article 3 months old

Material Matters: Production, Mineral Sands, Lead And Oil

Commodities | Jul 11 2016

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

-Lift in bulk volumes expected
-Titanium dioxide feedstock price rising
-Lead buying likely relative to zinc
-Modest oil price rise seen for 2017

 

By Eva Brocklehurst

Production Preview

With the March quarter affected by seasonally-induced weather interruptions, UBS looks for a sequential lift in bulk volumes – iron ore, coal and manganese – in the June quarter. Channel checks among the three major Pilbara producers suggest an 8% lift in exports.

The broker also observes the Platts 62% iron ore price declined over May but did lift into the end of the June quarter, closing at US$55.66/dmt. This is around the same level it started the quarter, which implies relatively benign adjustments to realised prices for the quarter.

BHP Billiton's ((BHP)) Western Australian iron ore shipments are expected to recover, yet UBS forecasts shipments of 257mt, slightly short of the 260mt provided as guidance.

UBS also suspects Newcrest Mining ((NCM)) could beat on gold production guidance, given quarter on quarter strength. The broker looks for 628,000 ozs in the June quarter, taking full year production to 2.47m ozs and in line with guidance of 2.50m ozs.

On the other hand, OZ Minerals ((OZL)) incurred unplanned maintenance in the first two months of the quarter and this could lead to lower-than-expected production. UBS estimates for copper production are set at 32,000 tonnes. Gold producer Regis Resources ((RRL)) is also a possible suspect to beat forecasts, led by ongoing positive grade reconciliation at Rosemont, the broker maintains.

Mineral Sands

Ord Minnett upgrades rutile price expectations by 6% for 2017 and 2018 on the back of improving demand. Zircon price estimates are largely unchanged. The broker notes pigment producers have been increasing prices and sales in the last quarter, which should improve titanium dioxide feedstock consumption and provide confidence in re-stocking.

Against a backdrop of improving demand the broker expects the higher grade titanium dioxide feedstock market to tighten, increasing rutile prices to US$797/t in 2017 and US$843/t in 2018.

The broker notes evidence of price rises in lower grade feedstocks, with Base Resources ((BSE)) passing on a US$15/t rise for the September quarter. The broker retains a Hold rating on the stock and upgrades the price target to 24c from 5c.

Ord Minnett upgrades Iluka Resources ((ILU)) to Hold from Lighten given expectations of higher production levels from the Mining Area C, and resultant royalties for Iluka, as well as improved titanium dioxide feedstock pricing. The broker suspects the stock will remain range-bound as, despite the improving titanium dioxide market, zircon markets remain lacklustre.

Lead

Lead prices on the London Metal Exchange climbed 8.4% in the last week of June, second only to nickel in a week that Macquarie observes was strong for base metals all round. Whereas nickel benefitted from fears of mines closing in the Philippines there was no news story to account for the lead rally.

Demand is considered seasonally soft in the northern hemisphere summer and stocks have been flat. The broker ventures the view that, with zinc's strength being tempered recently, some of the profit taking or new short positions in the metal has been countered by buying of lead on a relative value trade.

Macquarie finds no clues in the physical market. On the supply side, recycled lead is tight after a mild winter but in certain regions there is over capacity at the second stage which means refined output from such sources is strong. Primary supply has been dented by zinc-lead mine closures and imports into China are down 20% year on year in May. Still, none of these factors can really be attributed to the rally.

Lead markets are not as big and important as other base metals, with over half of the market contained in the closed loop of battery recycling. Hence, Macquarie concludes that the rally in zinc was probably the most influential driver of lead prices, tempting relative value players with such wide spreads.

Energy

Deutsche Bank observes oil prices have firmed recently as supply disruptions start to tighten the market amid strong demand growth. The broker expects oil prices will pause after rallying in anticipation of the upcoming inventory drawdown. The price is expected to be broadly flat at US$50/bbl in the second half, before rising to US$57/bbl by the end of 2017 as the tightening supply becomes more entrenched.

The broker upgrades 2016 Brent forecasts by 6.8% to US$45/bbl. In 2017 the broker forecasts a more substantial deficit in the market and expects demand growth will exceed oil supply growth. Yet Deutsche Bank does not expect the inventory drawdown will be large enough to normalise inventories until 2018. A relatively modest price appreciation is expected in 2017, to an average of US$55/bbl.

The broker continues to favour Oil Search ((OSH)) among oil stocks for its high quality assets.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

BHP BSE ILU NCM OSH OZL RRL

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BSE - BASE RESOURCES LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: OZL - OZ MINERALS LIMITED

For more info SHARE ANALYSIS: RRL - REGIS RESOURCES LIMITED