Material Matters: Iron Ore, Copper, Gold And Tin

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-Iron ore price to recover slowly
-Copper supply near balance
-Near term dip in gold price likely
-Tin deficit, break out potential
 

By Eva Brocklehurst

Morgan Stanley is alert, suggesting recent price weakness in key metal and bulk commodity markets is not a cause for alarm, yet. Unless the weakness has become broad based and the rebound in the industrial cycle is under threat, the analysts advise investors to seek exposure to commodities that possess compelling supply/demand fundamentals. In this regard, copper and iron ore are the winners. The recent dip in associated equity prices makes for an attractive entry point, according to the broker.

The overriding view is that the Christmas/New Year period is a weak spot for industrial commodities and, ultimately, the global recovery is on track. This weakness in demand should reverse as the first quarter progresses. Outside of copper and iron ore the other metals and bulk commodities are also seeing a recovery in demand, but prices are being suppressed by oversupply. Once Chinese mills return from the New Year break, iron ore is expected to slowly head back to the US$130-140/tonne range. Although steel inventory is lower than normal for this time of year, Morgan Stanley expects no aggressive re-stocking of iron ore. The broker's base case is underpinned by good growth in China's steel production, and the risk of momentum stalling is low. The broker emphasises there are few, if any, signs that growth is slowing in the key manufacturing and steel consuming sectors.

Morgan Stanley thinks copper liquidity remains low and the price appears oversold. The analysts consider there's a risk for the price to rebound later this quarter. Recent industrial action restricted copper supply from Chile's ports and global inventory has trended lower. Hence, Morgan Stanley thinks the 2013 supply/demand outcome, when reported in mid March, will show that 2014 is starting from balance or modest deficit.

Macquarie expects the gold price to weaken again, as investors sell on the back of the Federal Reserve's winding back of quantitative easing (QE). The low for the price is expected in the second quarter and then a rally in the second half is envisaged, on the back of renewed Indian demand. The broker notes recent volatility in gold equities and gold and suspects this could continue throughout the first half, amidst a currency slump in emerging markets. Macquarie's advice is to stay defensive and focused on quality. Among the broker's global buy candidates are OceanaGold ((OCG)) and Papillon Resources ((PIR)). Those on the global sell list include Alacer Gold ((AQG)), Medusa Mining ((MML)), Kingsgate Consolidated ((KCN)), St Barbara ((SBM)) Silver Lake Resources ((SLR)), Lachlan Star ((LSA)) and Gryphon Minerals ((GRY)).

The gold price could be pulled in both directions, according to Deutsche Bank. The Fed's tapering of QE is on one side of the equation and robust physical purchases but safe haven demand are on the other. So what will the price trend look like in the end? The analysts expect that the rally in the US dollar and Fed tapering will win out and the trend of lower prices will resume. Deutsche Bank believes the recent resilience in the gold price has been more a function of emerging market stress, weakness in equities, strong Chinese physical buying and speculation that India may relax capital controls on gold.

On the whole, these supportive factors are expected to fade. The broker does not think the emerging market stresses will result in a gold rally similar to what happened in 2012 following the spate of sovereign debt defaults. Deutsche Bank acknowledges short positions in gold are near record highs and there are fears emerging markets may face credit crises which could propel short covering. Countering this, the broker points to the upbeat growth outlook for the heavyweights -the US and China – and expects pockets of risk to be concentrated in the smaller economies.

Having said all that, Deutsche Bank expects that, by next year the US dollar will be back at levels approaching fair value and this should slow, or even stop, the liquidation of funds' gold holdings. Here, the role of India and China in the gold market will become increasingly important in providing a supportive environment for the gold price.

Hallgarten & Co has observed a long-term under-investment in the tin market. Moreover, leading producers are resorting to onshore processing of concentrates and this is disrupting the supply chain, creating shortages. This spells higher prices in the short to medium term. The analysts consider a crisis could be emerging in tin, given Indonesia is restricting access to its tin concentrate, new projects are quite small and greenfields exploration virtually non existent. The dynamics of tin are simpler than for many metals and the supply trends which have been emerging for some time, coupled with Indonesia's ban, give the analysts confidence that a supply shortfall is looming. Tin has potential to break out of a long-term range. Indonesia is the largest player in the tin market, outside of China, and the analysts consider the supply situation was tight even before that country flagged restrictions.

Which local companies are in the tin supply market? Consolidated Tin ((CSD)) with a mine in Far North Queensland is one. The company's ambition is to be a producer by the end of this year. Hallgarten finds promise in this stock and rates it as Long. Metals X ((MLX)) produces tin through its 50% ownership of Bluestone Mines Tasmania. The company is also now a gold producer so no longer a pure play. For this reason, Hallgarten has a Neutral rating, acknowledging the stock is attractive and the deal acquiring Australian gold assets from Alacer Gold was "daring and brilliant". To Hallgarten, this stock is evidence of where a choice has been made against building a major position in tin. This leaves a fragmented market and a plethora of juniors that the broker believes are easing pickings for Chinese players.

Kasbah Resources ((KAS)) has the Achmmach tin project in Morocco and plans a definitive feasibility study this quarter. Still, Hallgarten is cautious and rates the stock Neutral, until such time as the deposit can be realistically funded and developed. Equamineral Holdings ((EGH)) is focused on tin, tungsten and lithium assets in Czech Republic. To Hallgarten, having a past producing mine is all very well but it could prove a curse as the company tries to move the project forward. Hence, Neutral. Stellar Resources ((SRZ)) has the Heemskirk project in Tasmania and, if there's some signs of an offtake agreement to enable a start to construction, then the broker might reconsider the Neutral rating.
 

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