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Material Matters: M&A, Coal, Copper & Nickel

Commodities | May 31 2018

A glance through the latest expert views and predictions about commodities. M&A; thermal coal; copper; and nickel.

-M&A environment now more robust, Citi selects buyers and targets
-Seaborne market likely to benefit from China's contradictory measures in thermal coal
-Credit Suisse expects copper market to turn to surplus
-Nickel/stainless steel relationship disrupted

 

By Eva Brocklehurst

M&A

Globally, Citi notes miners avoided M&A in 2017, as acquisitions were at the lowest level since 2003. Coinciding with this, capital expenditure fell more than 90% since the 2012 peak.

The environment is now more robust and, with cash being generated, the broker expects the sector will look to become more active. The broker summarises the five most-likely acquirers and five most-likely targets in its coverage.

South32 ((S32)), Independence Group ((IGO)), Sandfire Resources ((SFR)), Northern Star Resources ((NST)) and St Barbara ((SBM)) are considered the most likely buyers as they have capacity, clean records with M&A and challenges regarding the maintenance or growth of their production.

The five most-likely targets include Whitehaven Coal ((WHC)), OZ Minerals ((OZL)), Resolute Mining ((RSG)), Perseus Mining ((PRU)) and Galaxy Resources ((GXY)) as these have the best combinations of longevity and growth, with strong margins and value. Each produces a single specific commodity which would offer the motivated buyer targeted exposure to that particular commodity.

Thermal Coal

A 16% rise in China's domestic thermal coal price has instigated a raft of new measures from the government, aimed at bringing the price down to RMB570/t by June 10 while bringing additional supply into the market.

Morgan Stanley notes these are seemingly contradictory goals. The measures have had an immediate impact on the domestic market as power plants have cancelled spot market orders and traders offloaded inventory. The measures are also weighing on seaborne markets as trade stalls.

Beyond the immediate disruption the ultimate impact on the seaborne market is less clear, the broker observes. Bringing on new supply while lowering prices remains a tall order, and previous intervention by the Chinese government has not been wholly successful.

Hydro power generation remains weak and thermal coal is still contributing around 75% of China's total electricity supply. Domestic miners are also likely to be reluctant to commit to significant expansions amid low contract prices, and the reduction in inventory could now lead to shortfalls throughout the Chinese summer.

The broker suggests China's power utilities may become increasingly dependent on the seaborne market for supply, underpinning seaborne prices. India is also struggling to achieve sufficient coal supply through its peak demand season. Morgan Stanley suggests the thermal coal market is set to remain tight over coming months.

Copper

Credit Suisse believes the copper market will turn towards surplus this year, in accordance with copper market indicators which show no tightness exists. The broker suspects the market is hoping for disruptions to mine supply, specifically in Chile as wage negotiations take place.

Yet, little disruption is expected on this front because strong copper prices incentivise mines to settle with unions. The important Escondida negotiations will occur in June and Credit Suisse expects a settlement will be reached. Going forward, the broker expects copper to be in surplus until 2022.

While there are fewer mine expansions underway, equally important, consumption growth is slowing which relieves the need for increased mine production. China's consumption sectors such as grid expenditure, housing sales, infrastructure and appliances are all looking softer than in 2017.

The broker expects prices to fall towards a cost support level, now seen at around US$2.70/lb versus US$2.30-40/lb, and tracking below US$3.00/lb by the September quarter. The broker lifts price forecasts from 2019, given costs have not declined as expected.

This is probably because of the impact of higher oil prices and stronger FX in some producing countries such as Chile. As the impact washes through the market, Credit Suisse expects costs to stabilise and slowly decline. The broker forecasts a price of US$2.70/lb for copper from 2020.

Nickel

Citi observes the relationship between nickel prices and stainless steel stocks has broken down over the last 7-8 months. The nickel price is up 40% since October and European listed stainless steel stocks down -15% on average. Nickel costs constitute around 75% of the price of 304 grade stainless steel, the most common grade.

The broker suggests nickel is being supported by the electric vehicle industry as the key input in new emerging battery technologies.

Although less than 3% of nickel metal currently goes into batteries, and over 80% goes into stainless steel, projections for substantial growth in electric vehicles over the next 15 years have raised expectations that 30-40% of demand could come from batteries. This has led to rises in the nickel price.

Meanwhile, stainless steel is being weighed down by over-production, which has been strong in both Indonesia and China and resulted in inventory spiking to the highest levels ever in China.

Although inventory has started to moderate, the broker notes the high absolute levels mean stainless base prices have struggled. Hence, Citi believes the divergences between stainless steel and nickel is likely to be sustained over the medium term.

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CHARTS

GXY IGO NST OZL PRU RSG S32 SBM SFR WHC