Commodities | Mar 03 2017
A glance through the latest expert views and predictions about commodities. Aluminium prices; iron ore demand; manganese rally; gold outlook; the zinc conundrum.
-Risk of a correction in aluminium pricing although supply fundamentals improve
-Downward projection for iron ore prices as additional supply weighs
-Manganese prices attractive for re-starts, fresh investment
-Gold price holding up as inflation expectations pick up
-Zinc smelters restricting output rather than accept low treatment charges
By Eva Brocklehurst
Aluminium
Deutsche Bank believes aluminium prices above US$1850/t are starting to price in a structural change in the industry, over and above a cyclical recovery. Chinese reforms, including a more stringent focus on environmental standards, may hold the key to a much healthier market. The broker notes that since the global financial crisis, the industry has been characterised by a surplus and ample inventories.
Nevertheless, uncertainty surrounding how Chinese policy will be implemented means it is premature to expect a return to the long-run margin of just over 20% for the 90th percentile producer, the broker asserts.
Although supply fundamentals have improved since the beginning of 2016, Deutsche Bank believes the current spot price is at risk of a correction. Despite scepticism that the current price cannot hold up, the medium term fundamentals do appear better to the broker. A return to an inflationary cycle in commodities is forecast and inflation of 7-10% is factored into 2017.
Iron Ore
Demand for iron ore continues to look positive, with Ord Minnett noting a combination of re-stocking, seasonal demand and positive trader sentiment pushing prices above US$90/t. On a fundamental view the broker believes the market is broadly in balance. In a balanced market, the broker considers it normal for short periods of significant tightness or softness.
While generally constructive on the outlook, prices at current levels will inevitably mean more material makes its way to market. On this basis, Ord Minnett is comfortable with a downward projection for iron ore prices. The March quarter is typically the weakest for the global iron ore supply but, if the remainder of the first quarter proves to be mild, Ord Minnett suspects a risk that inventory de-stocking will dampen prices.
Demand has lifted in response to stronger steel mill margins in China and higher margins reflects both higher steel prices and lower coking coal costs, CBA analysts believe. Steel demand is a real sustainable force behind higher iron ore prices as policy makers appear to be propping up growth ahead of elections in November.
The analysts believe infrastructure investment, particularly in transport, will be the main driver of demand and China's property sector is not expected to provide much assistance. Chinese iron ore producers are observed to be responding to higher prices by boosting operating rates. Seaborne supply is also expected to add 70-80m tonnes this year. The analysts expect additional supply should, eventually, start to weigh on prices. They now expect iron or prices to fall to around US$60/t by the end of the year.
Manganese
Re-stocking has been the main driver of the sharp rally in the manganese price over the last year. Record high imports in December into China pushed port stocks above long-term averages. Citi observes traders withdrew, possibly awaiting signals from the steel market, and this resulted in prices falling by 45% from their highs.
The broker believes stocks at Chinese ports, as well as globally, are at adequate levels and unlikely to be a driver of price in the short term. Citi remains positive on demand from the steel sector, particularly in China, over the next two quarters.
The broker also observes miners have been slow to respond to the 2016 rally in the price. However, current prices remain attractive for re-starting operations and even fresh investment. Citi expects prices to remain volatile but well supported in the short term. Alloy producers, that suffered margin compression, are expected to re-start purchasing and this should support prices in the short term.
Gold
For the past two years gold has rallied at the start only to descend by the end of the year. Macquarie observes 2017 has not been as impressive as the preceding two, adding just over US$100/oz from the low compared with US$200/oz in 2015 and 2016. Gold fell more in the December quarter of 2016 than it did in the prior corresponding quarter.
One reason for the moves in gold was the opposite move in the US dollar. The other is bond yields, and this is where Macquarie assesses a large difference between this year and last. In 2015/16 the US Treasury 10-year yield rose a little, as the US Federal Reserve hiked its funds rate, but came off sharply and slipped during the rest of the first half. This year the 10-year yield has risen significantly in late 2016 and has held up so far in 2017.
Pulling all the factors together, Macquarie suggests investors continue to be more confident about the wider economic outlook than they were a year ago. Equity prices have not collapsed and inflation expectations are higher. Views on how many rate rises the US Fed will achieve by the end of the year are unchanged.
Hence, Macquarie argues gold is holding up well, explained by the pick up in inflation expectations, which is helping to depress real yields, as well as greater political uncertainty in the US, which has depressed the US dollar.
Zinc
There is a hiatus in the zinc market. Morgan Stanley notes the annual concentrate treatment charge (TC) for 2017 has not yet been settled. The corresponding spot TC collapsed in 2016 because of a lack of supply. If smelters settle now, in line with spot prices, the broker suspects this could prompt smelter closures. Morgan Stanley also suspects miners want to boost payability and remove price participation, changes which would transfer a greater share of the value of contained zinc to the miners.
The broker observes the miners have the upper hand in the 2017 talks, a function of Glencore's mine closures and the impact of Chinese industry reforms. Nevertheless, smelters have bargaining power and some are restricting output, rather than accepting low TCs.
Meanwhile, changes in payability and price participation could result in a compensating lift in the base TC and protracted talks may tighten the market and increase the broker's forecast deficit. While metal market signals are bullish, Morgan Stanley observes price upside for zinc is capped by the availability of secondary metal, off-exchange inventories and the potential for downstream substitution.
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