Material Matters: Bulks, Base Metals & Gold

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A glance through the latest expert views and predictions about commodities. US election; bulks; base metals; and gold.

-Looming US election enhances commodity volatility
-Momentum should support coal stocks while iron ore even more buoyant
-Demand out of China underpins September quarter gains in base metals
-UBS switches preference back to gold stocks from base metal stocks
 

By Eva Brocklehurst

US Election

ANZ Bank analysts assert, as a major event in 2020, nothing compares with the pandemic in terms of the effect on global economies. Nevertheless, the election of a US president can agitate markets.

The last 25 years of US elections show few trends in commodity markets, yet using copper, gold and crude oil as guides, the analysts note a trend to higher returns for copper and gold one month leading into the election date. Oil is slightly lower. One month after an election the average return is generally negative for all three.

In terms of the policy platform, from a growth perspective, a win for Joe Biden would be the best outcome and the analysts expect commodities such as copper and crude would benefit the most.

Joe Biden has a softer stance on sanctions against Iran and Venezuela and an aggressive climate agenda that could hurt fossil fuel demand. However his infrastructure plan should benefit metals such as copper and nickel.

Should President Trump win, headwinds for industrial commodities are anticipated while gold would be well supported. The main uncertainty is a disputed result which is likely to stimulate demand for safe-haven assets.

Bulks

Macquarie notes China's thermal coal spot price has lifted to RMB599/t, just shy of the "red zone". A sustained lift into this zone would require the authorities to intervene "somehow", which typically involves a supply-side measure.

Still, the broker notes it is difficult for the government to start capping local coal prices as the country's vast domestic industry is reporting weak supply growth and import restrictions remain in train.

Moreover, winter re-stocking is about to begin. Policy adjustments for the short term are anticipated to include a lift in production rates at certain mines and a relaxation of import restrictions, which would be bullish for seaborne thermal coal.

Nevertheless, buoyant iron ore prices and positive leading indicators underpin Macquarie's bullish stance on iron ore exposures, which are preferred to pure coal stocks.

Citi notes that while the common wisdom suggests if the price of the underlying commodity rises the stock follows, this is often not true. Over the long-term this may hold but in the short term there is frequently a divergence.

Citi expects Whitehaven Coal ((WHC)) could benefit from a lift in thermal coal prices as the northern hemisphere re-stocks along with a relaxing of China's import restrictions. The broker notes Whitehaven Coal currently trades at a deep discount to discounted cash flow and risk appetite.

Momentum in coal prices over the next few months should support South32 ((S32)) as well, from winter restocking and a rolling forward of 2021 quotas in China. Metallurgical (coking) coal is also expected to benefit from a recovery in steel production outside of China.

What would it take for iron ore pricing to hold at US$90/t through to at least 2023? This is the question Credit Suisse contemplates, given its base caseis  for a high of US$105/t in 2021 before the price rapidly descends. This view is based on expectations that steel demand in China will subside and result in large surpluses of iron ore.

However, what if demand in China simply plateaus and an iron ore surplus does not eventuate? Then, the price outlook would be more constructive and perhaps average US$90/t, the broker suggests.

On the supply side, little in the way of expansions are planned. Vale is expected to recover to 400mtpa by 2023 and an increase to 450mtpa will probably proceed as will the development of Rio Tinto's ((RIO)) Simandou mine, but Credit Suisse assesses these are propositions beyond 2025.

Hence, pricing really depends on demand out of China. China's per capita steel consumption is high at 720kg per person but has not yet reached the peak level experienced in Japan the 1970s.

Base Metals

The London Metal Exchange base metals complex experienced quarterly gains across the board in September, which Macquarie notes is an unusual occurrence. This is indicative of macro drivers such as a weaker US dollar and a recovery in the Chinese economy.

The overwhelming importance of demand out of China has meant the metals moved into positive territory very quickly as a recovery came into view. Copper and zinc led the way for gains in the quarter, rising 21% and 18.9%, respectively.

However, gains were eroded somewhat later in the month amid concerns that China's stimulus may have peaked and worries over a second wave of coronavirus in Europe, as well as the outcome of the US presidential election.

Despite continuing disruptions resulting from the pandemic, zinc concentrate treatment charges have fallen sharply over September that reverses a three-month upward trend. This has put pressure on traders and smelters to cover short positions, the broker asserts.

Meanwhile, Macquarie is puzzled by the huge flow of primary aluminium into China over this year, given the country is a net exporter of the metal. Russia was the biggest contributor to the imports and the broker assumes most of this is been stockpiled.

Moreover, for aluminium alloy the picture is even more puzzling, as lower liquidity products are not suitable for financing and tend to go straight to industrial use rather than stockpiling. There is also little evidence that this material is scrap or secondary material.

UBS suggests the pace of materials imports is stronger than underlying demand in China, in part driven by the strategic initiatives taken by central provisional governments. While visible metal inventory is low the broker suspects copper inventory within goods such as cars and appliances has lifted.

Prices over the September quarter were generally higher than expected and are now above cost support levels. The broker factors in a flat price outlook for copper and nickel but acknowledges this view carries downside risk.

Gold

Following the strong performance in base metals in the September quarter and the looming uncertainty, UBS has switched its preference back to precious metals following a pullback in both the gold price and gold equities.

The broker prefers gold stocks which offer production growth, quality assets and robust free cash flow. Saracen Mineral Holdings ((SAR)) and Northern Star Resources ((NST)) offer the strongest production growth. [Note, UBS is writing before yesterday's merger announcement between the two, which was well-received by the market.]

Newcrest Mining ((NCM)) is perceived as having passed peak production but actually, the broker observes, it offers growth via the development of both Red Chris and Havieron. UBS believes the potential of Havieron is not fully understood.

The broker prefers SSR Mining ((SSR)) for its sector-leading yield and Saracen for production growth at an attractive valuation. Newcrest Mining and OceanaGold ((OGC)) appear the least expensive while Evolution Mining ((EVN)) the most expensive.

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