Material Matters: Cobalt, LNG And US Oil

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A glance through the latest expert views and predictions about commodities. Cobalt; European ETS; Australian gold miners; LNG; and US oil.

-Macquarie suspects strong recovery in cobalt price unlikely
-Earnings risk raised for European materials companies
-Bullish longer-term theme emerging for Australian gold miners
-Strong consensus for weaker LNG prices long term
-US crude stocks finely balanced

By Eva Brocklehurst

Cobalt

A strong recovery in the price of cobalt is unlikely, Macquarie asserts. Cobalt prices have picked up over recent weeks because of tighter supply and another firm month of electric vehicle sales in China.

Further price gains now appear diminished, the broker points out, amid news that Glencore will resume some sales of Katanga units and as Umicore downgrades earnings guidance because of challenges in the battery materials division.

Weaker cobalt prices played a part in the latter's downgrade announcement but Macquarie also cites the company's statement that "demand patterns for cathode materials have deteriorated in the past couple of months".

There was some expectation that the de-stocking activity that often accompanies a slide in prices had come to an end and the buyers were returning after the Chinese New Year.Yet, after allowing for mine disruption and increasing discounts because of weak pricing, Macquarie still calculates a real oversupply for the raw material of 18,500t. The broker assesses the market is facing demand shocks, slowing sales growth in electric vehicles and a shift away from cobalt intensity in cathode materials.

European ETS

Changes to Europe's emissions trading scheme (ETS) could jeopardise the competitive position of energy-intensive European materials companies after 2020. Assets in steel, cement, aluminium and copper smelting have suffered from a deteriorating global competitive position.

Most of these assets are captured under the region's ETS via the passing through of carbon dioxide allowance costs in power prices by power producers. Allocations and compensation are agreed until 2020.

However, the new version of the system that comes into effect in 2021 provides no base around the level of free allocations and the ability to compensate for leakage of economic activity. Morgan Stanley believes these developments warrant close attention and the recent increase in carbon pricing has lifted the potential earnings risk materially.

Oz Gold Miners

Recently, Macquarie observes the only support for the gold price was weak manufacturing data in Europe. Still, a bullish longer-term theme for gold is the emerging prospect of a peak in the US dollar, as global growth finally stabilises.

After the March quarter's reports, the broker notes Evolution Mining ((EVN)) expects a big final quarter to achieve the top half of its FY19 production guidance range. Cowal remains a strong organic growth prospect and the broker upgraded the stock to Outperform recently.

Regis Resources ((RRL)) published an updated resource and maiden reserve as well as a new mine plan for the Rosemont underground. This delivered a 37% increase in resources and a maiden reserve estimate of 600,000t at 6.4g/t for 123,000 ounces. Macquarie upgraded to Outperform.

Meanwhile, Saracen Minerals ((SAR)) is on track to meet its upwardly-revised guidance of 345-365,000 ounces. Exploration and organic growth prospects continue to deliver results, which Macquarie believes will support the company's aspirational 400,000 ozs/pa run rate.

LNG

On current LNG contract prices, Citi calculates a tight spread at 11.5-12.0% FOB is likely to persist for 1-2 years. The broker notes strong consensus that long-term LNG prices delivered into Asia will be weaker, at around US$7-8/mmBtu as opposed to the US$8.5-9.0/mmBtu implied by ASX energy stocks.

The bright spots in the market include the precedent set by a Japanese contract that was recently repriced at 14.1%, which may set a benchmark for upcoming price reviews for many of the ASX energy company projects. Citi acknowledges precedents are not always accurate, as specific contracts may vary considerably.

Another positive is an apparent willingness to support greenfield projects and independents to ensure a concentration on the supply side does not emerge. This is positive for Woodside Petroleum ((WPL)), in the broker's view. Citi retains a Sell rating on the stock as well as for Oil Search ((OSH)), with an Neutral rating on Santos ((STO)) and Origin Energy ((ORG)).

The broker believes the companies have a choice, either protect their schedules, or wait for the market to firm by allowing the schedules to slip or making a final investment decision without contract coverage. The broker concedes the latter choice exposes shareholders to the risk that prices stay low anyway as demand disappoints and competing projects catch up.

US Oil

Citi observes US crude and product stocks are finely balanced. The US has indicated it will not renew any sanction waivers to buyers of Iranian oil. Brent crude oil has climbed to 6-month highs and the market appears to have been wrong-footed, expecting renewed waivers for five of the eight countries that received them back in November 2018.

Meanwhile, Saudi Arabia is not rushing to end its production cuts, although it is currently under producing its quota. Citi assesses this to mean supply can be added back to the market and the country still be in compliance with the slated production cuts.

US crude inventory has built up in the week ending April 19, as gross imports outpace the higher local refinery runs. Gross crude imports to the US have risen from all major trading partners. In particular, imports of crude from Saudi Arabia doubled and imports from Iraq recovered after being at zero the previous week. Imports from Venezuelan rose to 0.2m b/d.

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