article 3 months old

Material Matters: Gold, Copper and Energy

Commodities | Oct 17 2016

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

Gold outlook for 2017; copper's performance in 2016 and outlook for 2017; previews ahead of production reports from the energy sector.

-Credit Suisse maintains a bullish outlook for gold, supported by supply/demand deficits
-Soft copper concentrates market to continue amid more modest surplus in 2017
-Lagged impact of oil prices on LNG to translate into stronger Sept qtr revenue

 

By Eva Brocklehurst

Gold

Since August, the focus for gold has shifted to the near-term drivers such as an impending rate hike from the US Federal Reserve, a strong US dollar and a reduced likelihood of a Trump presidency. Credit Suisse observes gold futures appear to have driven a gold sell-off, with 8.2m ozs of outflows since July 5. Holdings in exchange traded funds (ETF) have steadily increased, albeit at a slower pace than earlier in the year.

The broker reiterates a forecast for gold at US$1,400/oz in 2017. This bullish forecast is driven by continued uncertainty, wealth preservation and mine supply, supported by supply/demand deficits that are forecast to continue. A higher 2017 deficit is expected to be supported by declining gold mine supply, sustained demand from ETFs and central banks, and a small rebound in gold jewellery demand.

Copper

Copper has been the weakest performer of the major commodities in 2016 and Macquarie observes it is the supply side which has been strong. Copper mines have experienced few disruptions this year amid success from new entrants to the market. The broker envisages a soft concentrates market will continue.

Chilean mine output is down 4.1% in the year to August amid lower grades at the world's number one mine, Escondida. Macquarie is looking for a pick-up in output from Chile in the second half, although July and August data appeared unusually weak. Meanwhile, neighbour Peru is gaining ground on the number one, taking a leap forward as the result of the commissioning of a couple of key projects. Production is up 45.5% in the year to August.

Macquarie is sure benchmark treatment and refining charges (TC/RC) will be higher next year in China. This year they settled at US$95.35/t/9.735c/lb. Early indications suggest a settlement in the US$105-110/t and US10.5-11c/lb range. Chinese imports were down 7.9% to August and discounts have been generally suppressed this year, Macquarie observes.

Meanwhile, the scrap market is looking tighter. In sum, the broker believes increased supply, specifically in concentrates, will underpin the soft market, notwithstanding recent question marks over Chile's production and tight scrap markets.

Credit Suisse has increased its 2017 price forecast for copper, assuming a more modest surplus which factors in a slower ramp-up in Peru and a delayed restart of Glencore's African mines until after 2019.

The broker increases its price forecast to US$2.00/lb for 2017-18. Large surpluses are expected to remain in 2018-19 and are likely to depress the price, leading the broker to maintain a forecast for US$1.95/lb through that period. The long-term price estimate of US$3.00/lb is unchanged.

Energy

Oil prices have been fairly flat in the September quarter but UBS expects there are better times ahead. Brent crude has recently been more positive, largely because of the suggestion by OPEC (Organisation of Petroleum Exporting Countries) to consider reducing output. Allocation of the production cuts is expected at the November meeting.

Despite oil prices being almost flat, LNG prices are likely to have rallied. The 3-month lagged Japanese custom cleared price rose 23.5% in the quarter and UBS believes this should benefit all LNG producers, although Woodside Petroleum ((WPL)) is likely to witness a smaller lift in realised pricing because of the downside protection in some of its LNG contracts.

Australian energy companies are about to release September quarter production results and UBS looks looks for progress on Woodside's re-contracting of mid-term LNG contracts as well as an update on the proposed Senegal acquisition. For Oil Search ((OSH)) the broker looks for confirmation of PNG LNG's performance with trains one and two as well as progress on exploration.

The GLNG ramp-up will be the focus for Santos ((STO)), while for Beach Energy ((BPT)) the broker looks for any indication of the possible size of the Kangaroo discovery. For AWE ((AWE)) the broker looks for an update on Waitsia and Ande Ande Lumut. The focus for Horizon Oil ((HZN)) will be an update on the Beibu phase II.

Macquarie envisages most of the sector is fully valued on the back of positive sentiment, albeit little action, from OPEC. The broker expects the lagged impact of oil prices on LNG to translate into stronger revenue in the September quarter. Revenue for mid cap producers is expected to fall slightly. Operations at Woodside and Oils Search, in particular, will come under scrutiny as theses two have moved out of their high capex phase.

Macquarie expects the more mundane business of maintenance cycles and operation outages will become a bigger point of contention to maximise revenue going forward. Santos is expected to report consistent production from Fairview and, more interesting from Macquarie's perspective, strong production at Roma from September 1.

Acquisitions are also expected to feature, given Woodside's oil acquisition in offshore Senegal and a gas acquisition in offshore Australia. The proposed deal by Karoon Gas ((KAR)) with Petrobras in Brazil, if successful, is expected to push that company into becoming a significant oil producer.
 

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

BPT HZN KAR STO

For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED

For more info SHARE ANALYSIS: HZN - HORIZON OIL LIMITED

For more info SHARE ANALYSIS: KAR - KAROON ENERGY LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED