Commodities | Nov 18 2019
A glance through the latest expert views and predictions about commodities. Guinea; iron ore; base metals; and coal in China.
-Shaw and Partners relieved Fortescue did not win bid in Guinea
-More stability for iron ore expected in 2020
-Citi suggests pairing long copper with short zinc & lead
-Subdued economic outlook weighing on coal sentiment
By Eva Brocklehurst
Fortescue Metals & Guinea
Guinea hosts some of the largest and highest-grade iron ore deposits and Fortescue Metals ((FMG)) had put its hat in the ring for the recent auction process. The crucial word is 'deposits', as Shaw and Partners notes there has been a long and arduous journey for those, such as Rio Tinto ((RIO)), aspiring to develop deposits in Guinea over the past decade, emphasising there is no current production.
The government has announced a preferred bidder for Simandou blocks 1 and 2, a consortium representing China, France, Singapore and Guinea interests, which put a US$14bn offer on the table, including 650km of rail. Fortescue Metals is understood to have offered well below the winning bid and did not formally promise to build the railway.
The initial response from Shaw and Partners is "phew". The reason given is the general lack of understanding of what the company was doing in Guinea and why. The broker acknowledges, at the right price/structure, such a province is an opportunity for an iron ore major. Nevertheless, Guinea is not Western Australia, either geologically, politically or fiscally.
Vale will resume operations at its Alegria mine, adding 8mtpa to its system capacity, which now stands at 357mtpa. JP Morgan notes Vale should arrive back at 400mtpa by the end of 2021 if it delivers on guidance.
Meanwhile, Rio Tinto has announced it will not reach 360mtpa until after Koodaideri ramps up in 2021. JP Morgan maintains a forecast of US$85/t for the iron ore price in the first quarter of 2020 amid positive near-term drivers such as improving global PMI and stronger steel spreads.
Macquarie also assesses positive signs are emerging in the iron ore market as steel margins improve. Premiums for high-grade iron ore have remained relatively stable at 110%, the broker adds. Low-grade prices have been more volatile. While port stocks of iron ore have remain flat, suggesting a re-stocking of inventory is yet to occur, this presents a near-term catalyst for prices.
The broker notes Rio Tinto has cut its Pilbara guidance twice in three months from weather disruptions and operating issues and maintains a long-term forecast of 340mtpa. Meanwhile, BHP Group ((BHP)) shipments are running in line with the top end of guidance of 265-270mt. Fortescue Metals expects to ship 170-175mt in FY20.
ANZ analysts point out traders are becoming more bearish on iron ore amid compression in steel margins and the rising supply of high-grade Brazilian ore. These issues are affecting Chinese trader sentiment as a recent trip to China confirmed.
Steel traders appear to be running down stocks in case demand retreats further as winter arrives. Hence, with November being traditionally the weakest monthly year for steel output, iron ore prices are likely to explore the downside support level of US$70/t before the end of the year.
ANZ analysts warn the market is getting too far ahead and overly confident on Vale's ability to return to capacity, which the company has indicated is 1-2 years away. A more stable backdrop is expected in 2020 because of Chinese stimulus measures and ongoing supply constraints in Brazil.
National Australia Bank analysts maintain iron ore forecasts, expecting Chinese landed spot prices will average US$93/t in 2019 and ease to around US$74/t in 2020.