Material Matters: Oil, Gold & Base Metals

Commodities | Apr 07 2020

A glance through the latest expert views and predictions about commodities. Oil; Gold; base metals; and metallurgical coal.

-Reduced transport congestion hits fuel demand
-Gold the bright spot amid depressed growth and rates
-Base metal prices under pressure
-And metallurgical coal prices dropping rapidly


By Eva Brocklehurst


Global oil markets have endured the brunt of the coronavirus crisis, with the aviation industry the first to be hit. ANZ analysts note, globally, jet fuel makes up around 8% of total crude consumption.

However, the larger impact on crude demand has occurred recently, from diesel and petrol, as several countries move to lock down residents, substantially reducing road travel. Across Europe, congestion is down around -45% in March. In the US congestion in major cities has started to fall, and has reached -90% in Texas and New York.

The analysts note a study from Germany on the relationship between congestion and fuel consumption, and the impact is significant. Fuel consumption in free-flowing traffic is calculated at 8.2 litres/100 kilometres which increases to 14.7 litres/100 kilometres on congested roads. This is before any actual reduction in vehicle use is assessed as a result of the current crisis.

The ANZ analysts calculate that US petrol demand is likely to be down -60% from levels seen in February. The US and Europe make up 15% of the world's demand for vehicle fuel and demand is likely to have fallen by around -20mb/d.

The analysis suggests there has not been a demand shock to the oil market of this scale before, as in this case transportation sectors are effectively shut down. If second quarter GDP in Europe and the US falls by -10%, there is reason to expect world oil demand could be down between -5-20%.

When will it end? The analysts suspect that the first wave of restrictions will be eased on domestic travel, as has been the case in China, while restrictions on international remain in place longer. Hence, petrol and diesel consumption are likely to recover first and a recovery in jet fuel take longer.

This raises the risk of a lower-for-longer oil price and makes the supply side issue (OPEC/Russia production wars) largely irrelevant. The analysts suspect, with a lack of available storage, supply will start being shut down if the current demand destruction continues.


Goldman Sachs has revised gold price forecasts, expecting the yellow metal will now average US$1638/oz in 2020 and US$1800/oz in 2021. The drivers are risks to global growth, depressed real rates and an increased focus on the US election.

Goldman Sachs believes the Australian gold sector is well-positioned and can capitalise on healthy margins, strong balance sheets and a favourable outlook for the gold price.

The broker prefers St Barbara ((SBM)) in terms of valuation, Saracen Mineral Holdings ((SAR)) because of its compelling production and earnings growth profile, Resolute Mining ((RSG)), which is upgraded to Buy from Neutral, and OceanaGold ((0GC)) because of a deep discount to valuation. Newcrest ((NCM)), IGO Group ((IGO)) and Regis Resources ((RRL)) are all upgraded to Neutral on valuation.

The broker believes companies will continue to protect balance sheets and reduce dividend pay-out ratios, deferring growth expenditure where required. At the operating level there is some downside risk to production expectations and there is likely to be delays in mine construction because of restrictions on labour and equipment movements.

Base Metals

Base metal prices have also come under pressure since the escalation of the crisis in mid January. Zinc prices have fallen -23%, copper -21% and nickel -17%. Lead and tin prices are down -14% and -17% respectively. Macquarie notes cobalt prices are also now down -8%.

The vast majority of Macquarie's base metal miners have production and cash flow based in Australia and the fall in base metal prices has coincided with a -10% decline in the Australian dollar exchange rate. This has softened the blow for nickel and copper somewhat.

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