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Material Matters: Resources In 2020

Commodities | Dec 12 2019

A glance through the latest expert views and predictions about commodities. Resources in 2020; coal; base metals; gold; iron ore; and lithium.

-Generally, upside available across resources sector is reduced
-Cautious outlook for iron ore in 2020
-Supply rationalisation continues apace in lithium


By Eva Brocklehurst

What is the outlook for resources in 2020? One thing brokers generally agree on is that resource equity valuations are increasingly fair to full.

After a 17% return in the resources index in the year to date Morgan Stanley is cutting its industry view designation to In-Line, noting a -5% reduction in the average amount of upside available across its coverage. Hence, the broker downgrades the likes of Iluka Resources ((ILU)) to Equal-weight from Overweight. Citi, too, downgrades Iluka Resources to Sell from Hold, given the recent strength in the share price.

Citi downgrades resources bellwether Rio Tinto ((RIO)) to Neutral from Buy to reflect outperformance over 12 months against the ASX200. Ten out of the 19 stocks under Morgan Stanley's coverage are Equal-weight and, despite healthy balance sheets, elevated valuations and a reduced 2020 commodities outlook are expected weigh.

Citi is more upbeat about the outlook than Morgan Stanley, expecting global growth will be modestly higher and much of the improvement come from emerging markets. On the whole this should be positive for commodities.

2020 also holds promise for a trade breakthrough between China and the US, given the US will go to an election at the end of the year. Moreover, monetary and fiscal policies in both countries have meaningful potential for higher global GDP.


Morgan Stanley reduces coal price forecasts, lowering thermal coal estimates for 2020 and 2021 to US$66/t and US$69/t, respectively. In the case of Whitehaven Coal ((WHC)) and the reduced production guidance for Maules Creek, the broker lowers estimates and lifts costs.

Still, the assets are profitable through the cycle and there is possible growth in Vickery so Morgan Stanley sticks with an Overweight rating. Citi on the other hand downgrades Whitehaven Coal to Neutral because of the reductions to near-term earnings and the risk of ongoing weather-related production constraints at Maules Creek.

That said, the broker is bullish on hard coking (metallurgical) coal because of stronger imports in both China and India, and looks for the price to average US$170/t in 2020.

In contrast to coking coal, Citi is bearish on thermal (energy) coal, as weak European energy demand and persistently low natural gas prices weigh. Although traditional suppliers to the European market may redirect volumes to Asia, the latter is unlikely to be strong enough to absorb the additional supply and this points to further downside risk for thermal coal prices.

Base Metals

Morgan Stanley forecasts deficits for 2020 and 2021 in copper followed by a surplus in 2022, and believes this is the top resources segment for 2020. The broker retains a preference for Sandfire Resources ((SFR)) and considers OZ Minerals ((OZL)) fairly valued.

UBS lifts copper and nickel price forecasts slightly for 2020-2021 and finds OZ Minerals continues to stand out, having a large number of options to deploy capital new projects as well as expand production.

The broker recently upgraded Western Areas ((WSA)) to Neutral from Sell as the share price has declined -20% since October and is now trading in line with valuation. Western Areas remains highly leveraged to the nickel price.

Citi is bullish on a 6-12 month view for nickel and assesses risks are skewed to the upside. The broker expects the alumina market to move to a modest deficit 2020 as China curtails expansions and 2020 seaborne prices are expected to average US$335/t.


Morgan Stanley retains a negative bias towards gold as equities continue to imply gold above the spot price. Evolution Mining ((EVN)) is upgraded to Equal-Weight from Underweight as the stock has fallen -28% since its peak in August.

Citi notes gold equities are entering 2020 at record highs even with the US Federal Reserve on hold for now. This makes owning gold an attractive portfolio hedge in the current environment. While a soft landing is clearly priced for 2020, there are plenty of tail risks related to the US election and US/China trade, amid weakening hard data. This makes the broker wary of any risk rally.

UBS considers gold equities were largely overvalued in mid 2019 relative to the spot price. However, the situation has eased and a modest decline in spot gold to around US$1470/oz has driven a -20-30% decline in gold names generally, which the broker assesses are pricing in around US$1350-1450/oz.

UBS prefers Northern Star Resources ((NST)) in this scenario while believing the investment case for Alacer Gold ((AQG)) continues to improve, despite an almost 200% lift in the share price over the year to date.

Iron Ore

Morgan Stanley upgrades 2020 iron ore price forecasts by 5% to US$83/t but finds there is still no value in Fortescue Metals ((FMG)). Citi is cautious about iron ore too, expecting the seaborne market to move into a sizeable oversupply in the next two years and benchmark prices to fall to around US$60/t in 2022.


Supply rationalisation has continued apace in lithium, particularly from spodumene concentrate producers. Both Galaxy Resources ((GXY)) and Pilbara Minerals ((PLS)) have announced plans to curtail volumes for 2020.

Meanwhile, Mineral Resources' ((MIN)) Wodgina, under a new joint venture structure, has been mothballed, which defers a very large potential supply from the market. Citi expects more capacity reduction and deferral announcements in the next few quarters.

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