Material Matters: Coal, Copper & Gold

Commodities | Dec 10 2019

A glance through the latest expert views and predictions about commodities. China's growth; environmental issues; coal; copper; Oz gold and base metal equities.

-Pressure on China's economy building but steel still robust
-Impact of environmental issues on commodity markets likely to grow in 2020
-China's coking coal production remains below 2014 peak
-Australian gold equities pullback now beyond spot price decline

 

By Eva Brocklehurst

China's Growth

Pressure on China's economy is building. Longview Economics points to a deterioration, as speculative capital is leaving China. This is reflected in tightening liquidity for small regional banks, rising non-performing loans and indications China's banking system is "too tight". Meanwhile, the trade war with the US is affecting the manufacturing sector.

Exports and imports are shrinking and the manufacturing PMI (purchasing managers index) has generally been below 50 in the past 12 months. Numbers below 50 indicated contraction whereas numbers above 50 indicate an expansion.

The main issue, in Longview Economics' view, is whether the signs of stress in the financial system and the economic weakness will spread and/or intensify. On balance, in the absence of increased stimulus, an acceleration of Chinese economic growth remains unlikely in 2020.

Platts data indicates the record steel output reported in China in 2019 was not overstated but rather driven by a surprisingly robust property construction market. Winter output cuts are no longer a concern for steel mills, which will be able to maintain production should margins be favourable. Platts expects steel output to be underpinned in 2020 by low interest rates, more proactive fiscal policy and low property inventory.

Resources Outlook

UBS believes December 15 will be a pivotal day for commodities, as the markets await news of whether US President Donald Trump will put previously announced tariffs into effect. More tariffs are likely to weigh on commodity prices, in particular base metals, while any Chinese stimulus is expected to favour bulk commodities through infrastructure expenditure.

Meanwhile, global production reductions in coal have begun and prices are below the cost curve for manganese, aluminium and alumina. Further cuts to production could be favourable for prices in 2020. UBS expects manganese will rebound into 2020, with copper and aluminium also higher. Iron ore is expected to decline over the year but remain strong at US$80/t. Lithium remains a story for the second half of 2020.

Environmental Issues

ANZ analysts expect there to be a noticeable impact on commodity markets from environmental issues in 2020. Tighter emissions regulations, such as IMO 2020, are expected to weigh on crude oil. The move to low-sulphur fuel in shipping could also mean crude runs increase and stronger demand for LNG should also emerge.

Increased spending on renewable energy is also boosting demand for value-added minerals such as copper. There has been a notable increase in wind and solar investment in China this year. For each megawatt of capacity, wind generator use five times more copper in construction than do coal-fired or hydro generators. The analysts calculate copper demand from the sector is up 20% and the trend is expected to accelerate in 2020.

Demand for higher grade iron ore should also rise as the analysts envisage another clean air campaign in China. Tougher environmental regulations are also contributing to demand for palladium. Demand for thermal coal imports to China is expected to weaken, as a new railway line was constructed to shift the transport of coal from trucks to rail and reduce coal dust emissions. The completion of this is likely to boost domestic coal consumption.

The analysts note energy companies are already re-directing capital away from the fossil fuel industry to markets more aligned with the renewable energy sector. Hence, growth investment in oil, gas and coal markets is expected to remain subdued and the impact should broaden to the wider resources industry. Capital for use in energy and mining expansion will become harder to obtain as a result.

Coal

China's domestic coking coal market is more than twice the size of the seaborne market, Macquarie calculates. Total coke production has grown strongly this year, reflecting strong steel production and a move away from scrap to pig iron in the furnace as steel margins weakened. The broker points out metallurgical coke is mainly used as a reductant in iron making and small quantities are also used in sinter and ferro alloy production.


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