Material Matters: Pressure On Base Metals, Nickel Defies Slump

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A glance through the latest expert views and predictions about commodities. Zinc; Iron ore; nickel; oil; gold.

-US-China trade tensions and growth concerns weigh on iron ore
-Short-term firmness still possible, upside to big miners seen
-Nickel bucks the trend and rallies as inventories plunge
-Zinc’s fall may be ending
-Falling copper price will be limited by supply cuts

By Nicki Bourlioufas

Zinc market could be turning while Nickel maintains its run

Sentiment in the base metals this month has been bearish with the US-China trade war causing investors to price in a global growth slowdown. This has seen commodities under pressure, though for some this has been limited by falling inventories. The latest truce on Friday between the US and China could also provide a floor under prices.

According to Jarden, copper’s outlook is stable as slower demand growth this year (possibly nil in China) has been outmatched by a supply cut from Glencore in Central Africa and Codelco transitioning big open pits to underground. While the worst of industrial deterioration may be still to come, “having China comprising 50% of global copper demand limits the size of any fall.”  Jarden is forecasting a price of US$6,173/t in 2020, barely changed from an average of US$6,163/t in 2019.

ANZ too is upbeat on copper after a slide of almost -10% in the past year. “It is still on our preference list due to its underlying strong fundamentals. Any surprise on the trade front will be supportive for the sector,” says ANZ. However, the CEO of Codelco recently said copper prices will remain depressed through the next year, a result of the continuing uncertainty caused by global trade tensions.

Mixed view on iron ore, upside to miners possible

While iron ore has fallen from its year highs as global trade tensions threaten global economic growth, ANZ expects prices to stay around US$85–US$90/t in 2019 amid robust fundamentals. Supply losses in Brazil will leave the market undersupplied until 2020. “That said, improving exports from key countries and narrowing steel mill margins could be a drag on prices in the short-term,” says ANZ.

Macquarie Wealth Management is more upbeat and believes iron ore could hold in its current US$90-US$100/t range in the near term.  Outside of Brazilian supply disruptions, key drivers of the iron ore price include positive Chinese steel mill profitability. In addition, the lifting of pollution warnings in several cities in China this month could see steel mills restock, which could boost prices.

This could flow through to the iron ore miners. Macquarie sees upside in Rio Tinto ((RIO)) and BHP Billiton ((BHP)) with the stocks trading on forward 12-month free cash flow yields of 12% and 9%, respectively. Fortescue Metals Group ((FMG)) is its preferred iron-ore pick, with free cash flow yields of 15% for FY20.

Morgan Stanley, however, is less upbeat on iron ore. Analysts there expect the global iron ore market will loosen 95Mtpa by the end of 2020, “removing all remaining tightness in the market.” Morgan Stanley predicts iron ore will fall to US$70/t by the fourth quarter of 2020 from its 2019 peak of US$120/t, reducing the incentive for further expansion. “Most of our forecast 95Mtpa market easing through 2020 is due to our assumption that China's steel output will fall, as we expect housing starts to slow.”

Nickel stands out, zinc’s fall may cease

Nickel has bucked the trend and rallied as inventories plunge. Demand for physical delivery of the metal is also growing amid fears of short supply. The metal posted gains in early October after stockpiles in LME warehouses fell by 2.9% to 147,684 tonnes. Nickel is up close to 70% over the year to 7 October and is threatening to break back above US$18,000/t. According to ANZ, “the uptrend in nickel remains intact; but the metal is susceptible to short-term sell-offs.”

Macquarie Wealth Management expects the outlook for zinc to improve, with the commodity struggling for some time, with rising supply against weak demand, “and we think that we are now finally moving into the end stages of the correction.” Macquarie forecasts that zinc will soon find a floor around US$2,000-2,100/t and its descent should stop from mid-2020. “Unlike the other big base metals, zinc demand has already had its annus horribilis in 2019, with the important auto market slumping in China and Europe. More recently the figures have begun to move sideways, however,” noted the broker.

Energy markets weaker

Oil prices have slid since mid-September as hopes faded for any real progress in US and China trade talks that could diffuse fears over the global economy, which would weaken oil demand. Despite the recent attack on oil facilities in Saudi Arabia, weakening economic growth and expectations of higher US output have pushed crude oil prices down.

Still, ANZ sees some renewed upside for oil. Geopolitical tension in the Middle East is a key offset to the slowing oil demand growth caused by the deepening China-US trade dispute. “We revised our oil demand growth forecast for this year from 1.2mb/d to 1.0mb/d; but we still expect the balance to tighten in Q4 2019. With a tightening market balance and increased supply risks, we believe prices should factor the risk premium.”

China’s tightening regulation should help coal prices stabilise too, according to ANZ. Thermal coal prices at around US$66/t are down around -42% over 12 months to 3 October. Weighing on its price is that exports from major countries have increased, while the northern summer’s stronger demand is yet to materialise. According to Morgan Stanley, flooding at mines in India raised expectations could bring some support in the near term.

Australia's Department of Industry recently revised lower its forecasts for thermal coal prices as the market experiences weak demand for the fuel, it said Monday in its Resources and Energy Quarterly. In the latest report, the forecaster cut its forecast from the June edition for the average FOB Newcastle 6,000 kcal/ NAR thermal coal spot price for 2020 by -7% to US$68/t. The 2019 price was also dropped by -7%, to US$77/mt, while the forecast for 2021 was lifted by 3% to US$69/mt.

Gold

With slowing economic growth, geopolitical risks and another likely US Fed rate cut, ANZ sees investor demand for gold remaining strong. The sector may be vulnerable to brief pullbacks, as investors lock in profits. Strong ETF inflows have brought gold back above US$1,500/oz “and we expect this trend to continue for the rest of the year.” The silver price has outperformed gold since May and is likely to continue to do so for the immediate future.

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