Commodities | Mar 30 2021
A glance through the latest expert views and predictions about commodities: bulks; gold; and lithium
-Strong momentum in major miners likely, even if iron ore eases
-Gold prices expected to strengthen longer term as inflation builds
-Recovery in lithium gaining momentum
By Eva Brocklehurst
Major commodity stocks are down -18% on average from their respective 52-week highs and JPMorgan envisages downside is now priced in. Importantly, reflation dynamics and a strong global recovery should underpin miners and the broker remains Overweight on the sector.
Moreover, JPMorgan suspects major mining stocks could perform despite headline commodity weakness, even though their correlation to iron ore remains high. Numerous episodes are cited where stock performance has diverged from the trajectory of the material.
Macquarie incorporates stronger demand and upgrades iron ore, manganese and thermal coal forecasts for 2021 by 18%, 22% and 17%, respectively. This has transformed the earnings outlook resulting in upgrades for South32 ((S32)), Jupiter Mines ((JMS)) and Mount Gibson Iron ((MGX)) to Outperform.
The broker also highlights the outlook for both aluminium and silver have transformed the cash flow prospects of South32, and this stock is now trading at a free cash flow yield of around 10%, although lacks the near-term earnings upside of the iron ore producers.
In iron ore, a buoyant pricing environment provides strong upgrade momentum although there is minimal upside now to the broker's FY21 forecasts under a spot price scenario.
For FY22 a spot price scenario generates 84% higher earnings for Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) and 55% higher for BHP Group ((BHP)) on the broker's numbers. Macquarie reiterates Outperform ratings on all three.
In the mid-cap bulk miners the broker prefers Mineral Resources ((MIN)) and Champion Iron ((CIA)), as both have upside risk at spot prices and are planning to double iron ore production. Mineral Resources also has exposure to lithium, as Kemerton is expected to start production in the next year.
Yet Morgan Stanley expects downside to forward iron ore prices, highlighting the asymmetric impact of China's steel production cuts. The broker believes China's environment-related curtailments could tighten the steel market, expecting production there to decline -0.3-2.3% in 2021, instead of another year of growth.
This will tighten the seaborne market significantly and require higher steel prices before producers outside of China lift production. In turn, Morgan Stanley anticipates headwinds for iron ore and forecasts a price of US$160/t in the second quarter and significantly lower at US$100/t in the fourth quarter of 2021.
With iron ore coming off a high the price of other steel making ingredients such as metallurgical (coking) coal remains relatively low. Morgan Stanley notes seaborne metallurgical coal is much more exposed to the market outside of China than iron ore.
A rebound in steel production ex-China should therefore push the price up from the current lows caused by China's import ban on Australian coal. The broker forecasts an Australian hard coking coal price of US$140/t in the fourth quarter.
In coal, the change to Macquarie's earnings outlook is mixed. A better outlook for thermal coal has driven material upgrades to estimates for Whitehaven Coal ((WHC)) and New Hope Corp ((NHC)).
In contrast, a weaker outlook for metallurgical coal prices drives a -61% reduction to the broker's 2021 earnings for Coronado Global Resources ((CRN)) while modest upgrades to 2022-25 estimates reflect a strong boost in thermal coal prices.
Macquarie also likes the sulphate of potash developers within its bulk commodities coverage, and in this regard Mineral Resources is the preferred pick. Furthermore, Salt Lake Potash ((SO4)) and Kalium Lakes ((KLL)) are fast approaching first production and there is material upside.
Credit Suisse has reduced its 2021 gold price forecasts to US$1,900/oz and 2022 to US$2,100/oz. A reduction in risk aversion has led to a drop in gold price expectations, although long-term structural support still exists.
Hence, Credit Suisse expects short-term gold prices could remain under pressure, amid expectations the US Federal Reserve will raise nominal rates before 2023. The US Treasury yield curve has steepened considerably in recent weeks despite the Fed's commentary signalling near-zero rates through to 2023.