Commodities | Jan 16 2019
A glance through the latest expert views and predictions about commodities. Resources outlook; iron ore; and copper.
-CLSA prefers resource equities with exposure to commodities supported by Chinese policy
-Pull back in grade differentials has helped Australian iron producers
-China's scrap import restrictions likely to support refined copper demand in 2019
By Eva Brocklehurst
CLSA expects a rebound from the pessimism experienced in the resources sector in December. The broker is cautious, given the macro uncertainty, despite strong profitability across stocks. Quality is preferred: equities with value and strong balance sheets as well as exposure to commodities supported by Chinese policies, such as rare earths, aluminium and iron ore.
The broker has made three changes to recommendations after incorporating its first quarter commodity price deck, upgrading Alumina Ltd ((AWC)) to Buy from Outperform and downgrading Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) to Outperform from Buy.
Base metal price forecasts are lowered by an average of -10% for 2019 to reflect the macro headwinds, weaker sentiment and lower spot prices. This is countered by modest near-term upgrades for bulk commodities.
CLSA flags the defensive characteristics of gold and aluminium and continues to like copper for the medium term. The broker believes market concerns about growth, both globally and in China, are overstated, although acknowledges markets are forward-looking. Global growth in 2020 is expected to be at the slowest pace since 2015.
Macquarie reviews the iron ore industry's cost curve and notes costs for delivered ore have changed little. The seaborne marginal cost is still set by the low-grade producers in India, Iran and Australia. The broker calculates that, at US$50/t, up to 90% of the market remains cash positive. Macquarie calculates an average break-even price of US$51/t for Fortescue Metals in 2018.
Of note, a pull back in grade price differentials in the December quarter occurred and a correction in China's steel industry margins has benefited Australian producers at the end of 2018.
Macquarie also expects Fortescue to move lower on the cost curve in 2019/20 as its product mix improves, with the proportion of higher grade fines rising to almost 25% once Eliwana reaches full production. The stock is trading at a significant discount to Macquarie's spot price valuation with significant upside potential at current commodity prices and exchange rates.
Shipping rates for Australian iron ore miners have also improved in December, the broker points out. December quarter is historically strong for Australian exports and buoyant iron ore prices continue to drive momentum in the major iron ore producing stocks. Prices now centre on US$73/t.