Commodities | Apr 06 2017
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Coking coal and Debbie; manganese prices; lithium outlook; gold sector quarterlies.
-Metallurgical coal price rise may not be as substantial as in 2011
-Recent gains in manganese prices likely to be temporary
-March quarter electric vehicle data critical to the outlook for lithium
-Gold sector continues to present value to Deutsche Bank
By Eva Brocklehurst
Metallurgical (Coking) Coal
In the wake of Cyclone Debbie and heightened speculation regarding the upside for metallurgical coal, Morgan Stanley believes it is time for some perspective. The range of estimates for the tonnage lost post the cyclone is -13-19m tonnes. The supply side hit in terms of Queensland's 50% slice of global metallurgical coal trade, equates to around -4-6%, in the broker's calculations.
Assuming nothing is changed otherwise, this could lift metallurgical coal prices. That said, the broker is not suddenly a bull on metallurgical coal, the reason being that a bull case depends on nothing else changing and there are other supply-side issues.
Offsetting factors include the prospective delivery of a lot of coal down the supply chain and import inventory as a supply buffer. The general recovery from the cyclone could be quicker than the market expects while the US has reactivated supply with potentially 20-30mtpa of extra capability.
Ord Minnett is in a similar camp. The broker notes de-watering infrastructure installed at the mines post the 2011 flooding event has helped the majority resume operations more quickly. The broker estimates the outage created by the damage to the Goonyella line, which carries around 120mtpa, will result in around 15mt of lost exports. This equates to around a -5% interruption to seaborne trade.
The broker believes that while prices have already rallied, the ultimate impact from this cyclone will be less severe than the one in 2011, where open pit mines were filled with water and caused prolonged outages and caused prices to surge to US$330/t.
UBS also estimates the impact is around 15mt and that tighter markets should undoubtedly drive pricing higher. The scope for shipment diversions will depend on the access to spare trains, which is uncertain at this point in the recovery. The broker expects spot prices to lift meaningfully from current levels around US$155/t.
The broker contemplates a jump in spot prices in excess of US$100/t is entirely possible. A higher spot price will benefit those that sell spot coal such as South32 ((S32)), not affected by this weather event, while Whitehaven Coal ((WHC)), also unaffected, despite selling metallurgical coal on contract, is selling ramp-up tonnage from Maules Creek into the spot market.
Credit Suisse suspects Japanese negotiators may be feeling a little bitter about second quarter contract negotiations. They had the upper hand two weeks ago, haggling with producers over a US$5/t in a bid of a range of US$158-163/t, according to the broker's sources.
Second quarter contract offerings are now likely to be at a substantially higher price, although it remains unclear whether any Queensland mine could confidently offer supply in April. Credit Suisse expects at least 16mt of coal output will be lost, including 11mt of hard coking coal.
The broker expects prime hard coking coal spot prices to head towards US$180/t, which may be a negotiating level if the second quarter contract settles. This is the broker's assessment of price parity with China's price in Tangshan.
Prices for manganese ore have rebounded but are unlikely to persist at current levels, Citi suggests. The current rally represents stabilisation rather than a sustained up-trend and Chinese steel production is expected to remain modest over the next few months.
The fundamentals are unchanged and the broker believes recent gains in price will be temporary. Prices have stabilised after the they fell by more than 50% between December and March. Citi calculates the market balance of manganese ore should be back in surplus by the September quarter of 2017. Key to this view is a persistent overhang of inventory at Chinese ports. This remains the biggest threat to prices.
While net additions at Chinese ports have slowed over the last month, any severe stock liquidation will be negative for the spot prices, although the broker believes this is unlikely in the short term. Price stabilisation after a steep fall has attracted traders and end-users that have waited for more comfortable price levels.
Deutsche Bank notes Chinese domestic spot pricing for battery-grade lithium carbonate has been lifting in recent weeks and is now 7% above its 2016 lows.
Electric vehicle sales in January in China were disappointing although they recovered in February, the broker points out. February output of battery-grade lithium carbonate was down 18% month on month but production levels should have normalised in March.
The broker remains conservative in its estimates and assumes 650,000 tonnes of lithium will be sold in 2017, only 30% above 2016, which was 68% above the year before.
The broker estimates current lithium prices are well above incentive pricing, and if Chinese electric vehicle sales beat forecast to the upside and prices remain buoyant, the producers should likely outperform. Hence, the broker retains a Buy rating for the likes of Orocobre ((ORE)). Electric vehicle sales are traditionally weighted to the second half and March quarter data will be critical to the outlook.
Gold stocks under Deutsche Bank's coverage are up 6% since the beginning of the year. The broker still believes this sector presents value.
A solid March quarter is expected from Newcrest Mining ((NCM)), with Lihir and Cadia production rates increasing. OceanaGold ((OGC)) is expected to deliver production improvements from both Didipio and Macraes and commercial production is expected to be declared at Haile.
Alacer Gold ((AQG)) is expected to benefit from higher grades and strong results are also expected from Northern Star Resources ((NST)). Evolution Mining ((EVN)) will also report its first full quarterly contribution from Ernest Henry.
Those companies likely to disappoint in the current production quarterlies, in Deutsche Bank's view, include OZ Minerals ((OZL)) with a 5% decline in copper output forecast. Independence Group ((IGO)) is expected to report a mixed result, with Jaguar improving but grades at Tropicana falling. Orocobre's March quarter report is unlikely to improve investor sentiment, in the broker's opinion, but the stock is considered fundamentally cheap.
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