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Material Matters: Nickel, Coal And Arctic LNG

Commodities | Sep 06 2019

A glance through the latest expert views and predictions about commodities. Nickel ban; coal price outlook; and Arctic LNG.

-Indonesian nickel ore ban expected to take -10% out of the global market
-Coal demand likely to persist amid increasing supply-side constraints
-Arctic LNG likely to be one of the more viable projects launched in 2019

 

By Eva Brocklehurst

Nickel

Macquarie upgrades nickel price forecasts to incorporate the early reinstatement of Indonesia's nickel ore ban, moved ahead two years to 2019. This is expected to take out -250,000tpa of supply, or around 10% of the global market.

Nevertheless, the broker anticipates a supply response from Indonesia before the ban takes effect and increased exports from the Philippines. Combined with softening global demand this should lessen the impact.

Macquarie calculates a 2020 deficit in nickel of -50,000t and -80,000t in 2021. This should translate to higher nickel prices and the broker upgrades 2019 and 2020 forecasts by 20% and 19% respectively. Forecasts for 2021 and 2022 rise 6% apiece.

Incorporating these upgrades transforms the earnings outlook for Independence Group ((IGO)), the broker suggests. FY20 earnings estimates are increased by 80% and FY21 by 19%. Western Areas' ((WSA)) strong leverage to nickel prices is demonstrated by upgrades to the broker's forecasts as well and it remains the preferred pure nickel stock.

The outlook for Panoramic Resources ((PAN)) has been affected by a number of adjustments to production and cost forecasts as well as an expected rights issue. As a result, Macquarie lowers FY20 production forecasts for Savannah by -20% for nickel, -21% for copper and -31% for cobalt. The broker maintains Outperform ratings for these three major ASX nickel producers.

UBS models a nickel deficit of -130,000t in 2019 and believes the market will remain in deficit for the foreseeable future, amid increasing consumption of nickel in battery technology.

The broker forecasts nickel prices peaking at US$8.25/lb in the second and third quarters of 2021 and a long-term nickel price of US$6/lb. Nickel prices reached five-year highs recently, at US$8.17/lb after Indonesia announced the bans would be brought forward.

China continues to dominate, accounting for nearly 50% of global demand in 2018. Japan and Indonesia have the highest levels of demand following China, at 8% and 7%, respectively.

Coal

Coal prices have been affected by a slowing global economy and the uncertainty caused by the US/China trade conflict, as well as reduced margins for steel producers and port restrictions in China on coal coming from Australia.

On the supply side there has also been increases from China, Indonesia, Russia and Australia as well as the impact of substitute products such as gas. Regardless, Bell Potter expects demand growth will persist as there are increasing supply-side constraints, including infrastructure capacity, new project permits and financing of new developments.

The broker revises its coal prices lower across the board, with hard coking (metallurgical) coal forecasts for FY20 reduced to US$165/t, and FY21 to US$163/t. Thermal coal estimates for FY20-21 are now reduced to US$70/t.

Bell Potter notes Whitehaven Coal's ((WHC)) production profile is supreme and its projects could add up to 15mtpa of managed coal production over the next eight years. The broker assesses the company can withstand the current weakness in thermal coal price and remains highly leveraged to any recovery. Nevertheless, estimates for earnings per share are reduced by -35% for FY20 and -28% for FY21.

Changes to currency assumptions now more than offset the changes to coal prices for NZ producer Bathurst Resources ((BRL)) across FY21-22, while estimates are reduced by -9% for FY20. The company has an export hard coking coal business supported by domestic thermal coal sales with stable utility-like margins, the broker notes. Earnings remain leveraged to a recovery in seaborne coking coal prices.

Meanwhile, Coronado Global Resources ((CRN)) has an opportunity to improve operations at Curragh amid wider index inclusion, all against a backdrop of weak coking coal prices and Bell Potter retains a Buy rating. The broker rates Stanmore Coal ((SMR)) as Hold, given the recent appreciation in the share price. In the absence of a significant run in coal prices, earnings are expected to fall markedly across FY20-21.

LNG

A project called Arctic LNG marks the fourth major LNG project to be launched in the last nine months and Citi believes this is one of the better ones. A perceived gap in the LNG market post 2022 is considered to be the catalyst.

Project shareholders include Novatek, Total, CNBC and CNOOC as well as Japan Arctic LNG. This follows a successful start-up, Yamal LNG, in December 2017. Arctic LNG obtains gas from the Salmanovskoye field on the Gydan peninsula, Siberia, to feed a 19.8mtpa LNG plant.

Citi estimates a US$21bn cost with the capital intensity of US$3.80/boe and considers the project screens well against competing global LNG projects. Citi models Arctic LNG requiring a US$6/MMBtu landed gas price to break even. This is a blended average and reflects 60% sales to the Far East and 40% to Europe.

While the project carries higher transport costs versus other LNG assets this is more than offset by one of the lowest feedstock costs for the gas and makes it likely, in Citi's view, to be one of the more viable projects.

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CHARTS

BRL CRN IGO PAN SMR WHC WSA