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Metals Prices: The Song Remains The Same

Commodities | Sep 07 2006

By Greg Peel

“The continued strength in base metal prices has once again led to further upgrades”, said Citigroup.

“We have made substantial upgrades to our price forecasts”, said GSJB Were.

It’s a broken record, but supply side concerns and continuing low inventories have forced the hands of analysts who long ago stopped pretending they can actually tell when this commodity boom will end. Experience suggests the supply side should have caught up by now that we are this far down the track of unforeseen prices, but it just hasn’t been the case.

Not only have we had to wait for chronic years of underinvestment to be turned around like the QE2, pushing the old infrastructure to maximise profit opportunities has only resulted in maintenance shut-downs and equipment failures. Then there’s the labour problem.

Not only are skilled mining workers almost impossible to find, the ones that are employed keep going on strike. They too would like to share in some of the prosperity, and why wouldn’t they?

Weres notes the demand side has actually settled down somewhat. The Middle East is, well, tentatively peaceful, crude oil has slipped a bit, the US economy appears to be slowing and the Chinese economy is also being reined in. The latter is actually a good sign, says Weres, as it means there is less likelihood of a blow-out and more likelihood of a sustainable growth.

“The combination of these issues has seen a very slight improvement in our confidence in the demand side of the metals story through the balance of 2006 and 2007, while our conviction that supply will continue to struggle for some metals has been well and truly reinforced”, says Weres.

Both brokers have specifically targeted nickel, copper and zinc. In both cases also the only metal bucking the trend is aluminium, which is tipped to remain in surplus through 2008 due to strong Chinese production. The other three will almost definitely remain in deficit.

[The following prices will all be quoted in USc/lb]

Citi has increased nickel forecasts by 26.4% in 2006, to 970, and 35.7% in 2007, to 950. Weres has increased by 11.1% in 2006 to 948, and 25.0% in 2007, to 955. Yesterday’s spot price was 1406.

Citi has increased copper forecasts by 6.8% in 2006, to 300, and 22.2% in 2007, to 275. Weres has increased by 1.6% in 2006, to 310, and 36.4% in 2007, to 341. Yesterday’s spot price was 363.

Citi has increased zinc forecasts by 4.1% in 2006, to 135, and 20.0% in 2007, to 120. Weres has increased by 9.3% in 2006, to 140, and 15.7% in 2007, to 140. Yesterday’s spot price was 164.

Citi has reduced its aluminium price forecast by 3.6% in 2006, to 113, and left 2007 flat at 100. Weres has increased its forecast for 2006 by 2.7%, to 111, and left 2007 flat at 89. Yesterday’s spot price was 116.

What we can see from these movements is that Citigroup has held the traditional backwardation in its nickel, copper and zinc prices, such that 2007 prices are all lower than 2006.

Weres, on the other hand, has built in a contango, meaning 2007 prices are higher than 2006 (except for zinc which is flat). This implies Weres is concerned supply problems will not improve into next year.

Both brokers have also addressed other commodities. Citigroup has increased prices for Asian thermal coal by 3.7% on 2006 and 12.5% in 2007. However, Asian coking coal prices stay flat in 2006 and fall 6.5% in 2007.

Weres has slightly shifted down its gold price forecasts post correction (by 3.3% in 2006) but maintained the contango of 4%, such that prices for 2006-10 run (US$/oz) 611, 645, 671, 699, 727. This is the stock valuation price. The analysts still believe gold will possibly breach the old high of US$850/oz in the next 12-18 months.

Both brokers’ price changes have result in changes to earnings per share of various resource companies.

In the large diversifieds, Citi has increased earnings for both BHP Billiton (BHP) and Rio Tinto (RIO) by 3% in 2007. Weres has increased BHP by 13.8% and Rio by 15.5%.

In the smaller diversifieds and pure-plays, the stand-out increases in 2007 are from Citi:
Oxiana (OXR) up 17%, Jubilee Mines (JBM) up 27% (after a 68% increase in 2006), Minara (MRE) up 67% (after a 39% increase in 2006) and Zinifex (ZFR) up 16%.
 
For Weres the stand-outs in 2007 are:
 
Zinifex up 16%, Kagara Zinc (KZL) up 27%, Minara up 79% (after a 21% increase in 2006), and Jubilee Mines up 42%.
 
Citi’s coal price changes (thermal up, coking down) result in lower earnings forecasts across the board for coal companies. Weres’ gold price changes mean lower earnings forecasts for gold companies, with the exception of Newcrest (NCM) for which it has raised 2007 earnings by 15%.
 
Of the two brokers, Citi alone forecasts target prices. These metal and coal price changes have resulted in target price changes across the board, all of which are available in FN Arena’s Australian Broker Call service.
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