Material Matters: Zinc, Iron Ore And Oil

Commodities | Jan 17 2018

A glance through the latest expert views and predictions about commodities. 2018 outlook; zinc; iron ore & steel; coal; aluminium; nickel; oil; and Australian miners.

-Mining and energy commodities expected to peak in current quarter
-Zinc market should become more balanced towards end 2018
-Iron ore and steel prices expected to retrace from March
-China likely to boost local production of coal
-Crude prices expected to head lower over 2018

By Eva Brocklehurst

Commodity prices have continued to rally into 2018 amid a synchronised improvement in the global economy and re-accelerating demand in China, but appear set to retrace as the year gets underway.

Commonwealth Bank analysts observe demand conditions are presenting better than many predicted, in spite of the reduction in industrial activity from the northern winter. This has supported iron ore and coal to a much greater extent than the metals.

The analysts suspect most mining and energy commodities will experience a peak in the current quarter before sliding lower once the Chinese New Year holiday is over in March.

The main upside risk to forecasts, the analysts believe, is another year of aggressive supply-side reform in China, which would affect aluminium, alumina and steel the most. Oil prices are expected to fall as the OPEC-led deal fails to draw down stockpiles to the five-year average.

Deutsche Bank expects global demand to improve, even with a softening Chinese property market. The broker also envisages 2018 as a year in which M&A accelerates in the mining sector. Base metals appear more attractive to the broker versus the bulks.

There appears to be upside risk to demand from China and Southeast Asia in terms of infrastructure and machinery and a weaker US dollar is also expected to be positive for commodities because of upward pressure on marginal costs.

Deutsche Bank retains a preference for aluminium, nickel, zinc and copper miners. The CBA analysts expect most mining and energy commodities will peak this quarter. Supply is expected to respond to higher prices, while demand will slow slightly in China.

Zinc

Zinc prices have retreated on the London Metal Exchange, breaking a month-long run to the upside, and Macquarie, having flagged the current quarter as the peak for zinc prices for some time, assumes demand destruction and new mine supply will confront the structural deficit.

Fresh 10-year highs were hit briefly, at US$3400/t, accompanied by a steady draining of LME warehouses, although the broker points out that the LME is not the only location for zinc stockpiles globally.

The latest data signal that a large percentage of recent Chinese imports came from Spain, from what the broker suggests is a re-positioning of some of Glencore's Asturianas material to the bonded arena. Hence, a short-term pullback for zinc is seen becoming more likely, before a renewed pick up in Chinese galvanising activity and seasonal demand in March.

Timing is critical, the broker warns, and later in the year an orderly unwinding of fundamentals on either side of the supply/demand equation should ensure the market becomes more balanced.

Glencore appears committed to reintroducing tonnage carefully, while Chinese mine supply has struggled to grow. Macquarie observes many other new entrants have challenges which may result in weak initial output.

On the demand side, galvanising (60% of demand) appears undisturbed by price levels and there are few appropriate substitutes for chemicals (9%), while brass demand (11%) remains more a function of copper prices and fashion.

Iron Ore & Steel

Deutsche Bank's base case in 2018 is for flat steel demand and a modest -1% reduction in seaborne demand for iron ore. Seaborne supply is expected to increase by around 2%, mostly stemming from increases in production from the major miners.

This should increase the market surplus to around 65mt, even with further reductions in Chinese domestic iron ore production. Chinese steel production is expected to increase from March, and both steel and iron ore prices are expected to retrace from current levels.


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