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Material Matters: Silver, 2018 View & Miners

Commodities | Dec 14 2017

A glance through the latest expert views and predictions about commodities. Silver; gold; copper & nickel; 2018 outlook; and miners.

-Potential for silver to rally after lacklustre 2017
-Gold outlook deteriorates, negative backdrop for gold equities
-May be hard for nickel names to recapture 2017 highs
-Moves by China to manage growth may produce headwinds later in 2018
-Morgan Stanley singles out miners with additional options as costs and expenditure likely to rise


By Eva Brocklehurst


Macquarie has been bored by silver this year. It did not rise along with the base metals and is now easing. Investors appear to have headed elsewhere. However, the broker believes a turnaround in 2018 may be on the cards. This is firstly with a re-rating against gold as industrial demand rises, and then joining gold in a rally as the US dollar weakens.

Macquarie notes the average price for silver in the year-to-date has been US$17.12/oz, almost identical to 2016. If anything dramatic occurs it is likely to be on the downside, in the broker's opinion. Recently, the metal appears to have traded more like platinum than gold, with which it is most associated.

The broker asks why investors may have soured on silver which, as an industrial metal, should have been swept up in the industrial improvement over the current year. Silver may have suffered in comparison to buoyant equity markets but the broker finds it hard to obtain evidence this is the case. Perhaps Bitcoin and other crypto-currencies have attracted some money which would otherwise have been put into silver?

Nevertheless, industrial demand is expected to remain strong and the events that were negative for silver in 2017 are considered unlikely in 2018. Macquarie expects the first leg of a rally will be a re-rating against gold. This assumes base metal and gold prices remain where they are. The broker reiterates a forecast for an average silver price of US$20/oz in 2018.


UBS believes the 2018 outlook for gold has deteriorated, with rising US rates and an improving global growth trajectory. This provides a negative backdrop for gold equities, although those with strong free cash flow are expected to experience firm pricing. A focus on internal growth at Newcrest Mining ((NCM)) should keep the stock at a premium. At the smaller end, the broker expects Alacer Gold ((AQG)) to commission its sulphide project, while Perseus Mining ((PRU)) is likely to commission Sissingue by the June quarter.

Copper & Nickel

Copper equities have been struggling and UBS envisages growing risks to the downside for both OZ Minerals ((OZL)) and Sandfire Resources ((SFR)) in 2018.

The broker notes client engagement for nickel has been very high and driven by enthusiasm for electric vehicles and batteries but with nickel back near US$5/lb the equities have de-rated. The broker remains positive on the demand outlook but suspects it could be hard for nickel names to recapture their 2017 highs without internal catalysts.

2018 Outlook

With a number of commodities trading above long-term forecasts, UBS envisages a risk to the downside as the Chinese winter passes and supply returns to the market. These commodities include alumina, manganese and coal. However, the broker expects China's focus on reforms and pollution to continue through 2018.

UBS retains a preference for BHP Billiton ((BHP)) over Rio Tinto ((RIO)) as BHP is expected to announce capital management. UBS upgrades Whitehaven Coal ((WHC)) and Fortescue Metals ((FMG)) to Buy, as value is envisaged in these stocks.

Metallurgical coal prices are revised up 16-23% for 2018-19 amid a view that Chinese authorities will manage domestic coal output to target higher-than-market prices in order to help pay for capacity reforms. Demand drivers for thermal coal are expected to ease throughout 2018 but UBS expects ongoing safety issues will keep the Chinese coal market tighter, and prices higher, for another year or two.

The biggest changes to the broker's forecasts are a 16% lift to hard coking coal forecasts, an 11% lift to alumina, 9% lift to oil and 7% lift to iron ore, while platinum and silver are downgraded. Platinum is downgraded by -8-15% across the forecast horizon to reflect a view that it will be weighed down by themes in the automotive sector. This also takes into account are more benign outlook for gold.

Morgan Stanley expects demand to return to the fore in 2018 on a broadening of the global macro economic recovery. However, moves by China to manage growth in key commodity consuming sectors may produce headwinds through the second half of the year.

The broker reflects this in declining price profiles for steel-exposed commodity such as iron ore and metallurgical coal. Government policy is also expected to continue playing a role in commodity markets in 2018.

The broker remains bullish on palladium which tops its list of robust demand growth. The gold outlook is lifted slightly on a weaker US dollar but remains suppressed by the US Federal Reserve's rate hike cycle through 2018.

Of the base metals, Morgan Stanley has nickel and aluminium at the top of its list. Aluminium is supported by China's supply reform policies and nickel is close to its marginal cost of production, so there is room for upside as the market tightens. A balanced market is expected in copper, likely to bring some downside versus the spot price.

Zinc is expected to come under pressure through expanding supply. Morgan Stanley is most bearish on bulk commodities, expecting expanding domestic coal supply in China will also weigh on thermal coal after the winter. Expanding supply of lithium and cobalt is expected with the price of lithium looking set to fall as China's domestic output improves and Australia's hard rock supply rapidly increases.


Morgan Stanley observes miners are profitable and well capitalised with the luxury of excess cash flow to redistribute after a strong 2017. However, this position is likely to erode as costs and capital expenditure rise. The broker prefers those stocks with additional options to provide relative protection such as BHP Billiton in terms of divestments, Mineral Resources ((MIN)) with growth options and South32 ((S32)) with capital returns.

The broker has made several rating changes, raising South32 and Oz Minerals to Overweight. The former is underpinned by the benefit of higher forecasts for metallurgical coal, aluminium and manganese while copper supports the latter. Alumina Ltd ((AWC)) is raised to Equal-weight given Chinese capacity reductions should drive firmer alumina prices, while Independence Group ((IGO)) is downgraded to Equal-weight as it now looks fairly valued.

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