Material Matters: Coal, Gold And Lithium

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A glance through the latest expert views and predictions about commodities. Thermal coal; gold stocks; and lithium.

-China's controls of coal setting the stage for weaker imports
-Opportunities in gold stocks continue to emerge
-Lithium prices may have further to fall during 2020
 

By Eva Brocklehurst

Thermal Coal

The International Energy Agency has estimated that the coronavirus pandemic will lower coal demand by -8% this year, marking the largest contraction since World War II. While economies are slowly reopening and measures are being relaxed, Commonwealth Bank analysts expect coal demand will gradually return, but achieving pre-pandemic levels will be challenging.

Seaborne thermal coal prices have fallen -20% over 2020, as lockdown measures weighed on demand. Given low prices, the analysts suspect curtailments of coal supply remain a real risk.

Competition from cheap gas and renewables, and China's coal import restrictions, are likely to keep thermal coal prices in the US$50/t range for most of 2020. The analysts also lower there long-term seaborne thermal coal forecast to US$65/t.

Controls of coal imports, alongside China's recovering output, set the stage for a weaker imports in coming months. China's thermal coal imports rose 29% in the March quarter as domestic lockdowns resulted in more imports of thermal coal.

Meanwhile, diplomatic tensions between China and Australia have increased and there is growing speculation that this will be the source of new restrictions on some of Australia's exports.

This has occurred before, in 2019 customs clearance times for Australian coal increased to 40 days from 25 days. The speculation in 2019 regarding this move centred on it being a response from China to Australia's blacklisting of Huawei from Australia's 5G network.

Given the precedents, the Commonwealth Bank analysts suspect Australian thermal coal exports to China could again be targeted and the speculation, regardless, could hurt prices and volumes.

ANZ analysts consider the latest coal developments are nothing untoward and just a move by China to support its domestic industry. Imposing restrictions is part of efforts to stabilise coal prices.

Actions taken in 2018, when the Chinese government previously attempted to curb prices, included increased scrutiny of excessive coal use and stronger market inspections to avoid price gouging and speculation. Macquarie also points out Shandong province, a major coal producing centre in China, is being subject to a government-led reform program to reduce high polluting plants.

Australia sends between 20-25% of both its coking and thermal coal exports to China. In 2019 China imported 225mt and of that 46mt came from Australia. What is actually occurring, the ANZ analysts suggest, is that China's policy measures are being compounded by depressed export markets elsewhere.

India implemented a lockdown in late March which has meant power generation declined -25-35%. Japan has also lowered its demand for seaborne coal. While the move is likely to be aimed at Australia it will weigh on coal prices and, while the restrictions are targeted at thermal coal imports, as in the past, the ANZ analysts suspect coking (metallurgical) coal imports will be caught up in the game.

Gold Stocks

Gold continues to strengthen, up 15% in US dollar terms in the year to date and 23% in Australian dollar terms, Credit Suisse notes, as investors seek out its safe haven status.

The broker assesses valuations based on spot gold pricing to provide a gauge of whether there is value in the current environment, and also to identify peer-relative mis-pricing.

The best value stocks screen as St Barbara ((SBM)) and Northern Star Resources ((NST)) under a scenario of sustained spot gold prices. Of the large stocks, Northern Star is the most leveraged to the gold price by virtue of being the only pure gold stock with a higher cost base and a relative underperformance.

Moreover, the gap to Evolution Mining ((EVN)) has now closed, Credit Suisse asserts, on account of the relative outperformance of the Evolution Mining equity and the growth in Northern Star's reserve base.

St Barbara offers the best value, pricing gold at around US$1386/oz, -20% below spot and below the broker's long run forecast of US$1400/oz. Credit Suisse believes St Barbara can close the discount at which it currently trades versus peers via execution at Gwalia, a return to consistent delivery of guidance once upgrade works are completed.

The other stock that screens well is Regis Resources ((RRL)), which appears attractive on a relative basis compared with the broader sector. Credit Suisse assesses around 20% of the stock's value is underpinned by McPhillamys, yet to receive a permit, and attributes only 50% of the McPhillamys discounted cash flow to group valuation to account for the development risk.

The most expensive gold stock is Newcrest Mining ((NCM)), pricing gold at over the spot rate, at US$1776/oz. Credit Suisse considers Newcrest a higher risk based on its asset concentration, PNG exposure and uncertainty around the upcoming capital deployment.

Lithium

Morgan Stanley suspects lithium prices may have further to fall during 2020. SQM, Sociedad Quimicay Minera de Chile, expects flat global lithium demand in 2020 and has stated its intention to increase sales and market share.

Considering the high levels of inventory in the industry and new capacity being delivered in 2020, this underpins Morgan Stanley's suspicions that the price will fall. SQM's average prices are expected to continue moving towards or even below Chinese spot levels, which are now around US$6300/t for carbonate and US$7600/t for hydroxide.

Sales have been affected by a slowdown in Asia over the March quarter because of the outbreak of the pandemic but SQM has made no revision to the volume guidance of 55-60,000t expected in 2020.

The company is sending product to warehouses outside of Chile to mitigate geographic risks associated with the pandemic. Management intends to finalise lithium capacity expansion to 120,000t by the end of 2021, highlighting there are no significant delays in spite of the pandemic.

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