Commodities | Nov 14 2018
A glance through the latest expert views and predictions about commodities. Iron ore; nickel; copper; and mining services.
-Tightness in iron ore pellet supply may be easing
-Macquarie calculates 70-80% of China's iron ore imports could be displaced
-Nickel unlikely to be supported as trade war plays out
-Upside likely to be limited in copper until trade tensions ease
-The more east coast exposure the better for mining services contractors
By Eva Brocklehurst
Credit Suisse is surprised by the compression in iron ore grades as China's winter curtailment period commences. In 2017 the price of lower-grade ore, particularly Fortescue Blend, was slashed in winter, as it is an undesirable product when blast furnace capacity is restricted.
Winter reductions are just starting, so the broker acknowledges it may be a little early early in calling out the procurement strategies of the steel mills. Nevertheless, steel profits and outlook are considered to be less buoyant and mills may be more cautious. Hence, aggressive premiums and discounts for grade may not occur. As margins weaken for flat steel, the mills become more cost conscious and seek cheaper alternatives.
Meanwhile, the broker's analysts are calling the end of the Chinese property boom although, while authorities are trying to restart infrastructure investment, they are considered unlikely to embark on another major round of stimulus.
The fact that low-grade iron ore has rallied, despite rebar steel spreads being robust, is a sign of a tight market, Ord Minnett believes. The broker expects steel prices to remain buoyant into the first quarter, because of the lagged effect of fiscal easing, shutdowns of capacity over winter and low steel inventory and upgrades forecasts for iron ore prices over the next two quarters to US$70/t, expecting 2018 to average US$69/t, on the back of higher Chinese steel demand.
Since the collapse of the Samarco dam took a chunk out of the export market in 2015, iron ore pellets have been in tight supply, reflected in a contract premium of US$58/t in 2018. While miners remain bullish on 2019, Morgan Stanley notes China's spot price has been falling, to US$64/t from a US$90/t peak in September. This suggests a pick up in domestic feed supply.
China is mainly served by Indian exports and, while being the largest pellet consumer imports only 10% of its requirements, manufacturing pellets from its domestic high-grade concentrate. Morgan Stanley observes the country's appetite to pay for pellets increases when steel margins are high and increased productivity is required, as during winter capacity reductions.
Given spare pelletising capacity and ample feed, the broker believes a sustainable premium should be close to marginal cost on the pellet conversion curve, i.e. around US$30/t.
While pellet feed supply may recover in 2019, as Minas Rio re-starts and Canada's Bloom Lake ramps up, this may not be reflected in premium settlements as yet. Meanwhile, India's pellet exports are likely to continue falling as more iron ore is consumed domestically.
All three major Australian iron ore miners continue to look compelling from a valuation perspective, in Ord Minnett's opinion. Rio Tinto ((RIO)) remains the preference versus BHP ((BHP)). The broker envisages a greater risk/return ratio in Fortescue Metals ((FMG)) although the catalyst, the ramp up of the new West Pilbara fines production, is 6-9 months away.