Material Matters: Iron Ore, Copper, Gas & Gold

Commodities | Mar 07 2019

A glance through the latest expert views and predictions about commodities. Iron ore; copper; Queensland gas; and Oz gold assets.

-Iron ore strength likely to continue over 2019, but outlook beyond is unclear
-Macro issues may play a part in pushing copper prices higher, despite easing tightness
-Opportunities for production growth in Queensland CSG could offset other sources
-Which miner is likely to run the ruler over Barrick/Newmont Oz gold assets?


By Eva Brocklehurst

Iron Ore

Iron ore exports recovered in February with the big four Australian producers exporting 65.6mt, up 4% year-on-year. UBS notes all operators lifted monthly volumes and are within their annual capacity target bands.

The broker has downgraded Rio Tinto ((RIO)) to Neutral from Buy as the stock is now trading at a premium. Rio Tinto stock has rallied 23% over the year to date, supported by the strength in the iron ore price.

The risk to its view, the broker acknowledges, lies with the iron ore market and further disruptions in Brazil. UBS calculates the stock is pricing in a long-term iron ore price of US$56/t against the spot price of US$88/t, and the latter is not sustainable. UBS envisages an average 2019 price of US$74/t.

Morgan Stanley raises its iron ore price forecasts by 30% because of the tightness in the market caused by the dam failure at Vale's Brazilian iron ore mine. Price forecasts are raised to US$81/t for 2019 and US$68/t for 2020.

The broker observes there is still 140mt of iron ore in China's ports, cushioning the market and, by the time these excess stocks are diminished, supply should recover. Vale's mine is expected to recover to 386mt in 2020.

Citi is more pessimistic and believes low-cost iron ore spare capacity in Brazil will be wiped out for years to come, and the market is likely to remain highly vulnerable to disruptions going forward.

Citi also turned bullish on iron ore earlier in February, raising its 2019 average price forecasts to US$88/t and the spot target to US$100/t. The broker perceives the implications of the disruption to Brazilian supply are yet to be fully priced.

The broker estimates the global market is losing around -81mt per year of Brazilian supply, accounting for around 4% of the market. This supply is hard to replace with either spare capacity from Brazil and Australia or high cost supply from China, India and elsewhere. Although Citi concedes it is not impossible at the right price.

Still it is questionable whether traditional swing suppliers will respond at current or higher prices. A major decline in mining expenditure in past years and tighter environmental restrictions are likely to limit supply in China.

Morgan Stanley, on the other hand, expects supply outside of Brazil to respond to current market tightness and elevated prices, but suspects other major iron ore suppliers will be keen to limit the spike in prices and avoid high-cost supply returning to the market. However, the broker does not envisage significant volumes of idled supply will be available for a quick re-start neither in nor outside of China.

Morgan Stanley also suggests the market is ignoring the iron ore leverage of Mineral Resources ((MIN)), likely because of a lack of detail in the reporting for the mining services division. The upgrade to the broker's iron ore price outlook substantially lifts earnings estimates for the business. Morgan Stanley maintains an Overweight rating on the stock with a $20.80 target.


Chinese copper consumption appears to be improving and Citi notes exchange inventory is at 10-year lows. Citi suspects that Chinese demand may not be fulfilled that easily from imports, noting reduced production. China relies on a sizeable surplus outside of its borders to feed its consumption of copper.

Despite an easing of market tightness, Citi suspects prices may still head higher because of macro issues, such as the ongoing frictions over the China/US trade deal and a continuation of Chinese stimulus.

Demand is expected to rebound both seasonally and with stimulus measures in the next few months, and raise the threshold for ex China demand to compete for trade flows. President Trump has also confirmed he will delay the US tariff increase that was scheduled for March 1.

Citi remains constructive on copper, expecting prices to reach US$6800/t by the end of the year. The broker has a long-term target of US$7500/t. The share prices of global copper companies remain down year-on-year and offer potential upside, in the broker's view.

Citi points out copper is highly leveraged to macro sentiment and equities offer significant potential. The broker highlights Antofagasta in Europe, Southern Copper in the Americas and OZ Minerals ((OZL)) in Australia as top picks.

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