Commodities | Feb 07 2017
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A glance through the latest expert views and predictions about commodities. Macquarie eases oil and LNG price outlook; Philippines throws another spanner in nickel works; China's looming capacity reductions.
-Oil market likely to become over-supplied in 2018
-Spot LNG prices likely to struggle to rise
-Indonesia the wild card as nickel deficit expectations ratchet higher
-China's capacity reforms expected to ramp up this year
By Eva Brocklehurst
Oil And LNG
Macquarie's analysts have updated forecasts for oil and gas prices. They expect tighter balances in 2017 will lead to a return to surplus in 2018 and 2019. Brent is expected to average US$57/bbl, US$56/bbl and US$61/bbl in 2017, 2018 and 2019 respectively.
The broker suspects supply will be reduced by the cuts from OPEC, even assuming only 50% compliance from non-GCC members. The six GCC members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.
This pricing stability has already allowed shale producers in the US to lock in hedges and capital. The broker calculates that as OPEC's cuts roll off, this will combine with US production to push the market into oversupply in 2018.
Macquarie lifts spot LNG forecasts for 2017 to around US$5.8/mmbtu from US$5/mmbtu to reflect a combination of market tightness and stronger demand. But this relief is short lived as the ripple effect of rising US oil production means greater gas volume must coincide with the completion of trains three and four at Sabine Pass and train one at Cove Point.
2017 will also mean the completion of the much-delayed LNG export facilities in Australia. With more supply entering the market the broker envisages spot LNG prices will struggle to be materially higher than US$5/MMBtu until the early 2020's.
In light of the reduced forecasts the broker believes those stocks at risk within the LNG market are those most exposed to contract re-negotiation. Lower oil and gas prices means reduced earnings across the board, and as a result Macquarie downgrades AWE Ltd ((AWE)) to Underperform.
The broker retains a preference for Oil Search ((OSH)) over Woodside Petroleum ((WPL)). The broker remains positive on Santos ((STO)), as it seeks to ramp up gas volumes from Roma into GLNG. Beach Energy ((BPT)) is expected to struggle to replace the decline within its PEL 91 and is the most exposed to oil of the stocks the broker covers.
Revisions to Macquarie's oil price outlook results in a 30 basis point reduction to Australian inflation forecasts. The broker now expects headline inflation to remain stuck below 2% until late 2018. A flatter petrol price outlook removes a headwind for discretionary spending in terms of consumers.
Outside of the energy sector, a lower oil price forecast should benefit energy input costs for companies, making budgets less strained. Lower oil prices will represent an avoidance of the transfer of income from oil consumers back to oil producers but non-oil energy export earnings could also be more modest, particular for LNG volumes, as the price is oil linked.
The Philippines government has shocked the nickel market by announcing the suspension, or closure, of all mines it had previously suspended, as well as a vast bulk of mines into place under notice of suspension in October last year. The minister responsible has announced that the government is averse to any kind of mining operation in functional watersheds and said it was a mistake to have approved such mines in the past.
On Macquarie's calculations, the closures affect mines which produced around 165,000 tonnes of nickel in 2015. The decision is not final since all miners may appeal directly to the president. Nevertheless it goes against expectations that many of the mines would escape closure. At this stage the broker calculates up to -70,000 tonnes of nickel may not be available for export to Chinese nickel pig iron facilities.
The decision comes in the wake of the Indonesian government's move to allow a partial relaxation of its nickel ore export ban. It remains unclear how much Indonesia's ore quota will be and Macquarie suspects a deficit of -40,000 tonnes of nickel in 2017, and -50,000 tonnes per annum thereafter, may be on the low side.
Until there is more information from both countries the broker is reluctant to calculate a new supply/demand balance. However, the net loss in 2017 of around -70,000 tonnes of nickel, as a result of the Philippines announcement, could easily be offset by at least 20,000 tonnes of nickel from other sources.
After the reversal of the Indonesian ban on export ore Deutsche Bank retracted its expectations for a squeeze on the nickel price. While admitting its first half average price forecast of US$12,250/t and full year forecast of US$11,750/t may look optimistic, post the Philippines closures there could still be upside from today's spot prices.
The broker had expected miners in the Philippines would avoid closures as long as appropriate remediation plans were put in place. The latest news suggests that the shutdowns account for around 50% of the country's nickel ore output.
On a 2015 production basis, this would amount to around -200,000 tonnes but, given that many of the mines was suffering from grade decline, the broker estimates the loss is more like -175,000t of contained nickel. The broker agrees the tonnage of ore allowed out of Indonesia is still a matter of conjecture but assumes 10m tonnes of 1.4% grade, amounting to 90,000t of contained nickel.
The broker would expect upside risks to its export assumptions should prices rally but for now the net effect is seen removing 80-100,000 tonnes of nickel from the market and pushing up the 2017 deficit to -150,000t from -50,000t.
China has emerged as a major producer of metals and now accounts for around 20% of global supply. Goldman Sachs believes that the government is determined to curtail capacity considerably and that the oversupply of China's commodities may be much more limited than widely perceived.
The country is ramping up its structural reform on the supply side by removing marginal capacity, amid reforms to increase industry concentration while restructuring zombie firms to prove quality and efficiency.
Aside from a continued focus on coal and steel, Goldman Sachs expects reforms to extend to cement and aluminium this year. If steel capacity curtailment overshoots – as it did with coal in 2016 – the broker envisages a risk the steel market may experience a shortage in the first half this year. Also the potential for aluminium capacity cuts should support aluminium prices.
Western miners are unable to pick up the slack as mining capital expenditure among the majors is at the lowest it has been in a decade and a lack of investment in new growth over the past three years has meant there is limited ability to flex volumes.
Goldman Sachs believes these factors should support commodity prices remaining elevated for longer, assuming demand remains intact. The broker cites a preference for Australian stocks Newcrest Mining ((NCM)) and South32 ((S32)) among its globally preferred mining stocks.
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