Commodities | Jan 24 2018
A glance through the latest expert views and predictions about commodities. China; iron ore & steel; bulks; and lithium.
-Further policy tightening and stricter compliance expected from China in 2018
-Drop in Chinese steel mill profitability may lead to increased demand for lower-grade ore
-Strong demand and supply restrictions drive Macquarie's upgrades to bulk price forecasts
-SQM deal puts Chilean lithium brine producers at disadvantage
By Eva Brocklehurst
Investors at the 2018 Greater China Conference appeared more comfortable with the growth story than they were in 2017 and UBS also notes the government's push to close outdated polluting industries continues to gather pace. All companies expect further tightening of environmental policy and stricter compliance requirements.
The high price for iron ore and coal remains a concern for investors but the broker finds steel mills unworried about the high prices. Steel inventories are expected to exit the winter at low levels and construction ramps up in March, so there is an expectation for further spikes in steel and raw material prices.
Property remains a key issue as it is the largest driver of raw material demand. Government policies remain restrictive and this is weighing on sentiment. UBS suggests construction activity may well be flat year-on-year. Automotive, home appliances and infrastructure are all expected to slow. Growth is still expected in 2018, albeit at softer pace.
Iron Ore & Steel
China's winter heating season started with the iron ore price falling and steel prices rising, as expected. Yet, now, Credit Suisse observes the rebar price has plummeted and iron ore has risen.
It appears that supply/demand balances have been quite dynamic. Previously, the broker would expect steel traders to be already restocking for the construction season, underpinning the rebar price. The broker acknowledges signs that traders are beginning to buy, which may steady the steel price, but aggressive bidding for iron ore cargoes remains an enigma.
Credit Suisse assumes that steel mills are stocking up with high-grade iron ore ahead of the construction period. Steel mills are becoming cost conscious again, as the steel price has fallen so much and, anecdotally, the broker notes low-grade iron ore is gaining more attention. This should reduce low-grade discounts, although this is not yet visible in the indexes.
CBA analysts also suggest the restocking cycle that helped iron ore prices surge from mid-December may be waning and agree a drop in steel mill profitability may also lead to stronger demand for lower grade ores. As profitability comes under threat the analysts expect the lower grade discount may narrow, but not to historical levels.
Shaw and Partners argues that the absolute level of iron ore is not the key, but rather the stockpile versus import ratio. The stock to import ratio range since the GFC has been between 1-2 months and the current level is around 1.7 months.
So, the analysts calculate that, whilst the current ratio is certainly higher versus the low in December 2015 of 1.0 times it remains 15% below all-time highs. If rumour is correct, and Chinese mills have started restocking iron ore, the analysts expect this ratio to track lower in coming weeks.
Stronger demand and supply restrictions have driven material upgrades to Macquarie's bulk commodity price forecasts. The broker lifts estimates for iron ore and manganese by 20%. Estimates for 2018 for coking coal are lifted by 40% and thermal coal by 30%.
Incorporating the upgrades, Macquarie raises BHP ((BHP)) earnings estimates by 27-52% and Rio Tinto ((RIO)) and South 32 ((S32)) by 27-38% apiece. Upgrades to iron ore prices translate to earnings increases for both Fortescue Metals ((FMG)) and Mt Gibson ((MGX)) as well.