Commodities | Mar 19 2019
A glance through the latest expert views and predictions about commodities. Oz miners; coal; iron ore; and oil.
-Credit Suisse ascertains Oz miners are trading close to fair value
-Gap between high and lower quality thermal coal prices increasing
-Citi expects Chinese demand for iron units to decline over the next five years
-New cheaper oil projects creating dilemma for OPEC
By Eva Brocklehurst
Credit Suisse expects commodity prices and steel production in China could move lower throughout 2019. The broker's modelling of risk appetite suggests this has now normalised. All up, when running a mid-cycle earnings approach, the broker considers large capitalised companies are trading broadly in line with historical multiples, although BHP Group ((BHP)) is slightly expensive. Iluka Resources ((ILU)) appears the cheapest.
The broker ascertains the sector is, in general, trading close to fair value and struggles to visualise a positive shock outside of stimulus in Chinese infrastructure. The main risk is that Chinese policy diverges from its current rhetoric. On this basis, Credit Suisse would not be overweight on the sector and would consider moderating its position slightly. The key pick on a relative basis is Whitehaven Coal ((WHC)) followed by Iluka Resources and Alumina Ltd ((AWC)).
Credit Suisse observes the price of Australian thermal coal being sold to China is being hit relative to competitors, at odds with assurances by the Chinese and Australian governments. Whether there is a ban or just restrictions, the price suggests importers are avoiding Australian thermal coal. The sharp improvement in the Indonesian price signals to the broker where Australia's market share may be headed.
National Australia Bank strategists point to Platts data, which has indicated that Chinese coal buyers are seeking increased volumes from Indonesia and Russia, which could lead to greater volatility for prices in the short term because of supply constraints. The analysts expect thermal coal prices to ease gradually to US$90/t in 2020.
However, 5500kcal coal is now looking so cheap it could attract Indian buyers, Credit Suisse believes. Most high-ash coal in Australia is produced by Glencore, Yancoal and BHP Group. The former two have options to blend up some of their high-ash coal while BHP has few options from Mt Arthur because of insufficient washing capacity.
Morgan Stanley also notes the frequently-quoted 6000 kcal thermal coal price on an F.O.B. Australia basis has dropped from its 2018 peak, but at US$92.60/t remains largely in line with expectations for 2019.
The broker observes the difference between high-quality benchmarks and lower-energy alternatives has started to increase, and one of the drivers is the controls in place in China on import of low-energy coal. Morgan Stanley agrees this, in particular, affects BHP and Glencore.
Meanwhile, Credit Suisse points out, metallurgical (coking) coal prices have remain strong and Chinese buying is continuing. Ultimately, steel mills have little choice as China is short of premium-grade, low-sulphur coking coal. National Australia Bank analysts expect hard coking coal prices to decline to US$158/t in 2020 amid weaker steel output in China.
The risks around iron ore price forecasts are finely balanced, in Citi's view. The broker expects only a modest lift in global steel production in 2019-20 and continues to believe the market will lose around -80mtpa of supply in 2019 because of a net reduction of -40mt in Brazilian exports. The broker assumes the mine at the site of the tailings dam tragedy in Brazil will be off line for all of 2019.
2020 is considered more difficult to predict, although the three-year ramp up of capacity by Vale should enable exports from Brazil to regain some ground and reach around 370mt. The broker considers the downside case for iron ore prices at US$80/t in 2019 versus upside of US$95/t.