Material Matters: Copper, Steel & Manganese

Commodities | Jun 17 2019

A glance through the latest expert views and predictions about commodities. Copper; steel; manganese; iron ore miners; Queensland petroleum royalties.

-Supply-side disruptions in copper unlikely to affect price in current environment
-How long can property drive apparent steel demand in China?
-Manganese continuing to perform poorly, lacking supply constraints
-Strong upgrade cycle for iron ore miners as supply still constrained
-Petroleum royalties review to the fore in Queensland's budget

 

By Eva Brocklehurst

Copper

Risks are mounting for copper on the supply side in terms of outages, although prices are also being trampled by the US/China trade war. Macquarie is fielding investor queries as to what is required in terms of supply outage/reductions to overcome the increasing negative sentiment regarding global industrial activity.

The broker assesses copper is holding at US$5800/t but the impact of the US/China trade conflict on demand will need to now be factored in, as costs rise and business confidence takes a hit.

Supply remains weak and Chilean miners are talking of strikes, while grades are slipping. Zambia, meanwhile, appears to be repelling all future investment and the recently re-started Katanga asset in the Democratic Republic of the Congo is under review.

Furthermore, Macquarie adds, another scrap import restriction is increasingly likely in China as well. Supply-side disruptions need, at the very least, a neutral market tone in order to affect the price, the broker suggests. If the market is bearish, particularly amid global growth fears, incidents such as strikes will simply be ignored.

Steel

Macquarie notes a healthy demand for steel still seems to exist in China, as supply growth has been strong and exports subdued. Steel margins have, nevertheless, fallen to their lowest point in the year. Flat exports, when production is booming, generally suggest more domestic demand and/or rising stockpiles.

Macquarie observes China's property sector has clearly outperformed with investment rising at even higher rates than last year. Construction machinery, white goods and shipbuilding are also very active. However, the broader manufacturing sector in China is weak, particularly automotive industries.

How long can property drive apparent steel demand? As land purchases have fallen by nearly -34% in January-April, new building starts that are in evidence are more likely a lagged development, in the broker's view, rather than a reflection of positive sentiment and looser liquidity.

There is some offset from infrastructure, although Macquarie believes a peak is likely at the end of the September quarter or early in the December quarter. Steel inventory draw down has also begun to slow. Steel net exports only take 6-7% of China's steel production and exposure to the US is low. Hence, if it were not for property, China's steel demand would likely be slowing and this is bearish for prices and margins.

Citi expects stimulus measures globally will boost steel market sentiment and, with cash spreads now well below historical averages, there is potential for supply responses to emerge while Chinese exports trend down. Recent weak macro data and escalating trade war tensions have triggered stimulus efforts from central banks and governments globally.

Elsewhere, raw material costs have begun to ease. For the scrap producers, the broker expects new US and Chinese electric arc furnace (EAF) capacity will underpin scrap demand.

With steel profitability now below long-term averages, the broker believes the bottom of the market is near and upgrades Sims Metal Management  ((SGM)) and BlueScope Steel ((BSL)) to Buy as the risk/reward turns favourable. The broker believes consensus downgrades are more than priced in for these two stocks.

Manganese

Manganese has performed poorly this year, Macquarie points out. Spot prices are now down -10-18% in the year to date. The broker notes the growth trend in imports to China has reversed in 2019, after constantly rising since 2017.

This appears odd, given very strong crude steel production rates. The explanations the broker offers are a surge in China's domestic manganese ore production (considered unlikely), de-stocking across the value chain or a drop in the intensity of use. On the latter, Macquarie notes a spectacular drop in vanadium, a sister product, which suggests a relaxation of the environmental standards that pushed usage of both metals higher last year.


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