Commodities | Oct 02 2019
A glance through the latest expert views and predictions about commodities. Coal; iron ore; steel; base metals; and gold.
-Thermal coal prices dogged by Europe's LNG glut as supply switches to Pacific
-US producers likely to succumb if supply reductions in coking coal are required
-Iron ore supply rising, likely to dampen prices
-A US/China trade deal likely to lift copper and pressure gold
By Eva Brocklehurst
Thermal coal prices ex Newcastle have resumed a downward trend and are now in the low US$60/t price range. The short term reprieve to the downward spiral stemmed from a temporary recovery in the European gas price, Morgan Stanley points out, amid a risk of disruption to Russian gas exports and possible nuclear closure in France. This closed the European discount to Australian thermal coal prices.
A substantial recovery in the price of thermal coal is not expected until the glut of LNG entering Europe from Russia ends. This glut is devastating demand for thermal coal in Europe, Credit Suisse notes, already under pressure from renewables. The broker has given up any hope of a significant recovery in the near term and does not expect the Newcastle price to break back above US$70/t before 2021.
The US and Columbia may have cut exports as Europe's thermal coal demand has fallen rapidly but, since the downturn in 2014/16, when annual US exports declined by around -30mt, the US is shipping a higher share of its coal to India. Meanwhile, Russia is still expanding coal exports, of which 49% are sold in the Atlantic basin, and there has been a shift to the east as Pacific prices are on average higher than the Baltic export price.
While Russia cannot fully act as a balancing factor between the two coal basins, Morgan Stanley envisages rising exports of low calorie coal out of Indonesia will also support abundant supply in the Pacific market, more than offsetting any production cuts from the Americas. Moreover, as the European market has closed to coal imports Columbia has begun shipping some coal to the Pacific as well, especially Korea and Taiwan.
In 2021 Credit Suisse expects spot LNG pressures may start to ease, allowing imports to Japan and Southeast Asia to lift. Growth in these two regions is expected to reduce the 2021 surplus and put the market back into deficit in 2022.
Morgan Stanley envisages only a very modest recovery in the thermal coal price in the coming northern winter. There is a possibility China will slow imports as annual quotas will soon be reached and demand for coal is likely to finish the year on a low.
High imports of metallurgical (coking) coal, in order to support surging steel production have caused China's ports to breach the quotas, yet a slump in metallurgical coal prices is a feature of regulation rather than supply and demand, Credit Suisse suggests.
Uncertainty is growing in China. Buyers now require discounts of over -US$40/t to risk buying seaborne coal which they may not then be able to discharge. The new year should mean new quotas and hence the price could lift.
Therefore, Australian coking coal is not expected to experience renewed discounting such as occurred this year. Nevertheless, China's total metallurgical coal demand is expected to slide -6.3%, which should reduce the demand for seaborne coal. On reducing coal price forecasts, Credit Suisse downgrades estimates for earnings for coal stocks in 2019 and 2020.
The broker envisages India will be one of the few regions of growth for metallurgical coal. Recently the country has diversified its sources, having relied on Australia, and has taken supplies from the US, Canada. Mozambique and Indonesia. Russia is also making headway in India. If India decides to participate in Russian projects this will reduce its reliance on Australian metallurgical coal, Credit Suisse points out.
If supply reductions are required in the metallurgical coal market, the broker assesses it will be US producers that succumb. US mines largely occupy the top of the cost curve and have no currency offset to assist in cost reductions.
JPMorgan also notes some sign US exports are starting to fall amid lower prices. Long-term metallurgical coal prices of US$140/t are considered appropriate. At this level US exports start to decline but there is still an incentive for Australian capacity to expand.
Spot hard coking coal prices have fallen to US$140/t, from US$185/t at the start of the year and JPMorgan considers this a function of the availability of Australian coal and weak demand from the world outside of China. The broker does not believe prices need to be that low and forecasts 2020 coking coal prices of US$154/t, pointing to a 10% improvement.
The market now appears relatively balanced to JPMorgan, as Chinese steel production growth is strong while steel production is down -3% in the rest of the world. If growth in Chinese steel production continues and Indian imports pickup following the monsoon the broker believes spot prices for metallurgical coal have some upside risk.
Furthermore, the analysis shows the US drops out of the market at around US$150/t while the next wave of Australian projects have an incentive price of US$135/t or more.
Credit Suisse reduces forecasts for iron ore prices, noting increasing supply from both Brazil and Australia and potential for demand to moderate from China. The broker expects prices to remain relatively firm above US$85/t out to mid 2020 and then slide as a surplus builds.
A floor price is expected to be US$60/t, a level where steel and iron ore producers can make modest profits. Although there are no concerns for the Fortescue Metals ((FMG)) balance sheet and there are two projects that are driving growth, the broker downgrades to Underperform from Neutral. This is on the basis of the iron ore outlook, as in a falling price environment it will be difficult for the stock to outperform.
In 2020 Credit Suisse expects China's steel output will fall -4% and the share in electric arc furnace production is likely to increase. The broker expects China's steel production will peak in 2019 and then reduce at around -2.5-3.5% per annum. Current steel demand in China is driven by property and property-related construction and the property construction boom that commenced in 2018 is expected to be fading by 2021.
A change in Indonesian government policy to bring forward a ban on nickel ore exports to January 2020 has lifted the nickel price. UBS estimates this ban will remove around 200,000t of nickel from the market.
The broker raises nickel price forecasts for 2020 to US$7.50/lb which drives a 43% uplift to the net profit forecast for Western Areas ((WSA)). While this is a positive, the broker suggests the improvement in the nickel outlook is now recognised in the share price, as this is up 60% since June, and downgrades to Sell as a result.
UBS also downgrades near-term earnings estimates for OZ Minerals ((OZL)) , although notes the stock continues to stand out, with a large number of options for capital to be deployed and Carrapateena de-risking rapidly.
OZ Minerals and Independence Group ((IGO)) remain the broker's preferred stocks in base metals. Should the US and China reach a trade deal, UBS expects copper prices could rise towards US$3/lb and copper equities would increase around 10-20%.
UBS favours Alacer Gold ((AQG)) in the gold sector as it is still trading at a -20% discount to valuation. The broker anticipates upside risk to oxide production estimates over the next 12 months.
Gold prices have rallied 20% in the year to date on a combination of trade tensions and weakening global economic momentum as well as a decline in bond yields. A US/China trade deal is likely to cause a correction in gold and gold-exposed equities, but if bond yields remained low and geopolitical troubles continue there should be some support for the gold market, UBS suspects.
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