Material Matters: Previews Qtr Updates Part 2

Commodities | Jan 16 2020

A glance through the latest expert views and predictions about commodities. Iron ore; oil & gas; gold; copper; nickel; and lithium.

-Iron ore: is Fortescue Metals overvalued?
-Oil price recovery buoys large producers
-No demand for risk in gold equity market
-Strong start for lithium in 2020

By Eva Brocklehurst

Stockbrokers are generally positive about the 2020 outlook for commodities.

JPMorgan believes global growth will accelerate throughout 2020, particularly in Asia, which bodes well for commodities demand and a continuation of positive momentum in prices.

However, many ASX-listed stocks are starting to look fully valued. Alumina Ltd ((AWC)), Woodside Petroleum ((WPL)), Santos ((STO)) and South32 ((S32)) have just provided market updates.

Iron Ore

Both Morgans and Macquarie view investor sentiment towards large-cap miners as positive, amid robust earnings and dividends. Morgans remains most confident about the iron ore miners for the December quarter, which is typically seasonally stronger ahead of the wet season.

While there were signs of record shipments at the finish of 2019, Macquarie notes shipping volumes for the majors have decreased markedly over the last week and a constrained supply outlook amid positive growth in steel production in China should should contribute to another deficit year in 2020, keeping prices above the industry cost curve.

Macquarie is equally well disposed to both BHP Group ((BHP)) and Rio Tinto ((RIO)), reiterating Outperform ratings and noting both are offering free cash flow yields of 8-10% at spot prices.

Morgans expects Rio Tinto to achieve its 2019 production guidance and, while the share price is testing recent highs, envisages fundamental support for the valuation. However, South32, which has no iron ore exposure, is likely to have a mixed quarter.

Fortescue Metals ((FMG)) remains Macquarie's preferred pure-play iron ore stock, with free cash flow yields of 12-15% at spot prices. Yet Morgans begs to differ, finding it hard to justify the share price on fundamentals.

Hence, the broker retains a Reduce rating and remains cautious about how the stock may trade if momentum in iron ore ebbs. JPMorgan has downgraded Fortescue Metals to Neutral, given the sharp increase in the share price over 2019.

As iron ore approaches US$100/t again the broker believes investors will be reluctant to chase the stock because of fears the market will become overheated. The broker acknowledges a strong dividend yield but considers the fair value estimate has been achieved.

Oil & Gas

Large oil & gas producers have been buoyed by a price recovery in oil. Still, oil stocks may find it harder to maintain support on any disappointing results, Morgans suggests, given the drop in the price of oil over the last week.

There is also improved optimism towards global growth in 2020. The broker expects another strong quarter from Woodside Petroleum and 2019 group production of 89.5mmboe, within guidance. Production for 2019 of 73mmboe is expected from Santos, with GLNG upstream and Cooper Basin the key areas of interest.

Morgans has downgraded Santos to Hold from Add, following the share price appreciation.

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