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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.

China Policy

China's central bank will lower the required reserve ratio by 100 basis points for banks later this month. This reduction, together with earlier cuts, is expected to release around RMB800m in new net liquidity. UBS notes earlier liquidity easing cycles have resulted in flat-to-rising commodity prices and mining equities.

A similar scenario is possible in 2019, which is consistent with the broker's overweight call, albeit this time around the positive effect is likely to be modest because of the lower commodity intensity and infrastructure & fiscal stimulus.

The broker also points out this time around China's property sector is in better shape versus the 2014-16 cycle of fiscal easing. Excess capacity and related financial risks are also lower now, although the cycle is similar in that the government wants to support growth. Hence, commodity demand is likely to be supported through 2019.


Ord Minnett believes the robust macro economic backdrop for the gold sector can accommodate further moves in the gold price. ASX gold stocks have substantial operating margins and provide an excellent portfolio hedge into reporting season, the broker suggests.

However, macro uncertainty is likely to prevent marginal buyers from returning in the next six months. Mid cap stocks have outperformed the large caps recently and the broker notes Evolution Mining ((EVN)) and Northern Star Resources ((NST)) have been the preferred stocks for global investors.

Newcrest ((NCM)) has greater leverage to a rising gold price, given its production base and mine life, while OceanaGold ((OGC)) also appears good value, with the longest mine life of the broker's mid cap coverage. Ord Minnett awaits an update on Pogo before becoming more positive on Northern Star and downgrades St Barbara ((SBM)) to Hold from Accumulate on valuation.

Deutsche Bank, on the other hand, suspects the safety premium in gold is starting to stretch valuations. The broker continues to favour those stocks with non-US dollar costs and organic production growth. Newcrest and Evolution Mining are downgraded to Hold and Sell, respectively, on valuation.

Nickel and Copper

A ceasefire in the US/China trade war has meant nickel prices have stabilised, after falling around -32% over the second half of 2018. UBS notes the news flow has mostly been positive surrounding the negotiations, and further stimulus from China in the way of infrastructure projects has kept those shorting the metal in check.

Still, uncertainty is likely to persist until the US and China settle their differences. The broker points out the latest data show both Chinese and global stainless steel output were solid in the second half of 2018 and inventories are falling. Demand indicators may have deteriorated but this has not yet shown up in fundamentals.

Meanwhile, new Indonesian intermediate supply threatens the market although UBS assesses Chinese efforts to bolster sentiment should stabilise demand. Any further de-escalation in the conflict between the US and China should mean nickel outperforms other commodities over 2019.

Deutsche Bank reduces its price outlook for copper and nickel, leading to an average -10% fall in valuation for the sector. The down shift is not distributed evenly over stocks. In copper, the broker's valuation for Oz Minerals ((OZL)) is down -5% while the valuation for Sandfire Resources ((SFR)) is down -15%. On an historical average basis, the broker acknowledges both stocks show value.

In nickel, Deutsche Bank's valuation for Independence Group ((IGO)) has fallen -7% while the valuation of Western Areas ((WSA)) has fallen -18%. Likewise, on an historical average basis, both stocks show value.

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