of China’s nationwide steel
cuts should see iron ore demand and prices peaking during the 3Q’21.
● Our base case (60% indicative probability) is for iron ore prices to average $200/t in 3Q’21 before falling to $160/t in
4Q’21 and $125/t in 2022. This assumes that China unveils nationwide steel output cuts by 4Q’21, allowing the seaborne iron
ore market to shift into surpluses from 4Q’21 onwards. Shipments from Australia and Brazil are likely to increase sequentially
over the next few months thanks to planned expansions.
● Our bull case (20%) is for iron ore prices to stay elevated at $215/t for the balance of 2021 before falling to $180/t in
2022, based on the assumption that Beijing decides not to curtail steel output at a national scale, and that Chinese steel end-
use demand remains solid at 5-10% y/y growth in 2H’21. The bull case can also materialize with another round of severe
supply disruptions out of Brazil or Australia. Our bear case (20%) assumes a sooner than expected rollover of China’s property
and infrastructure construction work and rapid iron ore supply response from high-cost producers.
Source: Platts, Bloomberg, Citi Research
75
Citi quarterly iron ore price forecasts (2020-22)
Iron ore rallied alongside steel product and scrap prices
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Coal prices should stay elevated for the rest of this year
● Newcastle thermal coal prices spiked recently as East Asian
spot consumers are in panic-buying mode given tight spot
supply and low inventories at Korean/Taiwanese utilities.
Chinese and Indian utilities have also been bidding low-rank
Indonesian coal very hard. We expect Newc 6000kcal coal to stay
elevated for the rest of this year with some near-term upside risks,
particularly as we now forecast higher natural gas prices.
● Australian coking coal prices surged as it found ways to
European steel mills, who managed to re-sell their North-America-
origin cargoes to China, as China desperately seeks imported coking
coal to offset domestic and Mongolian landborn supply losses.
● However, we expect coal prices to fall back to marginal producer
cost levels in 2022 under the base case (60% indicative
probability), thanks to potential supply increases from
Indonesia, South Africa, Colombia and Mongolia. Coal demand
should also soften, as our projected gas price declines into 2022
should trigger some coal-to-gas switching. China’s looming
nationwide steel output curtailments will likely weigh down on coking
coal demand. We do not expect China to allow Australian coal imports
any time in the foreseeable future, which should leave a wide gap
between China CFR and Australia FOB prices.
● Our bull case (20%) for thermal coal assumes stronger-than-
expected global power and steel demand. Weather disruptions in
exporting countries should lead to even tighter markets.
● Under our bear case (20%), fast renewables buildout could
accelerate thermal coal’s demand decline and leave prices lower
for longer. A major slowdown in China’s steel-intensive sectors
should hit coking coal demand and prices.
76
Citi quarterly coking coal price forecasts (2020-22)
Citi quarterly thermal coal price forecasts (2020-22)
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China’s coming nationwide steel output cuts are key to watch
● The Ministry of Industry and Information Technology (MIIT)
plans to reduce carbon emissions from the steelmaking sector
by capping China’s 2021 steel output at 2020 levels. We
understand that provincial governments are finalizing their
curtailment plans, with Hebei, Jiangsu, Anhui and Gansu among
other provinces having announced draft plans over the past few
weeks. The Chinese government appears to be in a major rush to
limit steel output, far in advance of the planned nationwide peak of
its carbon emissions target for 2030. The purpose of these efforts is
to prevent steel mills from aggressively raising output over the next
few years.
● The Chinese government is looking to achieve the carbon
reduction targets while preventing domestic steel prices from
rising too fast. We expect to see more crackdowns on physical
and futures speculation and potential steel export tariff hikes in
order to cool down domestic prices. The government also hopes to
see some weakness in property-related steel demand to the extent
that it does not derail the broad-based growth trends, so that steel
prices may remain somewhat stable despite large-scale production
cuts. We think this is highly unlikely given ongoing steady rise in
property sales and prices in major cities.
● Hence our base case is that Beijing gradually accepts rising
local steel prices, so that the mandate of inflation controls
would give way to the decarbonization targets. Local steel
prices may end up rising to levels that hurt demand from price-
sensitive end-use sectors.
China’s efforts to curb steel-related emissions through output cuts have not worked so far this year, butwill likely
tighten into 2H’21. Our base case is for China’s 2021 crude steel output to rise 0.9% y/y, assuming strict
nationwide cuts from August/September onwards, though full-year volumes may still grow given a strong 1H’21.
Blast furnace margins (2012-21) weakened recently due
to rapid increases in iron ore and domestic coke prices
Source: Wind, Bloomberg, Citi Research
77
China’s steel inventories at traders and mills (2017-21)
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BofA - Commodities Outlook - As of 3Q21.

BofA - Commodities Outlook - As of 3Q21.

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