Material Matters: Galloping Gold, Iron Ore, Zircon, And Oversupply

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Predictions for gold, iron ore and coal prices; zircon stable; base metals oversupplied.

-Interest rate cuts, trade war, market doubts send gold spiralling up 
-Iron ore miners set to rise as ore price prepares to bounce back
-Coking coal faces long-term slide despite short-term recovery
-Zircon import prices in China to find balance when slight oversupply subsides
-Precious metals in strong demand, while base metals struggle with oversupply

By Nicki Bourlioufas

Gold climbs as investors seek safety from trade tensions and equity markets

Gold has posted major price gains in recent weeks as investors seek a safe haven from tumbling interest rates, US-China trade war, and turmoil in the equity markets. With the metal shooting above US$1500 an ounce in the first week of August, Citi Research boosted its 6-month to 12-month COMEX gold target price to US$1,600 an ounce. 

The US Federal Reserve Board cut its benchmark interest rate at the end of July by 0.25% to a range of 2%-2.25%. Citi said the gold market appears to be pricing in two more cuts by the Fed in 2019, moves that would indicate the Fed expects economic activity to slow. Gold miners have rallied to multi-year or record highs in Australia and offshore.

US President Donald Trump has threatened to impose a 10% tariff on US$300bn worth of Chinese imports that were previously untaxed from September 1. In response, China let its currency depreciate, sparking fears of a slowdown in world trade. It all makes gold look like a good place to ride out the storm.

Citi Research said purchases of gold bullion by central banks in the first half of 2019 totalled 374 tonnes, the strongest first-half total this decade. The buying trajectory suggests gold purchases by the central banks in 2019 will top the all-time high of 651t achieved in 2018.

While Citi is upbeat on the gold price, not all experts are. Credit Suisse has a forecast US$1,343 for calendar year 2019 and US$1,350 for 2020. Morgan Stanley too is more downbeat than Citi, forecasting the price will fall back to US$1,350 by the second quarter of 2020. 

Iron ore price crash may be overdone; miners tipped to do well

Credit Suisse says the collapse of the iron ore in August below US$110/t is a short-term phenomenon and the price will rebound to US$110/t, where it was trading for most of July. The fall was a reaction to China’s currency devaluation, which made iron ore more expensive to Chinese importers. 

However, Credit Suisse says the price will gradually unwind, likely hitting US$95/t by the end of the year. A major factor will be the end of the supply squeeze, as Brazil’s Vale brings idled operations back into production.

On the positive side, the market could be buoyed up by demand out of China, where the government is expected to continue its domestic stimulus in the face of higher US tariffs. China infrastructure investment was up 4% in the first half of calendar 2019 and the government is targeting 8% for the full year.

But Credit Suisse expects the China Iron and Steel Association, which represents state-owned and large privately-owned producers, to put pressure on small steel mills to cut over-production. Such cuts will likely reduce Chinese steel output in the second half.

Citi Metals and Mining is tipping good gains for Australia’s major iron ore miners over the coming year. It set a target price of $44 for BHP Group ((BHP)) compared to around $37 on August 12 and $110 for Rio Tinto ((RIO)) compared $86. It set $8.00 for Fortescue Metals Group ((FMG)) compared to $7 and US$14.00 for NYSE-listed Brazilian giant Vale, compared to US$11.55. 

Citi modelled a scenario in which the iron ore price would fall to US$60/t in calendar 2020. Under the scenario, 2019-20 Net Profit After Tax (NPAT) would fall by -21% for BHP, by -32% for RIO and by -35% for FMG.

While this may sound like a lot, Citi argues that “the downside case is not far from what most would consider through cycle commodity prices”. If the sell-off continues, “investors may get an opportunity to reweight into the miners”.

Coking coal set for short-term recovery, but long-term slide

Morgan Stanley says the market for metallurgical coal will likely remain oversupplied in the medium term, holding the price at around the current $160/t where it has settled after falling from $200/t in July. Met-coal, or coking coal, is used to produce coke, the primary source of carbon used in steel-making. 

Morgan Stanley says the met-coal price will recover to $175/t at the end of this year due to some disruptions to Australian supply and the resumption of buying from India after its usual June-September monsoon season lull. The price will then slump again to $165/t in 2020 and $141/t in 2021 on rising seaborne supply.     

Over the medium term, demand out of China is expected to slow. Morgan Stanley says the Chinese coke industry appears to be well stocked with coal, import restrictions are still being applied at major coking coal ports Jingtang and Caofeidian, and steel production is expected to slow in the second half. 

Zircon import prices in China stable, despite temporary oversupply

Morgan Stanley reported that checks with a Chinese mineral sands information provider suggest seaborne zircon import prices have remained stable at about US$1,595-1,630/t and are expected to remain steady, with demand remaining in line with customer orders.

China’s zircon stocks are slightly out of balance, with concentrators holding 1.5 months’ worth of stock and downstream users such as ceramics factories experiencing slight oversupply. At the same time, there is some risk that new mining rights may not be approved for zircon sands from China's coastal Hainan province as Hainan develops its tourism industry, and this could lead to a fall in supply.

Precious metals looking good; base metals struggle on oversupply

Morgan Stanley’s Metals & Mining Commodity Thermometer rates 15 major traded minerals with ratings range from 6 for “bullish” to 1 for “bearish”. In the latest thermometer, only gold is awarded a 6, on the strength of falling real interest rates, a negative outlook for the US dollar and an uncertain macroeconomic outlook.

Copper and palladium are rated 5 on concerns about supply shortages, and silver is also rated 5 on expectations it will rise along with gold. A slight oversupply of nickel sees it rated a 4. Aluminium is also a 4, with some recovery seen as possible given that the price has now fallen so far that smelters may cut production.

Platinum, alumina and thermal coal all scored a 3 on concerns about oversupply, and iron ore a 2. Cobalt, manganese ore, zinc, lithium carbonate and metallurgical coal were all rated 1, also for reasons of oversupply.

Macquarie Wealth Management says the recent decision by Glencore to wind down production at world’s largest cobalt mine, Mutanda, by the end of this year due to reduced economic viability “will have a stark tightening effect, slashing nearby oversupply and pushing the market into deeper deficits sooner. Cobalt’s price prospects have thus brightened.” Macquarie is calling for more mines to drop out to solve the oversupply problems for cobalt.

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