Commodities | May 02 2017
Iron ore balance; uncertainty prevails for nickel ore; deficit tipped in aluminium; copper prices likely to lift.
-Steel to drive iron ore prices but strong recovery considered unlikely
-Will the drop in demand for nickel in stainless steel production continue?
-Chinese curbs should have meaningful impact on aluminium supply
-Recent weakness in copper prices seen driven by speculators
By Eva Brocklehurst
Ord Minnett envisages the iron ore market will be broadly balanced this year, although traders will remain more conservative over the short term. Up to mid April iron ore prices fell around 30%, the correction being driven by a fall in China's steel prices and margins, and a rise in non-traditional supply.
Ord Minnett has reduced 2017 forecasts for iron ore to an average price of US$73/t from US$82/t, even though there are no material changes to the supply-demand outlook.
Global economic conditions appear supportive, as China's steel production ran at around 840mtpa in March, an all-time monthly high. After subtracting net exports, apparent demand is calculated to be up 6.3% and Ord Minnett believes is hard to get too bearish given the strength of the indicators.
The iron ore buyers' strike appears to be over, Credit Suisse observes, after a low point was reached in April. Underlying steel demand in China appears to be robust and new infrastructure projects are reported to be breaking ground at the same pace as 2016. Credit Suisse believes the drop in steel prices was a result of overproduction.
Nevertheless, for iron ore to rally back to US$90/t or higher steel needs to regain prices above RMB500/t. In turn, for that to occur, a supply deficit would be required. Seasonally, May is a peak for Chinese construction, but the broker suspects any steel shortfall is unlikely.
Credit Suisse suspects the prices of iron ore and steel will remain closely connected and steel will be the driver, because of end-use demand in China. The current price of around US$65/t for iron ore still represents a large margin for the major seaborne iron ore producers, and the broker expects a recovery to US$70/t in the next month, but any progress from there is likely to be difficult.
A drop in nickel ore exports from the Philippines appears unlikely as Nickel Asia, the largest producer, is now forecasting a 9% recovery in exports this year. Nevertheless, Macquarie believes the global market deficit remains in place, because of large production losses from conventional producers.
Uncertainty, if anything, has increased, the broker observes, amid large reductions to production by non-Chinese producers in the March quarter and a drop in nickel demand from the stainless steel industry over the past month.
Macquarie believes it is too early to state whether the reductions signal a fall in end-use demand but suspects they reflect some earlier overproduction, which can be corrected quickly, and some de-stocking amid expectation of lower stainless steel prices. The broker assumes growth in stainless steel and nickel use of 3% this year.
Macquarie cautions against getting too bearish about current nickel prices but still does not envisage a lot of upside this year. Lower prices have led to a sharp reduction in secondary nickel availability.
Nickel ore prices have fallen as more supplies are being offered from the Philippines. Indonesia has re-started ore exports for the first time since January 2014, while exporters from New Caledonia and Guatemala are racing to put material in the market before they are priced out by lower prices and higher freight rates.
At current prices, the broker calculates over 40% of producers are losing money and if prices stay below US$10,000/t this year would not be surprised to witness further mine closures.
Macquarie tips the 2017 global balance in aluminium to be in substantial deficit. Prices are not expected to make a near-term shift to the downside as previously expected and accordingly the broker upgrades forecasts. Average prices for 2017 and 2018 are forecast at US$1913/t and US$1806/t respectively.
Macquarie envisages structural weakness in this market because of supply conditions but recognises that on the one-two year horizon, aggressive steps being taken by Chinese authorities to curb oversupply will have a meaningful impact on the global balance, and prices should experience periods of buoyancy as a result.
In light of major changes to regulations in China, which are designed to constrain aluminium production capacity, the broker believes this is a negative for alumina and forecasts for 2017-18 are lowered by -5-7%.
Smelter reductions are a negative for alumina but the broker expects curtailments in China from the winter will lift prices to US$345-360/t towards the end of the year. The main impact the broker envisages is on Alumina Ltd ((AWC)), given its leverage to alumina. Incorporating the downgrades to prices, reduces the broker's target to $2.10 from $2.30.
UBS believes demand from China and flat supply in 2017 will drive a market deficit in copper, lifting prices. Recent weakness in the copper price, the broker suspects, has been driven by speculators selling after building up large long positions since October.
The broker observes a greater than usual disruption to mines in the March quarter, which has tightened the concentrate market. Export data from Chile suggests there is more than just the labour strike affecting Escondida, which is expected to take time to ramp up back to full capacity. Grasberg (Indonesia) is also expected to start ramping back to full capacity with 1.1mt of concentrate to be exported prior to February 2018.
The broker notes that tightness in concentrate markets is yet to materialise in metal market tightness. Inventory levels and cancelled warrants do not indicate supply anxiety for metal. UBS suspects scrap supply may be assisting in this regard, incentivised by the higher copper price.
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