Commodities | Apr 18 2019
A glance through the latest expert views and predictions about commodities. Mining services; gas; iron ore; and lithium.
-Major mining/infrastructure contractors may face capacity constraints
-Potential for LNG supply shortages beyond 2024
-Iron ore price edges closer to US$100/t, likely to more than offset volume losses
-Increasing pressure on lithium producers to lower prices and improved product
By Eva Brocklehurst
Deutsche Bank acknowledges underestimating the extent of the competitive response from miners in addressing the risk of cost inflation. Iron ore replacement expenditure is providing many opportunities for tier-1 construction-related civil contractors.
Yet, it appears miners are attempting to address cost inflation by reducing the size and complexity of the contracts they offer, in order to attract smaller operators. Value remains most important consideration and the implication is that contractor margins will be kept in check.
One thing that is also evident to the broker is that there are far fewer tier-1 contractors available in Western Australia today compared with the 2012/13 boom. Moreover, the amount of work also emanating from transport infrastructure on the east coast enables tier-1 contractors to be selective, which could mean more certainty for order books and margins through better execution.
In FY20, work done on transport infrastructure is estimated to increase to around $17bn and to $22bn in FY21. Deutsche Bank suspects tier-1 contractors such as CIMIC ((CIM)), Monadelphous ((MND)) and NRW Holdings ((NWH)) may face capacity constraints. The broker expects short-term positive news flow from these three operators.
The broker has Buy ratings on Ausdrill ((ASL)), Imdex ((IMD)) and Seven Group ((SVW)). The latter provides good exposure to mining capital expenditure and infrastructure without execution risk, Deutsche Bank believes.
The Australian energy market regulator (AEMO), has downgraded its gas supply forecasts after input from producers. 2P reserves have also been downgraded by -6%. The regulator envisages potential further shortages from 2024 under a neutral scenario and, for the first time, has identified underperformance with CSG is a risk to the market.
Canaccord Genuity believes it is time to review the state of the market as spot LNG prices have weakened materially and are nearing multi-year lows in Asia. This has not affected Australian pricing to date but has impacted investor sentiment.
As LNG plants under construction are down -53% from their peak in 2015, the broker is not surprised that the market is expected to tighten in the early 2020s and that Asian buyers are locking in medium-term contracts.
The three LNG mega project's at Gladstone, Queensland, costing in excess of $50bn to construct, are yet to reach collective nameplate capacity. Reaching full utilisation, Canaccord Genuity asserts, remains the most value-accretive opportunity in Australian E&P.