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Material Matters: Iron Ore, Base Metals & Coal

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.

Iron Ore

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.

Base Metals

For those thinking of going long on copper, amid tightening scrap availability, Citi suggests pairing with zinc & lead, which are in bearish territory. The broker notes clients have been bearish on zinc & lead but were yet to go short, owing to upside risks from improving macro sentiment.

Above US$2,500/t Citi considers the risk to the outlook for zinc skewed to the downside and, while an improving macro environment could lift prices a little in the near term, the larger sell-off is not far away. Lead prices have also further to fall on news of the return of Port Pirie lead smelter, although those with lower risk appetite may want to wait for spread tightness emerging on the London Metal Exchange (LME), the broker suggests.

National Australia Bank analysts note recent trends in base metals have been mixed with aluminium, copper and zinc tracking higher while nickel has eased. That said, prices are still well below mid 2018 levels, with the exception of nickel. The poor outlook for economic growth and global trade is depressing base metal demand in 2020, the analysts suggest.

Morgan Stanley notes the resumption of nickel ore exports from Indonesia and rising inventory in Shanghai have brought the price below US$16,000/t. A correction appears overdue. After suspending exports two weeks ago, Indonesia has allowed exports to resume from nine companies, at least until January 1, 2020. Morgan Stanley estimates output at around 60,000t per month.

The partial lifting of the suspension plus rising Chinese imports from elsewhere supports the broker's view that China will have sufficient inventory to maintain nickel pig iron production through 2020 at around 500,000t. Given this and growing production from Indonesia, as well as weakening demand for nickel in stainless steel, Morgan Stanley expects the price to come under further pressure in 2020. Some upside risk maybe evident in the withdrawal of inventory from the LME.

Coal & China

A slide in the price of coal in China implies further deterioration in the fundamentals, Macquarie suggests. Prices slumped in the domestic coal market and the broker's reasoning is that the industry has been oversupplied in the second half of 2019, amid robust domestic production and stable imports.

The recovery in Shanxi production after a fatal accident in January disrupted the first half is adding supply pressure to the thermal coal market. Macquarie estimates supply growth for both thermal and coking (metallurgical) coal a similar, as the biggest coking coal producer, Shanxi, has been performing strongly and contributing 48% of China's domestic supply.

However, coal production from both Shanxi and Inner Mongolia fell marginally in September, which the broker considers worth noting. All up, it appears to Macquarie that market sentiment is reflecting concerns over supply growth vs relatively subdued demand growth, a function of weakening economic activity.

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