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Material Matters: Steel, Coking Coal And Copper

Commodities | Feb 20 2019

A glance through the latest expert views and predictions about commodities. Better market conditions for steel and scrap, but price rises for cobalt and nickel are questioned, while copper looks poised.

-Traders and China stimulate demand for steel and scrap
-Coking coal and nickel increases likely to be short-lived
-Copper set to rise, but cobalt softens as supply increases
-Increase in light oils limits potential for Brent rise

By Nicki Bourlioufas

Steel and scrap find support from traders and China

Prices for steel and scrap have improved after a decline at the end of 2018 and Morgan Stanley predicts the stronger market will continue in the first half of 2019. Morgan Stanley analysts expect steep prices will be supported by trader restocking and improved sentiment due to Chinese stimulus measures, but say uncertainty around trade tariffs make the second half unpredictable. The analysts also suggest scrap prices have bottomed, with the next move likely to be up.

The price for US hot rolled coil (HRC) steel has declined by -26% since it reached a spot price of US$1,015 per tonne in July 2018. In January 2019, the US HRC spot price was US$750/t. The East Asia HRC price has fallen -20% since reaching a spot price of US$624/t in March 2018. The price touched a low of US$484/t in early January 2018, but recovered by a modest 4% to reach a spot price of US$505/t this month.

Morgan Stanley expects scrap prices to trade in a range of US$300-US$350/t in the short term. The analysts are encouraged by recent Turkish restocking on top of the iron ore price rise. The combination of the two, they believe, is likely to provide a short-term boost to scrap collections and prices.

Morgan Stanley has retained its overweight rating on BlueScope Steel ((BSL)), though its price target has been lowered to $19.50. While steel prices have declined from the peak experienced in 2018, the analysts believe there is upside to prices in the shorter term, though rising iron ore prices may place pressure on BlueScope Steel's Australasian operations short term. Longer term they continue to hold the view the industry remains attractive.

Morgan Stanley has retained an overweight recommendation on Sims Metal Management ((SGM)) with its price target raised to $12.50. “We continue to believe in the long-term structural shifts that surround the environment SGM operates in. While scrap prices declined during the end of CY18, recent green shoots in key scrap price indices are encouraging. We believe that favourable short- and long-term dynamics are not reflected in the current SGM share price.

Coking coal and nickel make shaky gains

Two key inputs to steel production, coking coal and nickel, are rising, but Macquarie Wealth Management analysts have doubts over whether the increases can be sustained.
Macquarie notes tha, after falling -15% at the end of 2018, the spot price for top-grade hard coking coal has recovered to more than A$200/t Free On Board (FOB). The catalyst for the improvement is supply disruptions in Queensland after heavy rains forced the closure of the Abbot Point terminal at the beginning of February.

But the Macquarie team says the improvement is likely to be temporary. The analysts point to the global correction in steel margins and the end of the dispute between rail freight operator Aurizon Holdings ((AZJ)) and the Queensland Competition Authority. The resolution should pave the way to a recovery in Australian supply this year, suggest the analysts.

Nickel has risen 18% in 2019 to US$12,735/t, partly due to speculation of reduced supply from Vale, the world’s leading producer of the metal. Morgan Stanley says the dam disaster at Vale’s Brazilian iron ore mine has heightened concern about the company’s Onca Puma nickel mine in the Amazon basin, which was suspended last year on November 18 on environmental concerns.

Investors are also worried that the disasters may have implications for the wider Brazilian nickel industry, and they have doubts over whether Vale can fulfill its long-term plan to raise its global nickel output to 400kt/year from 244kt/year.

Morgan Stanley says demand for stainless steel is still sluggish. The analysts predict a modest, seasonal pick-up in stainless orders is unlikely to be sufficient to offer long term support for the price of nickel.

Copper rises in tight market, but cobalt is in generous supply

Prices for most base and precious metals are likely to fall slightly, and bulk materials could slide by nearly -20% by the end of 2019, Morgan Stanley says. A notable exception is copper, for which it predicts a price of US$3.12/lb by the end of the year, or “14% upside from spot”.

This will emerge as China’s demand improves, combined with low visible inventories. The copper market is so finely balanced that a rise in demand of “anything above 0%” is sufficient to jolt it into outright deficit, on the analysts' assessment.

The recent spike in the cobalt price has collapsed as the market failed to absorb the increased output by mines in the Democratic Republic of Congo (DRC), Macquarie analysts point out.

The 16-month rally to US$44/lb from US$12/lb was driven by demand from makers of electro voltaic batteries and by the perennial view that “cobalt is a vanishingly scarce resource, mainly found in one challenged central African country”.

But this view has turned out to be something of a misconception. The DRC remains a tough place to operate, but the mega-mines have increased output in response to the price spike. New Chinese and Indian processors that use a range of raw materials have also contributed to the oversupply.

Global shift to light oil limits upside for Brent crude

Morgan Stanley notes OPEC reduced exports in January sharply, bringing the physical oil market into equilibrium, but a shift in the global production slate towards light oil puts a ceiling on Brent and West Texas Intermediate (WTI). Light crudes naturally yield more gasoline and, together with relatively modest growth in demand, this has driven gasoline stocks sharply higher.

Brent futures rose 15% in January – the strongest start in the 31-year history of the Brent contract. But Morgan Stanley predicts Brent will rise only modestly to US$65/b in the second half, although one factor that could drive it higher is the possibility of lower production in Venezuela given US sanctions against oil exports from that country.

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