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Material Matters: Gold, Coal, Oil & Copper

Commodities | Sep 12 2019

A glance through the latest expert views and predictions about commodities. Gold; platinum; thermal coal; oil; and copper.

-Gold equities underperform as gold prices head higher
-Have thermal coal prices found a base?
-OPEC likely to have no choice but continue production cuts
-Market signals turning more positive for copper


By Eva Brocklehurst


Citi has become more bullish about gold, anticipating the price could breach US$2000/oz at some stage in the next year or two. This is based on lower nominal and real interest rates and the risk of a global recession. Moreover, rich equity and credit market valuations and strong buying activity in gold are supporting the gold market. Silver price forecasts are also raised in line with the new gold deck.

The broker points out day-to-day gold market sentiment can diverge from the bullish theme, which provides opportunities to buy the dip in gold, expected to occur this month during a technically-driven sell-off that is not fully supported by a material shift in global growth or policy trajectory.

Amid this new base case for gold, with prices forecast to average US$1575/oz in the December quarter and to average US$1675/oz in 2020, Citi adjusts its view of gold equities. The broker cautions that, while higher gold prices may be a signal of global macroeconomic concerns this may not be entirely good news for gold equities. Gold equities have sharply underperformed the yellow metal in the past month.

Citi warns that a surge in gold prices does not necessarily translate to gold equities if, for example in the case of a US recession, there is a general sell-off in other asset classes. In this scenario, gold investors could turn to ETFs (exchange-traded funds) or the physical metal to ride out devaluation.

Generally, those that will benefit from a rising gold price are also defensive and the broker's top pick in the ASX 100 is Northern Star ((NST)), upgraded to Buy from Neutral. Citi's view of Evolution Mining ((EVN)) and Newcrest Mining ((NCM)), both upgraded to Neutral from Sell, centres on concerns about the possible effects on gold production if the drought in eastern Australia continues over the medium term.

UBS reviews its gold sector valuations, using a spot price assumption of US$1500/oz instead of a US$1300/oz long-term gold forecast as well as greater differentiation in the cost of capital across stocks.

The broker calculates OceanaGold ((OGC)), upgraded to Buy, has the highest weighted average cost of capital because of the higher risks from the ongoing regulatory and access issues at Didipio in the Philippines. The share price has not lifted with the surge in the gold price over 2019 because of these issues, and implies no value for Didipio. Therefore, a potential resolution is almost a free option, in the broker's view.

UBS raises Regis Resources ((RRL)) to Buy because the stock has not shared in the rally in the Australian dollar gold price and the risks appear well and truly priced into the stock. Northern Star is also upgraded, to Neutral, and the broker assesses the valuation is fair, despite the strong production growth and exploration potential. Newcrest Mining remains a Sell-rated stock as it trades at a premium valuation and production/earnings are forecast to peak in FY20.


Citi is also bullish on platinum over the next 12 months, expecting an improvement in automotive demand. Some consolidation in platinum prices is expected late in 2019 before a potential increase to US$1000/oz during 2020.

Citi suggests investment demand will be the leading driver of growth for platinum this year, but a bullish outlook is intact based on expectations of an eventual substitution of platinum for palladium and a recovery in automotive catalyst demand. The broker has had discussions that indicate many large South African fund managers which have palladium ETF holdings have started liquidating these and buying platinum ETFs.

Thermal Coal

Macquarie has noted a rally in the price of thermal coal based on a new risk of a nuclear plant shutdown in France. The details of this risk are scarce, the broker points out, and there is likely to be support building for thermal coal anyway because of supply cuts.

France has warned of anomalies in the welds of some steam generators and components used in nuclear reactors. No indication was given for just how many of France's 58 reactors are affected.

Thermal coal supply has fallen for the first time since mid 2016 as Indonesia joined Colombia and the US in cutting surplus tonnage. Macquarie points out around one quarter of the global seaborne market remains loss-making at current prices, with most of these operations located in Russia, Indonesia and the US.

Pending further developments in France, the broker warns that the exit of loss-making thermal coal capacity at current prices only promises short-term stability, not significant upside. Still, after a year-long slide prices may have found a base.


OPEC and allies are meeting to review oil production strategies. ANZ analysts suggest the group faces unprecedented uncertainty, particularly the tension between the US and Iran, as well as Venezuela. Trade tensions are also weighing on manufacturing activity.

Global vehicle sales, a key factor in gasoline demand, are on a trajectory to be down -6% in 2019. The analysts believe, with crude oil well below Saudi Arabia's target of US$80/bbl, there is no choice but to continue with current production reduction agreements.

The ability to push prices higher appears limited. ANZ analysts reduce forecasts for oil demand growth to 1mb/d in 2019 and expect a sizeable drawing down of stocks in the December quarter. They will be watching for any impetus in Chinese infrastructure expenditure after authorities suggested a boost was required to offset a slowdown in economic growth.


Morgan Stanley suggests demand for copper could resume as the market emerges from a seasonally-slow third quarter. Upside risk to the copper price is envisaged in a market that is still struggling to grow supply.

Non-commercial net short positions on COMEX reached all-time record levels recently as sentiment around trade tensions in the global economy deteriorated further. Prices have been subdued and a drawing down of inventory has filled the gap created by shrinking supply.

Morgan Stanley believes China is most likely source of a recovery in demand, noting market signals have turned positive. The cathode premium has risen to US$77/t and bonded warehouse inventory has fallen by -150,000t over the last two months. Meanwhile constraints on mine supply continue. Glencore's decision to cut the remaining 100,000tpa output at Mutanda from early 2020 will offset some of the gains from a recovery in volumes at Escondida and Grasberg.

Morgan Stanley expects mine supply growth will be limited to around 1% following a contraction of -2% in 2019, keeping the market in deficit and providing more meaningful support for the copper price.

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