Commodities | Mar 13 2017
A glance through the latest expert views and predictions about commodities. Asian investor briefing; iron ore prices; aluminium outlook; nickel uncertainty; subdued oil.
-Asian investors appear more constructive on the Australian mining sector
-As most iron ore miners make cash, swing supply is returning
-China appearing oversupplied with aluminium
-Growth in nickel use likely to be soft while uncertainty reigns
-Should OPEC-Russia deal hold, gradual up-trend in oil price expected
By Eva Brocklehurst
Ord Minnett has reviewed Australian mining from an Asian perspective following meetings with a number of investors and notes they appear more constructive at current levels in the market. With probable pent-up buying interest, attractive valuations and a positive macro-economic backdrop, the broker has become more bullish on the sector.
Most investors who are still selling have been doing this as a tactical trade rather than because of any structural concerns. The most interest, the broker found, is in Fortescue Metals ((FMG)), followed by Rio Tinto ((RIO)) and BHP Billiton ((BHP)).
There was broad agreement that the sector is cheap on net present value measures, earnings multiples and free cash flow yields. The main concern appears to be that miner stocks will fall with any correction in commodities. This is particularly the case with iron ore, as a price above US$90 tonne is considered a headwind for marginal buyers.
The majority of investors Ord Minnett met believe that iron ore will struggle to trade much higher over the near term. On the other hand, there is no strong conviction as to why iron ore should trade materially lower in the near term, as Chinese steel margins are at multi-year highs and cuts to capacity are supporting steel prices. Expectations centre on iron ore finishing 2017 in a range of US$60-90/t.
At current prices, Deutsche Bank calculates that only a handful of small miners are losing cash. With the bounce in FX and oil in the second half of 2016, 14% of supply is now estimated to lose cash at US$60/t.
Nevertheless, swing supply is returning at US$90/t, with the broker observing Chinese domestic production is now operating at a 280mtpa run rate, up from an average of 220mtpa in the first half of 2016. Although Chinese steel demand is robust, the broker suspects more low-cost supply in 2017 will result in a retracement in the price to US$60-70/t by mid year.
Macquarie observes China's preliminary commodity data in February revealed both iron ore and coal imports were strong. While this side of the Chinese commodity business model appears normal, with plenty of appetite to soak up raw materials, the other side, exporting finished products, was very weak in February.
Macquarie notes annualised steel and aluminium export volumes were the lowest since early 2014. Often such anomalies can be put down to Chinese holidays but the broker observes, in most cases, February was just an extension of a trend seen over January. Macquarie reiterates its view that the peak of China's growth cycle is passing and headwinds are likely to arise over the second quarter.
Macquarie observes the London Metal Exchanges biggest metal market by volume, aluminium, is showing a gain in the year to date of 10.5% as the price continues to rebound. Nevertheless, other data suggest the production is rising strongly in China. In the first two months of the year production is an annualised 5mtpa above that of a year ago, at around 35mtpa.
China appears oversupplied and the physical metal premiums have fallen to a steep discount to spot prices, pointing to a softer ingot market. It is small wonder, in Macquarie's view, that China paints a much more bearish picture. The broker believes strong sentiment, coupled with confusion over the timing of the cuts to winter smelting, has been the main support for prices recently, but in the last few days prices have moved lower as speculator expectations begin to confront consumer reality.