Material Matters: Copper, Gold & Iron Ore

Commodities | Aug 03 2020

Copper price movement and its correlation with the futures market; investment demand is driving high gold prices; iron ore market likely to be in deficit through 2020-21

-Copper price drivers: Futures market and China’s growth prospects
-Gold prices may be in for a correction
-Diversified miners expected to announce strong dividends

By Angelique Thakur

Copper: It's complicated

The last four months have seen the price of copper increase by 33%. Longview Econonomics suggests being 'long' copper has become an increasingly crowded position while sentiment readings on copper are at a ten-year high.

Longview has tried to decipher what is actually driving the copper price. The obvious answer points to changes in global demand and supply. At least this is what general consensus suggests is the case.

Longview, however, thinks the price of copper is more closely correlated with the futures market.

A look at copper futures trading in 2019 shows the total volume of copper traded on major futures exchanges amounted to 1.6bn tons. This is 64 times more than the copper produced and consumed in the physical market each year, which at about 25m tons, looks measly. This, suggest the analysts, reflects the financialisation of copper in the last decades.

Another factor impacting the global bellwether’s pricing is the outlook for China's economic growth, the report suggests. In particular, the Chinese 2-year sovereign yields, Chinese equity market and the exchange rate (renminbi versus the US dollar) are factors affecting the metal's price direction.

Currently, these variables combined suggest copper prices are expected to rise in coming years.


Australian iron ore: Minimal impact from the pandemic 

Wilsons' Australian equity focus list is Overweight the materials sector, on belief the sector is in a cyclical upgrade cycle.

Iron ore prices have rallied from US$90/t in the fourth quarter of 2019 to around US$110/t currently.

The Australian mining industry has experienced minimal volume loss, reports Wilsons, as opposed to production declines of as much as -30% in other parts of the world with the pandemic unleashing its wrath on the local labour force.

The August reporting season is likely to see the diversified miners announce stronger dividends. There may even be scope for market upgrades for FY21 estimates, expects Wilsons.

Going ahead, the analysts feel the iron ore market is likely to be in supply deficit through 2020-21, with Vale continuing to deal with supply issues.

With current FY20 dividend yields at about 5%, both BHP Group ((BHP)) and Rio Tinto ((RIO)) are Wilsons' key picks in the sector.  Where Rio Tinto leads in terms of iron ore margins, BHP is well-positioned across key commodities.

Post-lockdowns will see governments pivoting policies to project/infrastructure initiatives from income support (also seen in China post-lockdown).

Farther out, most commodity forecasters see iron ore prices going back to US$65-70/t in the next 12-18 months.

Gold: Weak consumer demand to continue

Gold has continued to climb dizzy heights, reaching a record price of US$1,981/oz in the last week of July, breaking its 2011 high record.

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