Material Matters: Iron Ore, Gold & Copper

Commodities | Apr 08 2021

A glance through the latest expert views and predictions about commodities: iron ore; gold; copper; and contractors/engineers

-Diverging views on the iron ore outlook
-Gold prices taking a back seat but for how long?
-Copper deficit could become more evident
-Engineers/contractors activity ramping up


By Eva Brocklehurst

Iron Ore

UBS believes iron ore is approaching an inflection point, noting Vale's shipments are up 14% over the year to date while China's steel production is at risk of being disrupted by environmental policies. The broker is also concerned about credit tightening in China.

UBS expects iron ore supply will lift in the second half of 2021 and demand should moderate, with iron ore prices falling below US$100/t by the fourth quarter. The broker anticipates both iron ore and geopolitical events will be the main driver of Rio Tinto ((RIO) in the short term.

Rio Tinto has to decide soon on whether to invest in iron ore in Guinea (Simandou) or transfer ownership to the Chinese. The broker has downgraded BHP Group ((BHP)) and Fortescue Metals ((FMG)) to Neutral, given its belief that iron ore prices will fall over the next year.

UBS maintains a view that this is not the start of an "super cycle" in commodities, as supply/demand fundamentals are not strong enough to support prices at current levels. UBS prefers base metals and battery raw materials over iron ore and gold.

Macquarie, on the other hand, retains a positive view on iron ore miners, and expects the market to remain in deficit over the coming year as demand should absorb the recovery in Brazilian supply.

The broker acknowledges volatility has increased as fears of steel production cuts in China have spooked the market. Yet its strategists envisage little risk of oversupply. Macquarie highlights, while shipments from Australia have been subdued in the first quarter, this is typically due to scheduled maintenance activity and adverse seasonal conditions.

As a result, significant upside still exists to the broker's earnings forecasts. Rio's shipments have been volatile while BHP has been relatively stable and Fortescue volumes firm.

Steel production reductions may be bearish for benchmark prices but Macquarie points out this could result in an increase in quality premiums, as steelmakers chase higher productivity and European production increases to offset China's export gap. Macquarie retains Outperform ratings on iron ore miners.


Macquarie is negative on gold, given the macro backdrop. Higher US Treasury yields and a stronger US dollar mean weaker precious metals price, and while this may be oversimplifying the issue, without a sustained increase in inflation expectations the bull market in precious metals is expected to fade.

Gold has struggled to hang onto gains from a technical covering rally in recent weeks and failed to break above price support at around US$1765/oz, the broker points out. Gold prices are expected to break below US$1600/oz in the second half of FY21. Macquarie pares back multiples used to derive its price targets for gold equities.

The top picks among the established producers include Evolution Mining ((EVN)), for its low-cost copper by-product, and Northern Star Resources ((NST)) and Silver Lake Resources ((SLR)) for organic growth. In juniors, Macquarie likes Perseus Mining ((PRU)), for its increased production, and Aurelia Metals ((AMI)) and Bellevue Gold ((BGL)) for exploration potential.

Bell Potter agrees the gold price is facing headwinds, given the robust outlook for global GDP, but expects declining real interest rates will override rising equities and be a catalyst for a recovery in the gold price during 2021.

At the moment, asset allocation is shifting away from gold as a safe haven towards more risk as well as growth equities. Inflation appears on the rise and is forecast to hit 2.4% in the US this year. It is then expected to remain above 2% out to 2023.

Real interest rates are now at the lowest levels for the last 20 years and as the US Federal Reserve is not expected to lift rates until after 2023 the broker notes there is scope for real rates to continue to drop. Yet, in the current market, inflation is rising and Bell Potter does not expect this rare disconnect between gold and real interest rates to last long.


Copper prices have dropped by around -8% over the past month after hitting US$9600/t late in February. Citi assesses the market is concerned about several things, including the subsequent waves of coronavirus and related lockdowns in Europe.

Credit is tightening in China, the US dollar is strengthening and there is general concern about a shift to services expenditure and away from copper-intensive developments. While copper may be vulnerable to macroeconomic weakness in the short term, the broker still envisages a copper deficit will become more visible over the next month or so and support physical prices.

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