Material Matters: Oil, Base Metals & Bulks

Commodities | Mar 17 2021

A glance through the latest expert views and predictions about commodities

-Lift in oil prices unlikely to be the start of a super cycle
-Energy transition, batteries underpin outlook for copper, nickel
-China's steel production cuts may pressure iron ore


By Eva Brocklehurst


For 2021 Citi upgrades its oil forecasts, envisaging Brent at US$69/bbl on average, noting it is cruising close to the US$70/bbl mark and could hit US$75/bbl or even US$80/bbl at certain times over the next few months.

The broker expects US$59/bbl for 2022 and assesses aggressive action by OPEC et al to keep more oil off the market for longer means inventory is being drawn down more rapidly than previously anticipated.

Nevertheless, while Saudi Arabia is reasserting its traditional role as a swing producer the broker suspects its stance could backfire and stimulate a stronger supply response down the line from shale and other producers.

Saudi Arabia's insistence on surprise tactics is particularly important at this point in time as prices have responded and facilitated the ability of many producers to meet their break-even price levels and increase hard currency earnings.

That said, the broker also points out this is not the beginning of a new super cycle for oil, and from 2023 onwards prices should return to the low US$50/bbl range. UBS also does not subscribe to the super cycle view, believing demand growth in 2021 and 2022 is above trend only because of the collapse in demand in 2020.

Yet, over the longer term the broker maintains a US$70/bbl forecasts for Brent, which is the level where supply should have enough incentive to meet the growth in demand and natural field decline.

UBS raises its Brent forecasts for 2021 to US$65.50/bbl and 2022 to US$62/bbl to reflect the market's desire to price in a faster recovery in demand and because of producers agreeing to defer increases to production.

The broker lifts expectations for oil stocks, upgrading Woodside Petroleum ((WPL)) to Buy as risk/reward is now more appealing, increasing earnings estimates by 8-51% for Oil Search ((OSH)) and Santos ((STO)) as well.

Citi, too, raises earnings estimates for Oil Search by 23%, the most leveraged producer in its coverage of oil. With a target of $5.27 the stock is the broker's top pick for those seeking upside exposure to oil. Under a longer-term base case at US$55/bbl Santos is Citi's top pick amongst the large cap stocks because of its higher-returning growth projects.

Base Metals

Macquarie has upgraded its outlook for copper based on the outlook for electricity and energy transition, which in turn transforms the earnings outlook for OZ Minerals ((OZL)) and Sandfire Resources ((SFR)). The broker retains a preference for OZ Minerals as it has several organic catalysts led by the Prominent Hill expansion.

The broker assesses earnings upside for OZ Minerals, boosted by gold exposure, is 40-75% over the next four years. Sandfire Resources also has upside of 50-130% over the same period, although the broker acknowledges its forecasts are coming off a low base.

Meanwhile, growth in nickel use in batteries is the main positive on that front, with a major impact from the middle of the decade onwards, and there are doubts about whether there will be enough available. Western Areas ((WSA)), over FY21, offers the greatest leverage to nickel, in the broker's view.

The company's recent capital raising should enable it to comfortably fund the Cosmos development and maintain strong exploration expenditure.

Mincor Resources ((MCR)) provides significant leverage to nickel as it resumes mining. IGO Ltd ((IGO)) has a positive trajectory driven by the re-basing of nickel forecasts and its gold exposure from Tropicana, with Macquarie calculating 20% upside for FY22-23.


Morgan Stanley anticipates significant risk to demand for iron ore given China's largest steel city Tangshan's intention to cut steel production emissions has potential to return the market to surplus. Taking into account China's scrap share of steel at 20%, the broker calculates China's iron ore consumption could be -34-61mt lower than the 1.43bnt anticipated.

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