Commodities | Aug 26 2020
A glance through the latest expert views and predictions about commodities. Iron ore; gold; alumina; metallurgical coal; and chrome.
-Tight supply/demand in iron ore could mean prices remain elevated
-Gold prices could stay higher for longer
-As inventory rises in China downside risk emerges for alumina
-Is a bottom finally emerging for coking coal?
-High chance of amount a market deficit in chrome
By Eva Brocklehurst
Iron ore prices at spot have been just below US$130/dmt and have averaged US$96/dmt over the year to date. Why? On the demand side, there is a strong economic recovery in China, which has meant crude steel output has risen, and on the supply side there have been disruptions to production in Brazil and South Africa.
Economic stimulus in China is fuelling steel demand and UBS also notes vessel queues outside of China are growing. Extended customs checks related to the pandemic have materially slowed offloading.
This explains low port inventory and higher prices. Ship loadings are expected to increase in August-September and may weigh on futures prices. China is responsible for more than 50% of global crude steel output and makes up around 75% of seaborne iron ore demand.
UBS also observes the correlation between iron ore prices and the shares of the bellwether producer, Brazil's Vale, have broken down temporarily. The market has assigned limited upside to earnings drivers which are temporary, such as Chinese stimulus and supply disruptions.
UBS disagrees with the view that that Vale has structurally de-rated following the dam breach at Brumadinho. In the second half of 2022 Vale is expected to benefit from higher volume sales and temporary weakness in freight rates when the Chinese vessel queues ease, which would add capacity to the seaborne market.
UBS believes current prices are unsustainable over the medium to longer term but the tight supply/demand situation could mean prices remain elevated for some time. The broker lifts 2020 price forecasts to US$98/dmt and adds US$5/t to the forward curve out to 2023.
UBS has re-jigged gold price forecasts, expecting these to stay higher for longer. For 2021 the broker now expects US$2100/oz and for 2022, US$2000/oz. This drives a substantial lift to the broker's net profit forecasts for the sector.
At present, the broker's valuations are based on a US$1900/oz price and no ratings have been changed. Most preferred stocks are Newcrest Mining ((NCM)), Saracen Mineral Holdings ((SAR)), Regis Resources ((RRL)) and OceanaGold ((OGC)), in that order.
Production growth is expected across most of the broker's coverage with Saracen the strongest and Newcrest perceived to be in peak production but with a growth path from development of both Red Chris and Havieron. Cost inflation is also likely and some of this is discretionary. As the gold price lifts managements often decide to exploit lower grade ore that may have been uneconomic previously.
Output at the Norsk Hydro Alunorte refinery has been reduced to 35-45% capacity as a result of pipeline maintenance. This latest outage brings the alumina market ex-China temporarily into balance. As a result, Morgan Stanley points out the price has risen to cut off the flow of exports and preserve the supply outside of China. This is likely to then drive China's domestic price higher.
Morgan Stanley envisages further upside for the alumina price FOB Australia, which has already risen to US$280/t, with the possibility to extend beyond US$300/t. Once production is restored at Alunorte prices are likely to return to the mid US$200/t region.
Fundamentals continue to suggest to the broker a more bearish price outlook and, as visible inventory rises in China, there is downside risk. Still, a weak US dollar, stockpiling and speculative interest should mean the price trades well above production costs.
Is a bottom emerging for coking (metallurgical) coal? Prices have been depressed since April as a result of the pandemic which has affected manufacturing and negatively impacted demand. UBS believes further downside is unlikely though, as current prices put 23% of seaborne supply out of the money. Moreover supply restraint is being exercised along with a number of major mine outages.