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Material Matters: Iron Ore, Met Coal & Copper

Commodities | May 21 2019

A glance through the latest expert views and predictions about commodities. Iron ore; metallurgical coal; aluminium; and copper.

-Iron ore supply disruptions continue, prices likely well supported over the next 3-6 months
-Macquarie sees limited appetite for capital expenditure on coal by listed Australian miners
-Recovery in aluminium prices contingent on supply reforms an easing of trade tensions
-Current weakness in copper price considered a reasonable entry point for renewed upside, in Macquarie's view

 

By Eva Brocklehurst

Iron Ore

Chinese steel production was at a record in April, reaching a 1bn tonnes per annum run rate for the first time. This comes at a time when iron ore shipments are materially affected by supply disruptions from Brazil, and to a lesser extent Australia. JPMorgan expects iron ore prices to remain well supported over the next 3-6 months. The main downside risk is the potential for Chinese domestic supply to re-start.

Shaw and Partners notes supporting themes for the iron ore price, include record steel production in China, declining port stocks and complacency among steel mills. The broker has feedback suggesting steel mills in China have been complacent about procuring iron ore and the trends at ports are worse than many suspect.

There are also temporary capacity curtailments in China likely, as environmental inspectors review mills, sinter plants and coke ovens. Vale has also just announced the potential risk for a rupture at another of its mining waste dams.

Shaw and Partners believes the company's social and regulatory licences are looking increasingly under pressure. Vale has indicated that a step up in production may not be possible until after 2020.

Metallurgical (coking) Coal

Macquarie observes the continued underperformance of Australian supply has supported coking coal prices over the last three years and total exports are still below 2016 levels. The gap has been filled by high-cost supply from the US.

While rail logistics and longwall moves are often the "go-to excuses" for a miss on production, Macquarie notes some hard coking coal mines appear to have deeper issues. The broker is mystified by the underperformance of BHP Group's ((BHP)) Goonyella and Blackwater mines, and notes the prevailing view that limited availability of ROM (run of mine) coal could deliver further negative surprises.

The ramp up of new mines in Australia are mostly adding semi-soft, PCI or lower tiered hard coking coal. Macquarie finds very little growth in the premium sector of the market. The majority of hard coking coal reserves are in the hands of diversified listed miners and they appear to have little appetite for capital expenditure on coal.

Macquarie continues to expect the hard coking coal market will remain tight, pointing out the quality spreads have held up much better than for iron ore, despite the weaker steel margins globally.

Aluminium

Fundamentals are positive for aluminium, as inventory continues to fall amid tightness in world markets, ex China. Demand in China is also improving. However, ANZ Bank analysts suggest any recovery in prices remains contingent on ongoing supply reforms and an easing of trade tensions with China.

The impact of the tariffs on Chinese aluminium imports into the US has been relatively minimal and ANZ Bank envisages little impact from the increase to 25%. Meanwhile, demand in China for aluminium is showing signs of recovery as housing, electricity grid investment and durable goods were all up sharply in recent months. Moreover, while the automotive sector remains weak the recent drop off in growth has eased.

Chinese authorities have been driving a reduction in aluminium smelting capacity to ease the environmental impacts and at the same time producers have been installing new replacement capacity, although the analysts note this trend is coming to an end.

The risk of Chinese output rising, therefore, has not eased completely. Market rumours suggests recent environmental restrictions may also be lifted to support domestic economic growth.

Copper

In the unlikely event of a halt to Chinese exports to the US, Macquarie calculates this would reduce copper consumption by around -1.5% of the global total. However, the downside impact of a failure of talks is likely to ensure a return to stimulus policy in China as a response, and provide support to half the global metal consumption.

The breakdown in US-China talks has come at a fragile time, the broker acknowledges, and the two countries do account for 56% of copper consumption. However, the balance skews towards China's activities, as it incorporates 60% of expected incremental copper demand growth for 2019. Thus, the potential damage to copper demand needs to be primarily assessed in terms of Chinese domestic end-use, plus exports to US end-use.

The theoretical slowdown and expected loss of copper demand has already meant the prices have tracked -6% lower, down to around US$6000/t. Macquarie believes this is a reasonable entry point for renewed upside because cathode supplies are constrained and cathode demand is likely to rise on a 3-6 months horizon. The broker expects, as its base case, that a trade deal will be forged.

If exchanges between the two countries become more aggressive Macquarie expects another sell-off in copper. However, the broker targets a return to the previous range of US$6400-6600/t , and possibly higher, if trade talks are back on the agenda around the same time as news flow around problems in the scrap metal market emerge. The broker points out incoming category 6 scrap restrictions appear set to at least temporarily disrupt the secondary supply chain of copper into China.

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