Commodities | Feb 19 2020
A glance through the latest expert views and predictions about commodities. Coronavirus implications for coal, oil, iron ore, gold, nickel and mineral sands.
-Thermal coal prices jump on possible shortage in China
-Downward pressure on oil builds, but reduced supply will support prices
-Gold price supported at US$1,600/oz
-Iron ore bottom seen at US$80/t
By Nicki Bourlioufas
Thermal coal stands out as price rises
Experts are revising their forecasts for key commodities in light of the novel coronavirus, though coal has been an unexpected beneficiary of is spread. While most commodity prices have dropped, the prospect of supply shortages in China have boosted thermal coal, with prices edging over US$70/t as the coronavirus outbreak halts industrial output and coal production in China.
While ANZ forecasts coal consumption could fall about -15mt in Q1 2020 compared to its original estimate, the biggest swing factor is coal supply. If coal production falls by -10% in Q1 in China, that would leave a deficit of around 35mt, to be met by imported coal. “If coal production falls -20% in Q1, that deficit blows out to 115mt (from 58mt in 1Q 2019). That would require a significant increase in imported coal to meet their demand,” says ANZ.
Oil prices drop substantially.
The International Energy Agency (IEA) last week revised down its oil demand forecast due to the coronavirus, predicting consumption will fall by -435,000 bpd for the first quarter of 2020, the first year-on-year contraction since the global financial crisis more than a decade ago. Previously, the agency expected consumption to increase by 800,000 bpd from a year earlier.
Morgan Stanley analysts too have lowered their 2020 global oil demand growth forecast from an already below-consensus 1.0 mb/d to 0.85 mb/d. Risks to this estimate remain to the downside given uncertainty around the coronavirus’ spread. However, Morgan Stanley forecasts Brent crude will be anchored at around $US60/bbl given OPEC’s commitment to production cuts in the face of falling prices. But if OPEC re-prioritises its market share, now at its lowest since 1990, prices could drop “substantially lower.”
However, Longview Economics says oil prices are now low enough to start generating a supply response, most notably a slowdown in production from US shale producers. They expect production growth from new US oil wells should fall. “A low WTI oil price (of ~US$50/bbl) should help set the stage for a meaningful tightening of the global oil market.”
ANZ Bank is more upbeat and sees oil prices recovering towards US$65/bbl from current levels around US$57/bbl (Brent). Following a slump in Q1 demand, a strong rebound is likely in subsequent quarters. OPEC too is committed to stabilising the market with a supply cut in Q2 and slowing production growth in the US should tighten the supply.
Virus Impact
In terms of iron ore, given softer demand in China and reduced steel production, prices have dropped. But the fall in prices will be limited, since the market is still recovering from the supply shock of Vale’s dam failure last year and the company will struggle to increase production this year. This should protect the downside at US$80/t, according to ANZ.
According to Macquarie Wealth Management, China mills’ weekly finished steel production continued to fall, down -4.6% week-on-week to 13 February to 8.98Mt, the lowest level in over two years.
The coronavirus has supported gold, though with the infection rate slowing, some safe-haven buying has been removed. Negative real interest rates and low interest rates globally “are keeping the backdrop benign for the price to rise above US$1,600/oz,” predicts ANZ.
Moving to nickel, Macquarie Wealth Management forecasts total nickel production could grow by 4% year-on-year to 2.47Mt in 2020. As in recent years, nickel pig iron (NPI) will grow faster than non-NPI, but all the growth this year will be in Indonesia with Chinese NPI set to fall by around -100-120kt due to less nickel ore availability. The massive ongoing growth in nickel has been driven by NPI. Since 2009, 80% of all growth in nickel supply of just over 1Mt has come from nickel pig iron. So far, Macquarie has assumed minimal impact for the year from the coronavirus, but that may change.
As for zircon, Morgan Stanley estimates that the coronavirus will likely impact 1Q 2020 production due to a combination of workers being unable to return to factories and a lack of availability of protective materials. The virus is also impacting logistics – while commencement of downstream factories has been delayed, even if factories can restart, some areas will find it hard to replenish raw materials.
A slow real estate start in China, which normally picks up post Lunar New Year, could lead to weaker ceramic sales in the next three months. Chinese zircon prices have fallen to US$1,480-1,520/t for Australian product while Iluka’s current reference price is US$1,580/t, “which we forecast will remain flat (with achieved price at US$1,353/t in in CY20 and US$1,462/t in CY21).” However, there continues to be downside risk to pricing, with downstream demand yet to see improvement, says Morgan Stanley.
While TiO2 export volumes have remained unchanged over the past three months, the price has dropped by ~US$80-100/t and is now expected to stabilise. “Our checks suggest that China will continue to grow TiO2 export market share (~5.4% in 2019). Internationally, the supply and demand balance in the pigment market appears stable; with players in the industry believing overall demand should be better in 2020 vs. 2019,” says Morgan Stanley.
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