Material Matters: Aluminium, Zinc And Energy

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A glance through the latest expert views and predictions about commodities. Aluminium; thermal coal; copper; zinc & lead; and energy stocks.

-China's supply-side reforms may change the outlook for aluminium
-China's thermal coal prices run sharply higher
-Risk of significant labour unrest in South American copper mines diminishes
-Zinc prices descend as China's smelters ramp back up
-Credit Suisse suggests, if oil surprises on the upside, Santos and Oil Search could rally
 

By Eva Brocklehurst

Aluminium

China's supply-side reforms to aluminium could change the outlook for the industry, Credit Suisse contends. The broker expects the price of aluminium will surge into the December quarter if supply-side reforms prevail. Around 5mtpa of capacity could be curtailed by mid October, and the winter reductions of around -30% in terms of aluminium production in the 28 northern cities should kick off in mid-November, reducing output by around -1mtpa.

By 2018 the excitement is likely to pass, and the broker expects China will still be producing a surplus and exporting semis, undermining prices in the rest of the world. The surplus may be worse if demand in China falters and infrastructure stimulus ends.

Credit Suisse calculates the price may average US$0.91/pound in the December quarter but sink back to US$0.79/pound in 2018, while the market appears brighter in 2019-20 as it tightens and supply-side reforms limit China's productive capacity at around 39mtpa.

Thermal Coal

Soft supply growth and demand over China's summer have driven up local thermal coal prices by 15% in just four weeks, Morgan Stanley observes. As a result China's National Development and Reform Commission has called for meetings with the big thermal coal miners to discuss options to re-balance the market. The broker notes this scenario is playing out the same way as 2016, when the limits on output meant supply slumped and prices rose sharply.

The NDRC has announced measures to boost supply and stabilise prices. These include delivering new mines at a faster rate than closing old mines, prioritising coal rail/shipping, lifting the utilisation rate of clean power facilities, imposing supply and price contract terms and cutting spot trade. It appears the NDRC us hoping that new supply will quickly weigh on prices.

Morgan Stanley suggests, given current tight trading conditions and a need to reduce prices, perhaps the NDRC could moderate some of its supply-side policies, at least until the summer trade eases, slow industry reforms and ease import restrictions.

Copper

Citi updates monthly production numbers from 31 major copper mines in Chile and Peru noting production was relatively stronger at Las Bambas, Toromocho, Andina, El Teniente, Centinela and Antucoya. Production was relatively weaker at Cerro Verde, El Abra, Constancia, Escondida, Collahuasi and Cerro Colorado.

The broker also notes Antofagasta has reached a new deal with its union at Zaldivar and miners in Peru have called off a strike after the government agreed to create a task force to discuss labour reforms.

The risk of significant labour unrest in 2017-18 appears less than investors are appreciating, in the broker's opinion. Citi's global commodity team forecasts copper to average US$2.69/pound in the second half and US$2.82/pound in 2018.

Zinc & Lead

Macquarie observes the recent strong rally that caused zinc prices to peak at US$2,843/t has ended. Profit-taking and producer hedging has driven selling, which intensified after the Chinese production data showed output was up 16.9% annualised. Lead has followed zinc's move even more so, as less liquid contracts tend to.

The Chinese data undermines the smelter reduction narrative that has been driving zinc market bullishness, Macquarie asserts. The basis of the bull case rests on the shortage of concentrate feed forcing smelters, particular Chinese smelters, to cut output and drive tightness in refined supply. Presuming that new capacity only accounts for some of the gains, the broker is forced to accept that some smelters are ramping back up and have feed.

This may have come from inventories during the down time as well as imports, which alleviates supply fears and delivers profitability back to the smelters. Macquarie notes that, while ex-China has responded to prices and market tightness, China's mine output has not, as ascertained from anecdotes and official statistics.

As a result, the ramp up in Chinese ingot output in June shows that, ex-China at least, there has been enough response to ease pressures on the smelters in that short term. Still, the mine supply response to China has been surprisingly weak and, in sum, the broker believes the balance remains steeply in deficit.

Energy

Credit Suisse has reduced its oil price forecasts, taking Brent down to US$52.50/bbl for the second half (from US$61.50/bbl) and to US$53/bbl (US$65/bbl) for 2018. The broker has dropped its long-run Brent price to US $60/bbl from US $65/bbl.

Partially offsetting the negative impact of the changes to oil price forecasts, the broker lowers its cost inflation forecasts to 1% per annum to reflect on environment consistent with lower-for-longer oil prices.

Unsurprisingly, the broker makes large reductions to near-term earnings forecasts for the major energy players. Nevertheless, Credit Suisse does not believe the Australian energy sector is down and out.

Valuations are not cheap on a global basis but then again, the sector has never looked cheap in the broker's opinion. If oil were to surprise on the upside, Credit Suisse suspects stocks such as Santos ((STO)) and Oil Search ((OSH)) could have some decent legs.
 

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