Commodities | Nov 17 2020
A glance through the latest expert views and predictions about commodities. Oil; Australia & China; iron ore; coal; copper; and zircon.
-Oil demand in the US following the path of the pandemic
-Iron ore appears relatively safe from China's import bans
-China's ban on Australian coal drives up price of premium quality
-Zircon demand expected to remain weak over the next quarter
By Eva Brocklehurst
The correlation between coronavirus cases and demand for crude oil is relatively strong, ANZ researchers note. In the US, demand for oil has followed the path of the pandemic throughout 2020.
Prices for oil have steadily improved over the past month on reports that OPEC and allies has been discussing a potential delay of the scheduled increase in production quotas.
Originally, stage 3 restrictions were slated for January 1, 2021 and would bring another 2mb/d back to the market. Sentiment is also being helped by the success of vaccine trials. A vaccine would likely ease tension, the researchers suggest, although in recent weeks OPEC has been preparing for the possibility production cuts may be extended.
Yet, not only does the alliance have to contend with soft demand, supply from producers such as Libya is rising. Iraq and Kuwait, the researchers point out, have continued to over-produce by significant margins.
Assuming a vaccine is widely available in the second half of 2021, the researchers expect demand for crude would rise in the second quarter but remain -6mb/d lower than 2019 levels throughout the second half.
A market surplus is expected by the end of the year and if OPEC sticks to its planned production increase in the first quarter of 2021, a surplus of 1.5-3.0mb/d is assessed by the researchers as likely in the first half of 2021.
Morgans is bullish on oil and envisages some of the largest upside exists in oil & gas. The broker does not believe supply, given the lack of investment and expansion being undertaken, will keep pace with demand as it recovers.
East coast gas prices have stabilised recently and demand is recovering with the re-opening of several states. Hence, Morgans expects strong upside for gas from 2023.
Australia & China
Macquarie notes imports of copper concentrates from Australia have joined coal, cotton, sugar, barley, red wine, lobster and timber in being informally restricted from imports to China.
This follows earlier bans on products from specific companies on the basis of alleged dumping or mis-labelling and has now become broader and more vague. Australia's dependence on China is highlighted by the share of outbound trade rising to 38% in 2019.
In iron ore, China has a large dependency on Australia but is still the dominant partner in the relationship. What makes iron ore relatively safe, Macquarie asserts, is that China lacks sufficient domestic resources to compensate and alternative suppliers are not able to fill the gap.
JPMorgan also points out China's steel production was up 10.9% in September and in the rest of the world output of steel continues to recover.
Strong steel demand is expected to continue in China based on accelerating credit growth and strength in property & machinery data. The broker also expects a decline from late November in Brazilian exports as the wet season commences.
Non-traditional supply of iron ore to China has picked up markedly, to 240mtpa in September, while Australian exports appear relatively stable. JPMorgan notes prices have averaged US$122/t since the start of October amid low volatility
Persistent strength in demand in China should support a buoyant environment for the next few quarters and the broker retains a 2021 forecast of US$105/t.
China's stance on Australia has led to a large divergence between prices of coal FOB (free on board) Australia and CFR (cost & freight) China. Chinese buyers have had to look to North America for alternative sources of coking (metallurgical) coal.