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Material Matters: Oil, Nickel, Iron Ore & Coal

Commodities | Oct 30 2019

A glance through the latest expert views and predictions about commodities. Oil; nickel; iron ore; metallurgical coal; and thermal coal.

-Are Russia/Saudi Arabia on the same page for oil production cuts?
-Nickel ore exports from Indonesia appear to be abruptly ceasing
-Iron ore price unlikely to be sustained into 2020
-Supply reductions required to lift coking coal price substantially
-Fundamentals brighten somewhat for thermal coal

 

By Eva Brocklehurst

Oil

Saudi Arabian officials have indicated a desire to stem growth in oil inventories in 2020. Given the backdrop of weakening global economic growth, Citi suggests OPEC et al can easily rationalise a deeper cut to production, although Russia and Saudi Arabia appear to be drifting apart.

Hence, the Saudis may need to consider deepening production reductions, along with United Arab Emirates and Kuwait, if Russia abstains. Russia's energy minister has indicated it is too early to state what might be required by the market in 2020.

Meanwhile, the Russian oil industry tsar, Igor Sechin, has raised doubts about Saudi Arabia's reliability as an oil supplier. Citi points out the Russian industry has been arguing that production caps were reducing the long-term growth potential of the country's oil companies.

Mr Sechin has also asserted the US is exercising more control over the oil market than Russia and Saudi Arabia, through sanctions that have reduced targeted country exports significantly as well as from rapid growth in shale output.

He also stated that the US has a privileged position in financial markets which should end and his company, Rosneft, will now conduct all oil and gas sales in euros. The Saudi currency is tightly pegged to the US dollar while the Russian rouble floats.

Citi acknowledges the overlap between Saudi and Russian interests in the energy sector has been imperfect yet both countries retain an interest in their mutual ability to affect prices. This makes the Sechin comments significant regarding the potential future direction of bilateral ties.

Nickel

UBS flags press reports which indicate the Indonesian government and the country's Nickel Mining Association have agreed to cease nickel ore exports immediately. To UBS, this appears to be an agreement rather than a decree or changing regulation.

By laws enacted in August, exports were to cease in January 2020. This appears to have the unintended consequence of nickel miners preferring to export to China rather than supply domestic smelters.

The industry agreement cited in reports appears to indicate pricing for domestic ore will be on parity with China's spot prices, with freight netbacks. The nickel price has rallied around 60% in the year to date, mostly because of the shift in Indonesia's export policy.

The bringing forward of the ore export ban without offsets has led to a temporary loss of around -8% of global supply. UBS believes the risks are mostly priced into nickel and nickel equities and maintains a forecast for US$7.50/lb.

However, price risk lies to the upside from the shifting policy and the consolidation of metal inventory. Nickel inventory on the London Metal Exchange has halved in just a month because of buying from Tsingshan on a view that supply will be tight in 2020.

Iron Ore

UBS notes unprecedented volatility in iron ore has occurred this year. First half news was dominated by supply-side shocks and, along with record productivity from Chinese steel mills, induced prices to rise 70% by the end of June.

Prices have drifted lower for much of the second half as major producers return from outages, with spot iron ore now at US$87/dmt. Nevertheless, the recent closure of Vale's Itabirucu dam serves as a reminder that a return to full capacity will not be smooth.

UBS considers current prices are necessary, as non-conventional high-cost supply has lifted. China's steel output is on track for a record year and remains supportive of the iron ore price as well.

Beyond 2019, the market is expected to come back into balance and such price levels are likely to be unsustainable. Hence, the broker prefers BHP Group ((BHP)) and Rio Tinto ((RIO)) over pure iron ore plays which are more exposed to a decline in prices, such as Fortescue Metals ((FMG)).

Metallurgical Coal

Morgan Stanley expects a partial recovery in the metallurgical (coking) coal price, to US$165/t, based on seasonal demand improving in India, China's import quota being re-set for deliveries in 2020 and the US cutting back exports.

As expectations for a near-term recovery in demand fade, the broker would require more meaningful supply reductions to lift prices further. Metallurgical coal is more exposed to steel weakness outside of China than iron ore, in Morgan Stanley's view. With the marginal cost of seaborne hard coking coal hovering in line with the spot price there is little incentive for significant reductions to supply.

The main risk to the upside, in the broker's view, is a chance of disruptions to Australia's concentrated supply base during the November to April wet season.

Thermal Coal

Macquarie observes production cuts have materialised in thermal coal. While coal remains uncompetitive against gas in Europe, spreads have improved since the northern summer, pointing to a much more balanced Atlantic market. Observable thermal coal inventory has stabilised, or started to decline, at all major consuming hubs in China, India and Europe.

A bearish factor has been removed, namely China's port restrictions, which are not materialising as previously expected. Macquarie suspects port authorities may have been instructed to "go soft" on coal imports to avoid the risk of sudden spikes in prices. Moreover, it appears likely India's imports will need to rise to offset a slump in production during the monsoon.

Strong demand growth is also flagged from Vietnam amid a surge in power generation and falling local production. This is likely to be a source of relief for high-ash Australian coal, in the broker's view, which has have struggled to sell in China.

All up, Macquarie suspects the fundamentals for thermal coal have brightened somewhat and reiterates a view that spot prices have bottomed. However, for a compelling price rally to take place a clear catalyst is required, and coal is likely to struggle as long as the LNG market remains stuck in such deep oversupply.

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