Material Matters: Coal, Gold And Base Metals

Commodities | Apr 13 2017

A glance through the latest expert views and predictions about commodities. China's aluminium exports; Coal price estimates upgraded; Caution prevails for gold; iron ore rally slowing; US oil producers; lead & zinc deficits.

-Morgans advocates trimming profits in Whitehaven Coal and South32 when prices exceed 10% of fair value
-Convincing break of US$1250-1260/oz for gold needed to encourage stronger participation
-Brokers suspect market may be valuing risks in base metals stocks more appropriately
-Rapid response of US shale oil sector to OPEC cuts explains price retreat
-Deficit conditions expected to persist in lead and zinc


By Eva Brocklehurst


Aluminium has outperformed after China outlined plans to restrict production to ensure cleaner air, and Commonwealth Bank analysts expect prices to continue outperforming in 2017. The analysts observe higher trade barriers are also further segmenting the market. China's aluminium exports are facing increasing scrutiny from international trade regulators. The analysts suspect that the end result may leave deficit conditions to fester outside China.


Just as the analysts believe supply was normalising for the coking (metallurgical) coal market along comes Cyclone Debbie to show that supply is never safe. The analysts suggest 13-17m tonnes of seaborne coking coal may be lost this year. Premium coking coal prices are likely to lift to US$250-300/t in coming weeks, they suggest.

Morgans upgrades FY17-19 prices primarily because of the disruptive influence of Cyclone Debbie. Exporters outside of the affected Queensland region, such as Whitehaven Coal ((WHC)), South32 ((S32)), and New Hope Corp ((NHC)) are short-term beneficiaries of a price hike. The broker suspects higher prices will be netted out by lower volumes for BHP Billiton (BHP)).

The broker advocates traders trim profits in Whitehaven and South 32 when prices exceed 10% of fair value and at the first sight of the topping out in metallurgical coal prices.

Chinese policy makers are expected to determine the future price direction of thermal coal. The CBA analysts upgrade thermal coal price estimates to US$74/t based on the price range indicated by the China National Coal Association as well as recent price action.


UBS is cautious about the direction of gold, emphasising the downside. Gold price forecasts are reduced by around -5% and the sector is considered expensive. Sentiment towards gold has been positive but the broker notes participation has been limited and market expectations appear to be over a broad range, with an upside bias.

The broker suspects a relatively orderly up-trend has thus far helped to strengthen underlying sentiment. Nevertheless, a more convincing break beyond US$1250-1260/oz is probably needed to encourage stronger participation. UBS believes the Australian gold sector, which has an average all-in sustaining cost (AISC) of US$833/oz in FY16 is occupying the front-end of the global cost curve.

Separating out where the cost reductions are, as well as the long-term sustainability, remains a problem and the broker believes this is prompting some investors to be cautious. Even with the reductions, the broker's gold price deck remains on average 10% above consensus.

The full story is for FNArena subscriber only. To subcribe click here

If you are New to FNArena click here for a trial