Commodities | Apr 21 2017
Industrial production recovery; rebound in China trade; iron ore cycle; positive outlook for base metals.
-Recovery in global industrial production augurs well for metals consumption
-Chinese copper concentrate imports the third highest on record in March
-Fundamental support for iron ore prices seen at US$50/t
-Macquarie observes strong catalysts for Metals X and OZ Minerals
By Eva Brocklehurst
Macquarie observes the recovery in global industrial production is continuing. The global car market, an indicator the broker favours for commodity-intensive economic growth, is holding up well despite weakness in China and outright contraction in the US.
Macquarie estimates global industrial production was 3.0% higher year-on-year in February, an increase on January's 2.4%. The broker notes this is a far cry from a year ago when an industrial recession was being flagged.
Deutsche Bank observes, after a quiet February, there was a strong rebound in Chinese imports and exports in March. There was a record monthly importation of oil which continues to reflect strong demand, although refined exports rebounded as well. The broker notes copper concentrate imports were the third highest on record, highlighting the country's continued preference for copper units in concentrate.
Iron ore imports have also increased to 95.6mt in March from 83.5mt in February, an increase of 14.5%. Deutsche Bank notes energy demand remains strong, with both coal and crude imports recovering. Crude oil imports increased by 22% as did coal. After a sharp fall in the prior month, aluminium semis exports and steel exports recovered sharply in March. Aluminium exports improved by around 57% and steel exports by 31%.
Macquarie believes iron ore and Chinese steel prices have retraced to more fundamentally supported levels. As an indicator of a classic pricing cycle, supply has responded to high prices and margin incentives and ultimately overwhelmed demand while re-stocking has come to an end.
Meanwhile, Chinese crude steel output surged to a record high in March, exceeding the level last seen in May 2014. The broker observes the drop in prices has not yet led to much re-balancing in terms of grade relativities. Lump premiums, meanwhile, continue to fall.
Traders that were happy to hold inventory when prices were rising have now started to sell more aggressively. Yet, with mill inventory levels still above average, Macquarie expects mills to endure further de-stocking of iron ore, which will exacerbate the weakness and potentially result in prices overshooting to the downside.
Macquarie believes the main question for the direction of iron ore prices in the near term is whether pessimism builds to a level that causes prices to overshoot on the downside, amid an aggressive de-stocking cycle, or whether underlying demand is solid enough to limit a further decline in prices.
Macquarie continues to believe fundamental support for iron ore lies around US$50/t and would expect prices to continue to fall now there is a clear downtrend.
Ord Minnett believes the decline in iron ore prices over the past month has been driven by a shift in investor exposure towards less-risky assets, rather than a rapid deterioration in fundamental demand. The broker points to March economic activity data in China that has come in above expectations, and global growth indicators such as purchasing managers indices that are at multi-year highs.
Ord Minnett believes the panic that set in across the global mining sector represents an attractive buying opportunity on a medium-term view. Even at US$50/t into perpetuity, the broker believes major miners demonstrate attractive valuation metrics. The capacity to de-gear balance sheets and return significant cash to shareholders via dividends also remains high in a US$50-60/t range.
Australian base metal miners have pulled back from peak levels, with Macquarie noting a significant decline in share prices. Copper miners such as OZ Minerals ((OZL)), Metals X ((MLX)) and Sandfire Resources ((SFR)) are down -25%, -23% and -14% respectively since the mid February peak.
Nickel miners Independence Group ((IGO)) and Western Areas ((WSA)) are down -36% and -29% respectively since their early January peaks. Nickel/cobalt play Clean TeQ Holdings ((CLQ)) is down -31% from the early March peak, despite cobalt prices being unchanged.
Macquarie remains positive on these stocks, expecting base metals prices to rise during 2017. The broker does not expect any material surprises from the upcoming production results, although there may be some risk from weather-related impacts.
The strongest catalysts are for Metals X and OZ Minerals, in the broker's opinion. The updated reserve at the former's Nifty mine presents a most significant catalyst among the base metal miners and the release of a feasibility study on the latter's Carrapateena is expected to enhance the economics of the project.
While the recent production to guidance for Independence Group disappointed the broker, once Nova starts to fire up in early FY18 Macquarie believes the potential is there to develop a strong production performance. The broker's bullish outlook for nickel is the main driver behind a positive view on Western Areas.
2017 is likely to be a big year for Clean TeQ Holdings, in the broker's opinion. The company is expected to secure offtake agreements for a large proportion of its nickel sulphate and copper sulphate at the Syerston development.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.