Material Matters: Metals, Aluminium & Coal

Commodities | Sep 25 2018

A glance through the latest expert views and predictions about commodities. Base, precious metals; aluminium; and thermal coal.

-Opportunities seen forming in base and precious metals
-Aluminium likely to remain in surplus, curbing price rises
-Buoyant pricing continues for high-grade thermal coal


By Eva Brocklehurst

Base, Precious Metals

2018 was expected to be a good year for metals but JPMorgan notes an escalating trade war between the US and China became reality and the base metal segment, in particular, took a beating. Barring a macro move into recession, the broker believes base metal prices are bottoming and a rebound should ensue in coming quarters. Metals appear quite cheap on both an absolute and relative basis to other asset classes.

The broker screens zinc and copper as particularly cheap. Moreover, JPMorgan expects China's fiscal easing to provide a material lift to metal demand over the next two quarters, offsetting reduced demand in the rest of the world.

Citi agrees copper appears oversold, particularly with inventories approaching a two-year low. The broker notes equity prices are being driven by negative sentiment towards base metals and also upgrades nickel player Western Areas ((WSA)) to Buy after a pull-back in the share price.

Morgan Stanley observes, over the September quarter, selling across base and precious metals occurred as markets priced in US dollar strength and the potential threat of tariffs. Only bulk commodities held up, supported by a lack of speculative selling and strong demand.

The price deck now carries a bullish tilt versus the spot price for base metals and the broker believes negative moves in both gold and base metals have created opportunities from a commodity perspective. Morgan Stanley also considers a weakening US dollar and eventual pullback in US equity markets supports a constructive outlook for precious metals. A long-standing bullish view on palladium is retained.

The move lower in gold and copper prices brings these two metals to the top of the broker's commodity ranking. Morgan Stanley expects copper, gold and silver prices to recover in 2019, with steady demand fuelling a recovery in copper and capital flowing back to precious metals.

JPMorgan also keeps a bullish bias in place for gold for the second half of FY19, believing the inversion of the yield curve will likely attract increased interest in the yellow metal.

UBS has Buy ratings on Northern Star Resources ((NST)), OceanaGold ((OGC)) and Alacer Gold ((AQG)). The broker likes Northern Star for its momentum and potential to turn around the recently-acquired Pogo mine. OceanaGold is expected to produce solid results from its operations, while Alacer Gold offers the largest potential return, albeit contingent on a successful ramp up of the sulphide project.

In aggregate, the broker believes Australian stocks are trading at similar forward enterprise value/operating earnings ratios versus their North American peers. Moreover, free cash flow yields for the ASX peers are generally higher and debt is lower.

Gold bellwether Newcrest Mining ((NCM)) is rated Sell as, while the UBS forecasts strong production growth in FY19, this is modelled as a near-term peak. Nevertheless, the stock screens well against the global majors, having the longest mine life at its major producing assets.

Morgan Stanley also notes lithium stocks have fallen significantly on the back of Chinese prices dropping to US$10,120/t from US$16,000/t during the September quarter. The broker upgrades Orocobre ((ORE)) to Equal-weight from Underweight and maintains an Equal-weight rating for Galaxy Resources ((GXY)), albeit with modest upside envisaged.

Morgan Stanley also envisages significant upside for graphite stock Syrah Resources ((SYR)), although it remains not without risk given the Balama project is yet to be declared commercial.


China will be implementing cuts to alumina production over the winter but leaving aluminium relatively unchanged. The reason is that aluminium smelters are designed to run continuously and it takes three months to power down and re-start, so winter curtailments would theoretically mean full production for only two months in a year.

The final quarter of the year is usually a period of restocking for aluminium smelters in China and the domestic alumina price is already 22% of the Shanghai aluminium price, a peak level.

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