Material Matters: Met Coal, Iron Ore And Nickel

Commodities | Jun 03 2020

A glance through the latest expert views and predictions about commodities. Met coal, iron ore and nickel.

- Supply glut in metallurgical coal to continue in the near future
- Copper shows resilience backed by strong fundamentals
- Hit to nickel supply along with a collapse in end-use demand
- Iron ore prices expected to reduce during the second half

By Angelique Thakur

Metallurgical-Coal: Current glut caused by weak demand

Seaborne metallurgical (coking) coal has a diversified demand base with 77% of demand from countries other than China, for example India, Japan, South Korea, Europe and Brazil.

Massive steel output cuts in these regions point to a -25-30% year on year output fall, impacting the demand for coking coal.

Since it is costly to idle coke ovens, most steel mills keep their ovens operating. This implies the decline in coking coal demand will not be as steep as that witnessed for steel, suggest Morgan Stanley analysts.

This was also seen during the global financial crisis when steel output for key regions (excluding China) fell by -38% year on year over February-April 2009 while met coal imports fell by just -13%.

Based on this logic, the analysts predict ex-China crude steel output to contract by -13% in 2020 and rebound by 8% and 5% in 2021 and 2022 – forecasting a V-shaped recovery.

Over the same time, seaborne met-coal demand is forecasted to decline by -11% in 2020 and increase broadly in line with crude steel production thereafter.

Morgan Stanley experts note hard coking coal prices are down more than -30% since mid-March. China, as influential as it is in driving iron ore prices, does not have the same effect on met coal prices as it imports 82% of its iron ore requirements while just 9% of its metallurgical coal needs.

Having said that, the country is still an important spot market buyer in the seaborne market, buying unwanted cargoes. However, the current glut in its thermal coal market may lead to tightening of import restrictions with met coal as collateral damage.

With many players still making money at the current price levels, the supply contraction of -7% expected by the experts for 2020 will mostly be led by disruptions in Mongolia and mine closures in the US and Australia. Once these are resolved, the experts expect met-coal supply to grow.

The analysts forecast prices to dip to US$105/t in the third quarter, gradually recovering to US$145/t by the second quarter of 2022. Overall, the revised price outlook implies prices lower than consensus for both 2020 and 2021.

Morgan Stanley analysts are Overweight on both South32 ((S32)) and Whitehaven Coal ((WHC)). They expect 12% of South32’s FY20 revenue to come from met coal.

Overall, the experts predict a -1% decline in Australia's exports this year which translates to 2mt.

Copper: A dip is just a blip

Strong buyer activity in China helped prop up copper’s price throughout the second quarter even as end-use markets contracted globally.

However, softening signals from China and an increase in supply raises the question of whether demand is strong enough to prevent a price fall. Morgan Stanley analysts answer in the affirmative.

They point out copper scrap inventories have not seen an excessive build-up with supply shortfall matching the demand decrease. This along with a relaxation of the lockdown measures and positive stimulus should ensure resilient copper prices.

However, the China-dependent immediate scenario presents some downside risk due to a slowdown in buying by the country along with supply running ahead of overall recovery in global markets.

The analysts report restarting of major mines but warn there will be no strong growth in the second half with low prices impacting capacity utilisation. The analysts peg the loss from this at -540kt year till date.

Backed by strong fundamentals, any dip in the price presents a buying opportunity, insist the analysts, who forecast a strengthening of the price during the second half.

They consider copper their preferred metal and expect it to play an important role in the post-covid-19 story.

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