Commodities | May 07 2019
A glance through the latest expert views and predictions about commodities. Iron ore; oil; and nickel.
-Troubling decline in Chinese iron ore port stocks
-Geopolitical risk likely to stem recent price oil price weakness
-Tight oil market to prevail
-Negative factors for nickel short-term, structural deficit prevailing
By Eva Brocklehurst
China's iron ore stockpiles have declined for the fourth week, reaching the lowest level since October 2017. Volumes of both Brazilian and Australian iron ore fell. Shaw and Partners suspects it may be even worse than the numbers are indicating.
Assuming President Trump does not derail a trade deal with China then China/US trade should continue to support a bilateral growth story and steel production stay at or near recent highs. Also, assuming iron ore imports continue to track around recent levels then iron ore port stocks in China should improve. Yet, on the latter point, the broker admits to being troubled by this decline in iron ore stocks.
JP Morgan notes the supply/demand balance for iron ore remains unchanged, despite a return of the Vale 30mtpa Brucutu mine. However, positive market sentiment has been dampened and the announcement of a re-start has stemmed the iron ore rally as the market is expected to re-balance more quickly.
JP Morgan still expects a -46mt deficit in 2019. Price forecasts are maintained, at US$87/t. The key risks are further growth in Chinese domestic iron ore production, which has had the stronger start to the year since 2014, and further disruptions in Brazil.
Shipping rates over the last week have rebounded in Brazil, to 325mtpa, but remain below the average run rate of 400mtpa, Macquarie points out. The broker notes the major Australian iron ore miners are now shipping above average weekly levels. Fortescue Metals ((FMG)) has shipped at a stable three-year average and BHP Group's ((BHP)) weekly rate has reverted back to its three-year average.
Rio Tinto ((RIO)) is now shipping at levels 4% above its three-year average, but will need to maintain this for the remainder of the year to reach the lower end of guidance. Macquarie's forecasts for shipping volumes for the June quarter are above those suggested by the port data run rate. The broker assesses a soft first week in April has now been overcome, as total shipments from all the majors have increased.
Macquarie reiterates Fortescue Metals as its preferred pure play iron ore stock, with benefits from an improved product mix and price realisation. Earnings forecasts are raised across the sector for 2019, at current spot prices, with increases of 30% for BHP Group, Rio Tinto and Mineral Resources (((MIN)).
The Australian iron ore mining sector still does not fully reflect the strong market, JP Morgan asserts, noting consensus earnings have been upgraded steadily, with marking to market upgrades to operating earnings (EBITDA) ranging from 27% for BHP Group to 70% for Fortescue Metals.
Morgan Stanley notes high-frequency US stock data suggests oil inventory has risen at over double the normal rate in the last five weeks. Most of the explanation is provided by the build-up in US crude stocks and weaker refinery throughput. The broker would become concerned, nonetheless, if this trend did not reverse in coming weeks.
Meanwhile, demand data has been a little weaker in Asia. These data points are risks to its call, although Morgan Stanley sticks with a view that Brent should mostly trade in the US$75-80/bbl range for the rest of the year because of supply tightness.
This is because of three hot spots, notably Iran, Venezuela and Libya, combined with a view that US shale is unlikely to surprise on the upside. The broker is on the look out for any further news of run cuts in refineries in Europe. While bearish news has flowed through oil markets and Brent has lost a little from its recent peak, the broker suspects this is an expression of wider macro concerns.
Citi does not believe the recent price weakness will persist, as OPEC output is stable or falling and escalating geopolitical risk could mean Brent moves back over US$75/bbl. Saudi Arabia continues to signal an extension of oil output cuts.
The broker also suggests other oil price moves could be more about profit-taking than a shift in sentiment. Citi believes a focus on high-frequency US oil inventory data alone can be misleading as it diverges from global stock changes relevant to waterborne markets.
Citi also notes Libyan light sweet supply has turned to being a bullish influence from being bearish. Military confrontation puts up to 600,000b/d at risk of disruption, against the potential for growth of 200,000b/d in the case of a peaceful resolution to the crisis. Libya currently accounts for around 1% of global oil supply.
In an extreme scenario, where other disruptions occur, Citi calculates that flat prices could rise above its forecast of a US$84/bbl average for the September quarter. Assuming US incremental production cannot materialise until some months later, and OPEC reduces its capacity ahead of the hurricane season, this would mean an exceedingly tight situation in the oil market.
Nickel was the best performing metal on the London Metal Exchange up until March, rising 25% amidst an ongoing deficit and falling exchange stocks. Still, Macquarie notes, while inventory fell in April, prices have not being sustained and have dropped almost -7% in the month.
The broker suspects the strength of demand may have caused the sell-off, particularly in 300-series stainless steel, and especially in China. A surge in Chinese production of high-nickel containing grades of stainless has been accompanied by a rise in Chinese reported distributor stocks of this product and a steady fall in stainless steel prices.
This has led to speculation that production cuts may be imminent and, therefore, Macquarie suspects prices probably sold off. Other concerns centre on a potential end to recent Chinese economic stimulus, and that nickel pig iron production growth in particular may be running ahead of demand.
Another concern, although the broker considers this less significant, is that demand for nickel in batteries may ease or fall as subsidies on Chinese electric vehicles are removed. All up, Macquarie considers the negative factors are all short-term and the market remains in structural deficit with prices trending higher.
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