Morgan Stanley’s latest views on Copper, Coal, Gold, Iron Ore, Nickel, and Lithium, plus Top ASX Stock Picks

Major broker Morgan Stanley has reviewed a swathe of recent data on the Chinese economy and as a result has considered its top picks in aluminium, coal, copper, gold, iron ore, nickel, and lithium. Let’s investigate their key findings.

China data good for miners

Morgan Stanley notes that the latest data on industrial production in China showed a substantial and better-than-expected increase of 7%. Contrasting this, property new starts were down 29.7%.

.

Chinese PMI and IP. Source: Refinitiv, Morgan Stanley Research

These are two key pillars of the Chinese economy and are likely to be crucial in achieving its 2024 growth target of 5%. For Aussie investors, these two key pillars are likely to have a big impact on local commodity stocks.

Morgan Stanley sees industrial production moderating from the strong start to the year, as much of it was due to “front-loading”. On property, it acknowledges year-on-year growth rates should remain negative for some time but that they will also improve in the coming months. This is due to a combination of “more policy easing and better execution on fiscal stimulus needed to rebuild buyers' confidence”.

China - Property sales and new starts. Source: CEIC, Morgan Stanley Research

Commodities views

On the commodities front, these are Morgan Stanley’s latest views:

Steel / Iron Ore

• We’re approaching the peak season for construction and this is spurring an increase in Chinese steel output.

• Steel exports are also strong, up 31% in January-February, and this has resulted in an 8% increase in iron ore imports.

• Iron ore port inventories rose sharply into January, but have drawn down in February.

China's iron ore stock at ports and stock-to consumption ratio. Source: Mysteel, NBS, CEIC, Morgan Stanley Research

Aluminium

• Production is up 5.5% year on year in January-February

• Easing power supply tightness has assisted and should continue to support increased production – which could put “pressure” on aluminium prices in the “near term”.

Coal

• Production is down 4.2% year on year in January-February, mainly due to safety inspections.

• Consumption by power utilities is up 9.7% a year in January-February.

• The result is “Sustained high coal imports”, +23% year in January-February.

• China has returned as a “a key market for Australian coal and customers”.

Copper

• Copper markets “remain tight” due to a major mine shutdown in Panama and “disappointing guidances from various producers” in recent months.

• Inventories are “continuing to fall”.

• Copper remains the broker’s preferred base metal.

Gold

• “Gold could outperform in 2024 as rate cuts loom”.

Nickel

• “Nickel has likely troughed”

• The recent price rebound was driven by “short covering”, but “fundamentals are improving too”.

• Supply cuts are accelerating, “wiping out most of the surplus we modelled for 2024, with an added volume of around 120ktpa at risk”

• Prices to remain “choppy” though as notes rising inventories at LME warehouses.

Lithium

• Supply cuts have been slower than expected, but “are now picking up”.

• 6% or 78kt of production has been cut so far.

• On the demand side, cathode output plans “are looking better than expected”, this is “boosting” sentiment.

• The 2024 surplus is still likely, but smaller.

• The lithium/battery supply chain remains “fairly well-stocked”.

• “We may still see more downside for now, but if production cuts continue to materialise and EV volumes hold up, prices are likely closer to a trough”.

• “We expect the spot price is likely to be choppy going forward” as price recovery may temper further production cuts.

Top ASX commodity stock picks

These are Morgan Stanley's top ASX commodity stock picks “in order of preference”.

Copper

Rio Tinto (ASX: RIO)

• Due to 13% copper, revenue in 2024 will increase to around 20% by 2026

• Rating: OVERWEIGHT

29Metals (ASX: 29M)

• Due to “bottoming expectations, valuation upside”, Morgan Stanley notes around 52% of the company’s 2024 revenue will come from copper*.

• Rating: OVERWEIGHT.

Aluminium

Alumina (ASX: AWC)

• Selected because of “tight alumina market and pricing”.

• Rating: OVERWEIGHT.

South 32 (ASX: S32)

• Selected because “many of its key commodities being supported in 2024”.

• Rating: OVERWEIGHT.

Gold

Regis Resources (ASX: RRL)

• Due to “upcoming McPhillamy study”.

• Rating: OVERWEIGHT.

Iron Ore

Deterra Royalties (ASX: DRR)

• Due to “valuation upside from where the stock trades”.

• Rating: OVERWEIGHT.

Lithium

“We maintain our cautious stance on Li equities under our coverage, given ongoing Li price volatility and recent market weakness,” says the Morgan Stanley Research team.

Mineral Resources (ASX: MIN)

• Due to “supported by its IO exposure”

• Rating: EQUAL-WEIGHT.

IGO (ASX: IGO)

• Due to “headwinds largely priced-in at current stock price levels”.

• Rating: EQUAL-WEIGHT.

Pilbara Minerals (ASX: PLS)

• Due to “premium valuation and significant capex plans compressing FCF generation over FY24-“25.

• Rating: EQUAL-WEIGHT.

*Note the research report which is the source of this article is dated 27 March 2024, which post-dates 29Metals announcement of the suspension of operations at its Capricorn Copper Mine. No reference was made to this announcement in Morgan Stanley’s research report.