Commodities | Sep 25 2017
A glance through the latest expert views and predictions about commodities. East coast gas; thermal coal; oil; base metals; precious metals.
-Difficult to ascertain state of Australian east coast gas supply
-Thermal coal may be approaching a tipping point
-Fundamentals for base metals set to improve, zinc retains the best outlook
-Citi expects gold prices to hold above US$1300/oz in the short term
By Eva Brocklehurst
East Coast Gas
Credit Suisse contends that without information which the Australian consumer regulator, the ACCC, has (hopefully) acquired, it is hard to know how many of the recent gas supply deals are illusions, and how much is already committed to the domestic market.
In reality, larger shortages should impact later in the decade. The broker continues to believe that given federal powers only extend to export controls and there is no control over how that gas is then sold or priced domestically, the Australian domestic gas security mechanism (ADGSM) is unlikely to have any real impact other than to remove "crazy" $20-plus/gigajoule prices.
It appears prices are falling a little, even for 2019 volumes. The ACCC should have the power to acquire knowledge of the bids being received in order to to deduce the real picture of the 2019 market. Nevertheless, Credit Suisse suggests it won't be until this time next year that the 2019 market is addressed.
The broker contends the only situation in which the ADGSM will have an impact on gas producers is if an outrageously large shortfall is declared, and the GLNG-diverted gas cannot find a home domestically. Even in such a case, GLNG can drill fewer wells and/or put gas in storage. The end result is that operating expenditure will rise more for gas consumers and earnings will go up more for anyone with uncontracted gas to sell.
Thermal Coal
Citi expects 2017 thermal coal prices to average US$84/t, with short-term strength sustained because of Chinese safety and environmental inspections as well as robust coal-fired power generation. China's thermal coal market may experience tight balances for longer because of a combination of soft supply, strong demand and re-stocking. Longer term the broker is bearish, as coal-fired power struggles to grow and supply remains adequate.
Macquarie suggests thermal coal is approaching a tipping point. Disruption to Chinese suppliers has been a key theme, the broker agrees, but the recent leg-up in prices has been driven by demand. Traders have stepped up their buying in the past two weeks, hoarding material and betting on utilities needing to re-stock ahead of the winter. Meanwhile, power plants have sat back and waited for prices to fall before increasing inventories.
Macquarie notes the Chinese government domestic coal supply remains tight and the Chinese government has decided to take some action, issueing a notice urging miners to speed up new coal capacity additions and increasing tonnage for long-term contracts. The broker believes this may mark the turning point in the cycle and a correction in thermal coal prices.
Looking into the December quarter the broker suggests demand is not supporting a sustained price uptick. Lower Chinese prices should eventually feed through to seaborne prices via the Chinese arbitrage. Some upside may be available from India but the broker counters this with an expected sequential improvement in exports from Australia and Indonesia.
Base Metals
CIBC World Markets expects fundamentals for base metals are set to improve, highlighted by a reversing of easier monetary policies around the world. Zinc has the best outlook. The analysts expect an incentive price for zinc of US$1.50/lb will be required by the March quarter of 2019 to encourage re-starts and construction of new projects. Zinc prices are expected to remain at these levels until new production comes on stream in 2020.
Citi also suggests the fundamentals are holding steady for zinc. China's domestic zinc output has continued to fall while the much speculated issue of re-starts at Glencore's mines hinge on demand stability, particularly from China. Citi modestly upgrades 2017 average price estimates for zinc to US$2830/t.
A copper incentive price of US$3.70/lb is needed to encourage new projects, and the CIBC analysts expect prices to rise to that level as the market tightens. Citi notes end-user copper demand has outperformed against market expectations so far this year. The broker continues to expect Chinese copper demand to grow at 3-4% in 2017. Citi revises near-term copper prices higher and now expects 2018 prices to average US$6415/t.
Meanwhile, CIBC analysts expect nickel to be in structural deficit over the next five years, as years of oversupply of low-quality nickel pig iron caps the upside. Citi considers the stainless steel market the real short-term swing factor. Concerns about stainless steel price stagnation are observed to be growing, despite a recent drawdown on inventories. Hence, the forecast market deficit of 34,000 tonnes may only deepen this year if demand remains robust.
Citi suspects the aluminium market may be even tighter in the December quarter as the government in China has not yet specified the definition of total capacity in terms of the winter reductions. Chinese smelters are currently running at maximum capacity and inventory is building, despite robust demand.
Nevertheless, Citi retains a neutral view on the medium-term prices. Ongoing capacity cuts in the sector may cause major concerns regarding inflation. Furthermore, there is also a lack of rationale in continuing to reduce supply. Citi modestly revises aluminium price forecasts higher for the next 12 months.
CIBC analysts also expect molybdenum to be oversupplied, with secondary production coming from copper mine by-products.
Oil
Citi expects oil inventories will continue to fall and physical markets tighten in the near term, but the broker becomes bearish about oil prices going into 2019, given a likely surge in OPEC and non-OPEC production in response to the current market environment.
Hurricane Harvey has disrupted oil markets, altering supply, demand and product from refiners as well as end-user demand. Citi expects this will put downward pressure on US crude pricing but be supportive for Brent, with the net effect on global oil difficult to gauge.
While the US Gulf Coast and Latin America need to import additional petroleum products, surplus ex-US refinery capacity is in short supply, Citi contends. Almost all of the new additions to refineries in the second half of 2017 will be in China, yet product export quotas may limit the ability of China to increase its exports of product.
Precious Metals
Citi observes geopolitical tensions have shifted gold into a higher price range for longer. Moreover steady US interest rates coupled with a softer US dollar should keep gold supported for the remainder of this year. Any correction in asset markets would also favour gold. The broker's base case calls for COMEX gold prices to hold above US$1300/oz in the short term, perhaps declining -5-6% by the second half of 2018. Gold is expected to average US$1270/oz for 2018.
On the upside, record equity prices and low volumes are capping gold and the broker's US and global equity strategists do not expect a sharp unwinding of the long equity trade. Meanwhile, there has finally been a modest improvement in the lacklustre Asian jewellery trade. Indian demand is expected to recover into the end of the year with the wedding season underway and Chinese demand is also is expected to gain ground on seasonal effects.
Citi suggests, given the dual role of silver as both a precious and industrial metal, its price trajectory may resemble copper and aluminium, and a resurgence of industrial scrap could pose headwinds in light of the double digit price gains in the year-to-date. A decline in mine supply this year has exacerbated the trend, with primary output registering only nominal growth.
A recovery of by-product supply may mean total silver output stabilises over the medium term. Citi cites improved output of Chilean copper and Mexican zinc/lead mines that may boost silver supply within the next year.
Citi notes the sizable surplus for platinum in the current year and takes a view that global mine supply growth will remain roughly consistent with previous years. Limited demand from both jewellery and industrial end use suggests the market surplus in 2017 may increase rather than decrease.
Meanwhile, the broker expects the deficit in palladium to deepen in the December quarter and a better-than-expected recovery in the global economy would translate to higher industrial consumption of the metal.
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