Commodities | Jul 30 2014
-Miner confidence at low ebb
-Nickel, zinc, aluminium improves
-Copper demand softens
-Gold stocks build in China
-Palladium, platinum shortage
-Iron ore more positive short term
By Eva Brocklehurst
A new survey conducted by the Mining Business Outlook report suggests the sector has reached a five-year low and confidence levels will take some years to recover. A majority of respondents shared the view that the sector faces the possibility of some drastic changes. The report also revealed the industry has lost its investment appeal, with 89% of the global industry leaders surveyed agreeing that Australia is no longer the world's best investment market. Despite some optimism last year, this year's report found mining leaders are plagued by tough market conditions, declining commodity prices, falling demand and a difficult regulatory environment.
Economist Saul Eslake supports the report's findings, noting no major new mining projects are expected to commence in the next few years and there is wide consensus that prices will continue to decline as more supply comes on stream globally and the growth rate in demand slows. The report notes 25% of mining leaders are concerned by falling demand in key markets and expect demand will be hampered by the high cost of doing business in Australia.
Goldman Sachs expects further price differentiation across the base metals complex in the next 12 months, with copper set to underperform relative to nickel, aluminium and zinc. The broker has raised nickel, zinc and aluminium forecasts, reflecting a quicker-than-expected shift in the relative fundamentals of these commodities. A cyclical upswing in demand is envisaged, in combination with low supply growth following years of under investment in new capacity outside of China. This has meant zinc and aluminium outperformed in the first half of this year.
Goldman notes major commodity markets such as copper, oil and iron ore are impacted by the structural shift in supply cycles – from an investment to an exploitation phase. These have shifted from strong supply and rising productivity after a decade of over-investment in production capacity. As new capacity is better exploited the broker expects the cost curve will shift lower. The previous exploitation phase produced price declines of around 50% in real terms over a 20-year period. The broker believes iron ore, gold and copper are the commodities with the greatest downside on a 12-month view. Conversely, the most bullish views are with nickel, zinc, aluminium and palladium.
Macquarie's July copper survey suggests demand is softening. A further contraction in construction and slow growth in power sector orders points to weaker demand from China during the summer. The latest survey results depict a mixed picture for copper demand from end users, with orders from the white goods sector outperforming those from construction and infrastructure. The tightness of the Chinese physical market has started to ease and lower increases to supply for refined copper should leave a better balance, in the broker's view. Market sentiment appears to be moving more positively amid an improved macro outlook and looser liquidity. Copper traders are the least positive players and inclined to hold fewer stocks.
Geopolitical tensions have taken centre stage in the precious metals markets with higher gold prices the result of the Ukraine/Russia conflict as well as the Israeli offensive in Gaza. ANZ Bank analysts note these factors have primarily supported gold, but palladium is also affected as Russia accounts for 42% of global primary supply. The analysts estimate that a significant onshore stock of gold is building in China, which has resulted in a slowing of imports, and this will continue to hold back import demand over the next few quarters.
Gold prices are expected to come under downward pressure this year, although there is the potential for further safe-haven demand. Palladium prices have threatened US$900/oz this month while platinum has failed to hold the US$1,500/oz level. The analysts believe, in the near term, the fundamental shortage of both metals is supportive of prices. The risk to palladium is a further escalation of the tensions with Russia that might lead to trade sanctions and limited supply.
A major lift in iron ore supply from Australia has overwhelmed demand growth in China and weighed on the price this year but on the supply side UBS thinks the trade is re-balancing. China has cut production and supply growth in Australia looks complete for 2014. The broker believes the sell-off in iron ore this year has delivered the lows in price and the short-term outlook is modestly positive. The broker looks for iron ore spot prices to stabilise in a US$95-110/dmt CFR range but is wary of a seasonal correction risk around September-October.
China's high-cost domestic producers are under pressure at US$90-100/dmt CFR and anecdotal evidence suggests around 100mtpa of seaborne grade equivalent capacity has now been shut down. Elsewhere, non-traditional suppliers such as Iran, Mexico and Peru may also be stressed, UBS suspects. Collectively, they have doubled supply in five years and now provide for over 200mtpa. This supply has a higher break-even cost base because of lower economists of scale in mining/logistics, greater freight distances and lower grades.
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