Commodities | Jul 13 2020
The current gold price rally is expected to continue into FY22; Subdued demand growth outlook for metals; Dividends forecasted for Metal stocks
-Gold price is expected to touch US$2000/oz in 2021
-With China running out of things to build, demand outlook subdued for industrial metals
-A look at dividends expected for metal stocks
By Angelique Thakur
Gold: Rise and Shine
Expecting low-interest rates in the future, Citi is bullish on gold and forecasts prices to rise to US$1825/oz in the second half. Macquarie also agrees and suggests the current rally is a financial one driven by negative real rates.
Gold equity valuations are not inexpensive, admits Citi, noting the ASX All Ords Gold index is up 31% year to date. However, the yellow metal stocks are also still not at the high levels seen in late 2011 and Citi analysts feel this is not the time to be underweight on them.
Citi believes gold prices will outperform consensus expectations but warns if expectations don’t play out, gold equities may underperform more than the underlying gold price.
Citi has downgraded Newcrest Mining ((NCM)) to Neutral while moving to Sell on Evolution Mining ((EVN)). In mid-caps, Citi prefers Northern Star Resources ((NST)) while downgrading Perseus Mining ((PRU)) to Neutral after a 30% one-month gain in its share price.
Macquarie prefers Westgold Resources ((WGX)), highlighting the company finished the year on a strong note and offers some of the best operational leverage of the peer group.
Dacian Gold ((DCN)) and Aurelia Metals ((AMI)) are also rated Outperform by Macquarie.
Over the next 12 months, Citi expects gold stocks to trade at historic multiples but cautions the journey may not exactly be straightforward. Citi expects gold prices to plateau at US$2000/oz for many quarters into FY22.
Industrial metal prices have risen on the back of a broad-based recovery in trade flows and if this was not enough to generate investor excitement, the fact that this recovery is backed by an actual increase in activity in material-intensive sectors (property and infrastructure and mostly in China) and is not speculative definitely bolsters investor sentiment.
The obvious question then centers around market fundamentals for these metals and the stability of the rally over the medium-term.
Macquarie, in a bid to analyse the present situation, studied demand growth for various commodities over a 25-year period. The conclusion is for future growth rates for all base metal to be at-or below their 10-year and 25-year CAGRs (compounded annual growth rate).
Macquarie, even though it forecasts positive demand growth for these markets, expects a somewhat subdued growth outlook when seen against growth rates over the last 10-20 years.
In fact, the broker notes consumption rates of commodities were already slowing down before the pandemic hit the markets.
The impact of the global lockdown in the first half has been so huge that Macquarie forecasts a fall in the consumption growth rate of base metals by -1-7% on a yearly basis. This is despite expecting a broad-based recovery during the second half of the year.
Moreover, even though a recovery is expected over the medium term, Macquarie admits growth rates are likely to remain at levels below those reported in recent decades.
Copper’s demand growth post-2020 is expected to be capped at about 2% per year with zinc predicted to grow 1.5% per year.
On a similar note, alumina’s global demand has been relatively strong in the GFC to 2018 period but is now expected to slow down to less than 2% per year due to slowing activity in key alumina consuming sectors worldwide.
Nickel is Macquarie’s preferred long-term exposure given its relatively strong demand growth which nevertheless has fallen from the more than 6% levels seen in 2010-13 to a more moderate 4% per year.
This has been driven by a moderation in stainless steel demand, offset somewhat by an increase in nickel bearing electric vehicle battery demand.
Bulk commodities have not been spared, and have seen a declining trend in demand growth from their 2011-12 peaks.
Demand rates for steel and its raw material are about half of 25-year averages and reflect a maturing of China’s massive steel-consuming property and auto sectors.
Thermal coal’s demand growth has also collapsed as a result of stalled investment in new coal supply in recent years in a bid to move away from coal and reduce carbon emissions.
Overall, China consumes about 40-70% of the market supply and Macquarie notes a moderation in China’s intensity of consumption as the country runs out of things to build.
This in turn translates to a subdued global metals/bulks’ demand growth outlook, concludes Macqaurie.
Reporting Season FY20: Iron Ore expected to give biggest the bang for your buck
With the financial year over, the focus has now turned to the results season in August. Macquarie points towards a mixed outlook for bulk commodities with weak prices for coal and alumina on the one hand and buoyant for iron ore prices on the other.