Commodities | Feb 26 2015
-Coal supply discipline absent
-Mines escape Marcia’s fury
-Zinc softness unlikely to stay
-Copper disruptions mount
-Morgans flags bauxite potential
By Eva Brocklehurst
Coal markets remain subdued with supply high in the face of weakening demand. ANZ analysts note prices of both coking (metallurgical) and thermal coal have fallen 20% over the past year. Producers have cut costs but seaborne supply discipline has been largely absent. The analysts observe conditions are unlikely to improve much this year and, with the biggest consumer, China, introducing unfavourable trade restrictions, there are few catalysts for a significant price recovery in the short to medium term. The analysts are downgrading forecasts for coal prices by 7-17% over the next three to four years, with the larger downgrades for long-term forecasts in 2017 and 2018.
Tropical Cyclone Marcia cut across key coal centres of Rockhampton and Gladstone in Queensland recently. Rainfall is the big risk factor for coal production in Queensland but it seems the mines escaped much of the impact. UBS expects top grade coking coal prices will drift lower. A lower Australian dollar is allowing major Australian producers to discount prices further and increase pressures on their US counterparts. The broker believes exits by the US market players are necessary to re-balance global supply, and are the precursor to a recovery. Hard coking coal prices are forecast around US$119/t, but without real cuts to US production this carries downside risk.
Macquarie remains bearish on thermal coal, despite the rebound in the benchmark Newcastle spot price since early this year. A trader squeeze is blamed for the rebound which has led to a distortion in physical spreads. The distortion has occurred as the market heads into Japanese fiscal year contract negotiations. The April-to-March contract is estimated to back around 60mtpa of Japanese imports and is an important earnings driver for Australian producers.
The price is determined by reference to prevailing spot and derivatives levels. Over the past six years the contract has settled at an average premium of $7/t to the spot price. Macquarie suspects this is driving the current price squeeze, with traders gambling on the purchase of physical tonnes at elevated rates to secure a better price backing for the contract sales. Why does this matter? The broker maintains a bearish view based on fundamentals which suggests that this squeeze will not achieve its desired outcome.
Macquarie observes the prevailing view is that zinc demand will be muted. Seasonality does play its part but supply of the metal appears plentiful. Zinc prices appear soft at spot but the analysts observe a divergence in the near-term outlook. Macquarie is constructive and, while acknowledging current softness and some macro headwinds, believes upward pressure on the price is likely to come from high official outflows of London Metal Exchange stocks and the positive import arbitrage between the Shanghai exchange and the LME.
Most observers expect prices will be stronger in the second half, with a range of US$2,400-2,500/t expected, particularly when the Century mine finally closes and douses some of the scepticism that has crept into the market with the price retracement. Macquarie remains bullish over the medium term on supply constraints.
The propensity for copper supply to be disrupted has reared again, exacerbating reductions in guidance announced by the major miners late last year along with a slower ramp-up in Chinese smelters. Macquarie has tightened estimates of the supply/demand balance and expects this to preface a more bullish outlook for the copper price from mid to late March as strong seasonal demand picks up.
Disruption to supply has broken out in Zambia, where workers have gone on strike at the Lumwana mine in protest at the company’s stated intention to put the mine on care and maintenance in response to a new taxation regime. This adds to the disruption from the announcement by BHP Billiton ((BHP)) of a major outage at the Olympic Dam mine because of a mill line failure.
Total disruptions are now envisaged at around 181,000 tonnes, equivalent to 24% of Macquarie’s original annual disruption rate of 741,000t. With 15% of the year having passed the run rate is well ahead of the broker’s allowance for disruptions.
Metro Mining ((MMI)) has conducted its pre-feasiblity study on Bauxite Hills, Queensland, and Morgans believes the stock is posed to re-rate given the potential for upside. The simple, low capex development could allow the company to exploit compelling bauxite market dynamics. The biggest hurdle is obtaining funding for development. Bauxite Hills is around 95km north of Weipa, a prolific area for bauxite. The company’s operation requires minimal port infrastructure. Morgans observes a bullish tone for bauxite demand since Indonesia brought in its export ban on raw ores 12 months ago.
While there are many deposits of bauxite around the world, few offer a sufficient investment return, a clear path to government approvals and ready access to infrastructure. The broker notes stockpiles of Chinese bauxite are dropping by around 1m tonnes per month and the refineries in China are struggling to source material from non-traditional destinations such as Malaysia and Thailand, which is driving up the price.
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