Commodities | Sep 29 2014
-More upside for nickel
-Gloom descends on iron ore
-Coal outlook uninspiring
-Copper choked by supply
-Zinc bulls to the fore
By Eva Brocklehurst
Macquarie is sceptical about hopes for a sustained price recovery across most metals and bulk commodity markets. There are few constraints evident on the supply side for raw materials over 2015. The much vaunted cuts to capital expenditure remain a 2016 story and Macquarie expects more time will be spent trading into cost curves. Citi concurs, believing that, after outperforming in the first half, commodities appear to have turned significantly as an asset class and the outlook is now mixed. Weaker global conditions, a stronger US dollar, slowing Chinese economy and an oversupplied crude oil market have undermined the broader asset class.
Are there any exceptions? Nickel perhaps. A second leg in the up-cycle is expected in 2015 as ore stocks deplete and Macquarie's analysts still envisage 33% upside to prices on an annual average basis, as a refined scarcity premium emerges. Citi has become a little less bullish on nickel, making minor downgrades to forecasts. The broker also believes a pick-up in Filipino ore flow and continued refined nickel exports from China has dented the credibility of the nickel bull story. The main question for the broker centres on how much additional ore can be expected from the Philippines and how much the stockpiles of Indonesian ore last.
In the case of nickel, Credit Suisse agrees the inventory build is more sizeable than previously thought, so supply constraints will take longer to impact. The broker believes Nickel is an oddity at present, as a large part of the cost curve will disappear when nickel laterite stocks are depleted in China and higher cost production will need to be enticed into the market to fill the gap.
Where is most of the gloom centred? Brokers anticipate iron ore prices will continued to be weighed down by the amount of supply coming into the market. On the demand side the primary source of weakness is a slowing construction sector in China, weighing on steel production. Macquarie recently downgraded iron ore price forecasts significantly. The broker observes the iron ore market is in the midst of a transition without precedent and the displacement cycle is happening both earlier and more aggressively than anticipated.
Citi is very bearish on iron ore. Iron ore supply growth is forecast to re-accelerate, while the outlook for Chinese steel demand is weaker and a weakened winter demand outlook should drive prices lower in 2015. That said, a softer Australian dollar may come to the rescue for local producers in Citi's view. The broker lowers Australian dollar forecasts to US83c from US94c for 2015 and to US81c from US93c for 2016.
There is just too much supply out there for bulk commodities, in Credit Suisse's opinion. There is no margin left in the industry and there seems no more room for extended declines. Credit Suisse observes iron ore is a couple of years behind coal in this regard, but remains on a path to "pitiless pricing" given the relentless supply expansions by the major miners. Coal prices might improve in 2015, as producers capitulate, but the broker believes this would just change the outlook to uninspiring, from grim. Macquarie has significantly reduced medium-term thermal coal price forecasts but remains positive longer term, on the basis that global seaborne coal supply growth will slow substantially and Indian and Korean demand will increase markedly, hence less volume will need to be cleared through the Chinese market.
Citi differs in its coal outlook in suspecting that coking coal prices have bottomed and a rally could be driven by improving Chinese demand, supply curtailments and slower oncoming new supply. Still, prices are not expected to go that far in the medium term as a number of new mines come on board. In thermal coal, Citi expects demand in India, new Chinese quality restrictions and increased Ukrainian imports should benefit the market.
The brokers agree copper is being choked by too much supply. The market is in tension, in Citi's view, with Chinese data and a strong US dollar vying against falling exchange based copper stocks. Citi analysts believe concerns over fundamental market weakness are overplayed, as Chinese copper output has surged in recent months. Macquarie also holds the view that copper prices will be weighed down by the amount of supply growth over the next year, also citing weakening demand in China's construction sector. Copper appears to have too much supply but this could be clouded by temporary demand for financing applications, in Credit Suisse's observation. Still, The broker agrees that surpluses are building and prices have further to fall.
All three brokers hold more bullish price forecasts for zinc, because there is insufficient supply and prices need to rise to stimulate mining and refining. This base metal is the next most convincing bull case after nickel's rally petered out in May, in Macquarie's opinion. The broker has raised price forecasts and expects a swing to deficit for concentrates in the middle of next year. Credit Suisse remarks that the depletion and demise of large mines is well understood by the market but this is not the immediate problem. Rather, there is currently a surplus of concentrate and low zinc refinery utilisation in China is running down global inventories. Shortfalls will become the problem from 2016 onwards. Lead has also entered into a deficit this year and Credit Suisse expects consumption to continue at a solid play, while mine supply struggles to keep up.
Barriers to primary aluminium trade should also result in higher all-in prices over the next couple of years, in Macquarie's view. Citi takes the view that, with the imminent prospect of rate hikes in the US, even non-LME financing in aluminium will become challenging, and this will prompt a release of metal in 2015. The broker notes consumers appear not to have panicked and chased the recent rally, with most appearing well hedged. In contrast, speculative interest has surged.
Macquarie considers the tin market will remain in surplus through 2015, with strong supply of raw material from Myanmar circumventing Indonesia's effort to hold the price over US$23,000/t. Credit Suisse suspects the opposite may be true, observing that Indonesia, as the number two global producer, has assumed the role of price marshal. Refined tin exports ceased in September in response to the falling price and the latest export estimates from the country, if achieved, will drive the metal into a steep deficit, in Credit Suisse's opinion. The broker expects the price to rise over 2015 towards the Indonesian target and forecasts a medium term target of US$25,000/t. Macquarie does accept that considerably higher prices will be needed to incentivise new mine output from established producers.
The platinum complex should also experience relatively better conditions in 2015, in Macquarie's view. Supply is struggling to keep up with demand, which is largely centred on vehicles, and Credit Suisse expects stockpiles to contract over the next 18 months. Credit Suisse has an overarching bullish outlook on the platinum group, given significant structural challenges in the delivery of South African supply to the market while underlying demand remains robust.
Brokers are lukewarm on gold and silver, expecting mixed conditions. Increasing wealth in India and China is expected to underpin gold hoarding and shield the precious metal against interest rates and exchange fund trading. Credit Suisse expects gold prices to remain in a US$1,200-1,400/oz trading range over the next few quarters. Citi expects continued US dollar strength to place downward pressure on the yellow metal through the end of 2014, while expectations of US rate hikes in 2015 reduces investor interest in holding gold. Price forecasts have been downgraded to average US$1,220/oz into 2015. Macquarie suspects gold and silver will stage a slow recovery over 2015, as market expectations of long-term US rates come to the fore and physical demand in key consuming regions recovers.
Uranium remains plagued by too much inventory and Macquarie is of the view that the recent rebound is event driven rather than structural, so there is a long way to go for this market to be brought back into balance. Credit Suisse holds a similar view and considers September's price spike abnormal, probably reflected in the imposition of additional sanctions on Russia by the EU and the US. The broker's longer term price forecast of US$70/lb is unchanged.
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