Material Matters: Bulks, Gold & Base Metals

Commodities | Jan 15 2019

A glance through the latest expert views and predictions about commodities. Commodities sector outlook; China policy; gold; nickel and copper.

-High bulk commodity prices likely to ease back in line with end-market steel
-China's looser fiscal policy likely to lead to modest support for commodities
-Robust backdrop for Australian gold sector, although valuations becoming stretched
-Uncertainty likely to persist for nickel until US/China trade conflict ebbs


By Eva Brocklehurst


On the back of new commodities prices forecasts, and downgrades to iron ore, oil and base metals, Goldman Sachs moves Fortescue Metal ((FMG)) to Sell. The broker maintains Buy ratings for BHP ((BHP)), Rio Tinto ((RIO)) and Alumina Ltd ((AWC)), believing the upcoming February reporting season will be a catalyst for Australian bulk miners, supported by record shareholder returns and further disciplined investment in growth projects.

The broker's economists forecast growth in China will bottom in March/April, and heightened uncertainty regarding the timing and magnitude of policy responses is likely to result in downside to both bulk and base metals over the first quarter of the year. Goldman Sachs cuts 2019 forecasts for aluminium by -4%, copper by -6%, zinc by -21%, nickel by -34% and oil by -11%.

Iron ore forecasts are reduced by -5% for 2020. The broker expects iron ore to drop to US$60/t in the second quarter of 2019 because of increased seaborne supply and weaker Chinese steel demand. Despite the downgrades, the broker believes a broad-based recovery in base metal prices is likely in the second half, amid a broader economic recovery.

Deutsche Bank observes high bulk commodity prices have been propping up the resources sector but expects prices will catch up with end-market steel. Iron ore is forecast to move down to US$62/t and temporary dips below this level are not ruled out.

The broker eases back on its view for copper, now forecasting the red metal will be range bound for more than two years. A slowdown in China's property sector is expected to start affecting iron ore, which has so far been resilient. Steel consumption in China is forecast to decline to only 1% growth in 2019, from 7% in 2018.

Ord Minnett maintains a neutral stance on the ASX resources sector. The broker continues to believe Rio Tinto presents the more compelling value opportunity on a number of metrics, but along with BHP will be affected by any weakness in Chinese macro data. The broker continues to like Fortescue Metals but, as the stock has rallied almost 30% since its September low and is approaching the stockbroker's valuation, downgrades to Hold from Accumulate.

Deutsche Bank believes the BHP share price is yet to reflect the second half 2018 downturn in oil prices, given the enticing shareholder returns on offer. Deutsche Bank downgrades BHP to Sell from Hold.

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