Material Matters: China, Iron Ore, Manganese, Dividends

Commodities | May 21 2020

China, Iron Ore, Manganese, Dividends

-China’s threat to replace Australian iron ore imports considered hollow 
-Metallurgical coal prices likely to remain depressed till India picks up pace
-Manganese prices expected to shoot up further
-Mining dividends expected to outperform the banks

By Angelique Thakur

Iron ore exports and China: Muscle flexing with no substance

The ongoing Australia-China spat has soured trade relations between the two, with China threatening to move away from Australian iron ore.

Good luck with that! UBS’ mining sector experts describe iron ore as a very tight market with not a lot to spare.

Australia supplies 60% of China’s iron ore imports. The next best option available, Brazil, makes up 23% of the market but is beset with weak production and falling exports, observe the experts.

Even if demand from Brazil’s existing export markets - Europe and Jakarta - were to decrease, the analysts believe the hit to demand will be -60mtpa. This is not enough unless production really picks up, they assure.

China’s investment in Guinea’s Simandou iron ore project is also at least five years away from first production. All in all, UBS concludes, with conviction, a move away from Australia is highly improbable at this point.

Metallurgical coal – bleak road ahead

Metallurgical (Coking) coal prices started 2020 on a high note, peaking at US$163/t by mid-March. Things went downhill from there, with prices falling to US$109/t by late-April, reflecting worsening demand conditions across the globe.

With India making up 17% of the world’s coking coal imports, analysts at Commonwealth Bank were not surprised to see coking coal prices plummet right after the nation implemented a lockdown. The analysts consider India’s recovery a prerequisite to any meaningful price recovery for the fossil fuel.

Unfortunately, any recovery is expected to be tepid, with the analysts considering it far too optimistic for major importers- India, Japan and South Korea- to increase steel output as fast as China did after its lockdown.

The analysts predict the premium coking coal price to average US$110/t for the quarter-ending September before fully recovering by FY21-end. The Commonwealth Mid-Year Economic and Fiscal Outlook (MYEFO) estimates a -12% fall in coking coal prices in 2020-21 with upside of 18% forecasted for 2022-23.

Nickel – demand gap woes

Nickel Pig Iron (NPI) flows have seen a shift with increasing production and exports from Indonesia, supported by a weak domestic stainless-steel market and a ban on nickel ore exports.

This has somewhat offset falling production numbers in China, notes the Morgan Stanley team.

Contrary to expectations, nickel supply has seen minimal disruption but this has been overshadowed by a fall in demand from end-users due to lower stainless steel production and a contraction in China’s electric vehicles battery sales.

The team believes nickel presents limited upside potential unless there is a strong recovery in demand.

Macquarie experts note spot nickel prices are currently trading lower than their forecast. This will translate to lower earnings, the analysts predict, with average earnings for FY21-24 downgraded by -52% for Western Areas ((WSA)), -120% for Panoramic Resources ((PAN)), -55% for Mincor Resources ((MCR)) and -57% for Nickel Mines ((NIC)).

Companies with gold exposure have their earnings shielded somewhat from price weakness in base metals generally and are therefore preferred by the Macquarie.

These include OZ Minerals ((OZL)), Sandfire Resources ((SFR)) and IGO ((IGO)).

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