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Commodities

Material Matters: Base, Bulk And Precious Metals
FNArena News - September 27 2012


 - Commodity price forecasts revised
 - Bulk material expectations updates
 - Industrial metal markets analysed
 - PGM outlook reviewed


By Chris Shaw

With the September quarter drawing to a close BA Merrill Lynch has marked-to-market commodity price assumptions, with changes reflecting a revised outlook for stronger gold prices and weakness in the bulks sector given a soft steel output.

An open-ended Quantitative Easing environment should be supportive for gold in BA-ML's view, leading to the introduction of a two-year price target for the metal of US$2,400 per ounce. A short-term target of US$2,000 per ounce for the June quarter of next year is retained. Gold is BA-ML's preferred commodity exposure, with preferred stocks being Regis Resources (RRL), Evolution Mining ((EVN)) and Newcrest ((NCM)).

For the bulks, BA-ML has cut hard coking coal price forecasts by 16% in 2013 and 5% in 2014 to US$185 per tonne and US$190 per tonne respectively. The changes are based on revised global steel demand growth of 4.6% and 3.9% respectively in year-on-year terms in 2013 and 2014, down from 4.8% and 4.4% previously.

Iron ore price forecasts have also been lowered, BA-ML dropping estimates by 15% in 2013 and 8% in 2014 to US$110 per tonne. The changes are based on revised expectations for the ramp up of new supply and high cost Chinese production. 

For the base metals BA-ML cautions recent strength in prices may not last, as the US fiscal cliff and potential for weaker Chinese growth in the first quarter of next year presents some reasons for caution. Any resulting weakness in prices stemming from these factors could present an opportunity in the broker's view, with copper BA-ML's preferred metal exposure given a lack of new projects. 

The changes to commodity price forecasts by BA-ML have translated to earnings and price target adjustments across stocks under coverage. There have also been some resulting changes in ratings, with BA-ML downgrading Ampella ((AMX)) and Gindalbie ((GBG)) to Underperform from Buy, OZ Minerals ((OZL)) to Underperform from Neutral and upgrading PanAust ((PNA)) and Perseus ((PRU)) to Neutral from Underperform.

PanAust is BA-ML's preferred copper exposure ahead of OZ Minerals, while Western Areas ((WSA)) is preferred to Independence Group ((IGO)) in the nickel sector. 

The FNArena database shows Sentiment Indicator readings for the above stocks of 0.9 for Perseus, 0.8 for PanAust and Evolution, 0.7 for Western Areas and Regis Resources, 0.6 for Independence Group, 0.3 for Ampella, 0.2 for Gindalbie, 0.1 for Newcrest and 0.0 for OZ Minerals.

Commonwealth Bank notes coking coal prices have fallen to 2012 lows, with spot premium coking coal now trading at US$140 per tonne. In the market CBA notes producers now appear less desperate to move cargo, as inventory pressures are easing and Chinese domestic prices increase.

Traders have indicated to CBA that if buying was to occur before China's National Day Holiday beginning on October 1, a big discount to coking coal prices would be required.

Further on the bulks, Macquarie points out August global steel output figures highlight the knock-on effect of slowing industrial output. Overall crude steel production for the month was down 1% in year-on-year terms.

While august is seasonally a weak month Macquarie suggests the data is unlikely to inspire much in the way of confidence in the sector, especially as the recent falls in global capacity utilisation means steel margins remain under pressure.

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