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Material Matters: Oz Commodity Outlook, Iron Ore, Coking Coal And Copper

Commodities | Dec 17 2014

This story features OZ MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: OZL

-Will RBA ease next year?
-Iron ore margins remain small
-Met coal surplus reducing
-Copper cash costs reviewed

 

By Eva Brocklehurst

2015 Aust Commodity Outlook

JP Morgan expects Australia's key commodity prices to remain low, which means a much lower terms of trade position is likely in 2015. This points to weaker nominal GDP growth and has adverse economic implications. Prices for Australia's largest commodity export, iron ore, have halved this year while coal, the second largest, is down 25%. Meanwhile, crude oil prices, the basis for pricing rapidly growing liquefied natural gas exports, have plunged 40%. On this basis, JP Morgan has reviewed its outlook for 2015. Until now the broker's 2015-16 forecasts anticipated higher export prices, as global demand firmed and the pace of new supply slowed. Now, the broker expects iron ore prices will stay close to current lows over 2015 and oil prices will stay lower for longer.

The pessimistic outlook is subduing investor confidence. JP Morgan had expected the Reserve Bank would start to normalise its cash rate slowly in 2015, with a quarter percentage point increase in the fourth quarter. While this remains the base case, the broker suspects the RBA, should prices go lower and damage be done to the real economy, would stand ready to cut the cash rate. Nevertheless, the broker also notes officials have indicated a preference for a lower Australian currency, which they argue is still overvalued, as the instrument to deliver easier monetary policy.

Iron Ore

UBS has reviewed the levels for iron ore miners to be breaking even, given a common misconception in the market that all iron ore producers receive the much quoted headline iron ore price, as published by Platts. This is a landed price on a dry basis for a 62% iron fines product, before any discount or premium is applied for quality. Since the beginning of December, iron ore miner costs have come down, with some reporting record months for production and costs. Capesize freight rates have fallen as has the Australian dollar, while the lump premium has increased and the iron ore price has steadied.

UBS observes the change in the currency and freight rate can significantly affect the price at which Australian iron ore producers will break even. Margins remain small and sensitive to these changing rates, as well as to the discount for impurities. Hence, the broker believes an investment in the high cost iron ore players remains risky, especially those with net debt such as Atlas Iron ((AGO)).

Metallurgical Coal

After the hard metallurgical (coking) coal settlements for the first quarter emerged on Wednesday, Macquarie notes both premium and mid settlements are up in Australian dollar terms, although the premium price of US$117/t FOB is a new low in the history of quarterly contracts. Macquarie expects the future in terms of price will be determined by the relative magnitude of two effects: pressure on the cost curve and the withdrawal of tonnage from the market. The broker is increasingly confident that 2015 will be year of negative seaborne supply growth. Australian export growth is seen halving to 5mt in 2015, from 11mt in 2014. This view is based on the fact that only one Australian coking coal asset is ramping up, Caval Ridge, while for the rest it remains a question of how long efficiency gains can be maintained.

Macquarie expects this to be positive for the oversupply position but, with oil prices falling and further currency depression in Australia likely, any recovery in metallurgical coal prices may take longer to materialise.

Copper

Various commodity research houses expect a surplus in copper in 2015. Bell Potter has completed an analysis of the cash cost measures for copper producers OZ Minerals ((OZL)), PanAust ((PNA)) and Sandfire Resources ((SFR)). The broker's earnings estimates are now based on copper prices of US$2.90/lb out to 2017, compared with forecasts of US$3.10/lb previously.

The broker expects that in 2015, operational risks for OZ Minerals should be lower, with lower waste stripping at Prominent Hill. PanAust's production should also be lower risk, as copper grades at Phu Kham improve. Bell Potter makes no changes to currency or gold price estimates but estimates 2015 all-in copper cash costs of US$2.20/lb for OZ Minerals and US$2.67/lb for PanAust. Sandfire's all-in forecasts are US$2.24/lb but its debt repayment commitments increase this to around US$2.80/lb. The broker upgrades its PanAust recommendation to Hold from Sell and retains Buy ratings for Sandfire and OZ Minerals. Sandfire is expected to pay down debt rapidly, while OZ Minerals has potential for a transaction on Carrapateena.
 

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