Commodities | May 25 2021
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A glance through the latest expert views and predictions about commodities: iron ore; gold; nickel; and LNG
-Iron ore prices may have peaked yet the market remains in deficit
-Can emerging inflation underpin a rebound in the gold price?
-Stainless steel pricing, nickel consumption on the rise
-LNG production delays come despite the spike in LNG prices
By Eva Brocklehurst
Iron ore prices to appear to have peaked, having fallen from a record last week of US$230/t. Yet the market remains clearly in deficit in the current quarter, Macquarie observes. As prices are materially above the broker's forecasts this drives significant valuation upside for the iron ore miners which, in the main, are trading at free cash flow yields of over 20%.
Meanwhile, iron ore shipment rates from key Western Australian ports are back over 900mtpa and a further increase in June is expected. Macquarie assesses guidance ranges from the major miners are achievable.
BHP Group ((BHP)) provided FY21 guidance of 276-286mt and Fortescue Metals ((FMG)) 178-182mt. Rio Tinto ((RIO)) expects 2021 production of 325-340mt, subject to a tie-in of 90mt of replacement ore and the impact of the Heritage Act. In Brazil, Vale has provided guidance for 2021 of 315-335mt.
JPMorgan does not believe the iron ore price is sustainable at this level but acknowledges current demand cannot be overlooked. The broker's preferred stock is Rio Tinto, noting the significant changes to management since the destruction of Juukan Gorge.
JPMorgan believes Rio Tinto has passed the worst regarding its 2020 issues and the business is well-placed to avoid a recurrence, while regaining investor trust will be a potential tailwind. Based on the broker's analysis regarding China's peak steel production in 2020, a US$70/t price for iron ore is considered appropriate in the longer term.
Morgan Stanley expects the rebound in the gold price will be short lived. Gold has been supported recently by lower real rates and further US dollar weakness, moving back to the higher US$1800/oz region.
Investors have been drawn to the market by inflation expectations and the shift in sentiment regarding US Federal Reserve policy. Increased volatility in crypto currency and equity markets has also increased demand for the safe-haven aspect of gold, the broker points out. Central banks have become net purchases of gold, buying 160t in March.
Gold bulls expect the emergence of inflation could push the price back above US$2000/oz but Morgan Stanley does not agree.
The broker does not envisage inflation will be strong enough to outweigh the impact of rising rates, a strengthening US dollar and tapering of asset purchases on a gold market that is already elevated relative to history.
Morgan Stanley strategists now expect the Fed will flag a tapering of asset purchasing at the September meeting and the tapering will kick off from April 2022. A rise in real rates by the end of this year accompanied by a strengthening US dollar is likely to put downward pressure on gold as a result.
Based on Morgan Stanley's outlook for real rates, the gold price support level is expected to move back to around US$1767/oz in the December quarter. There is also risk of a sharper sell-off once tapering begins in earnest in 2022.
In the broker's base case price support is assumed in the US$1600/oz range until the next rate hike from the Fed, which is forecast for the third quarter of 2023.
Feedback from investors has confirmed for JPMorgan that Newcrest Mining (NCM)) is under-owned in Australia. The stock remains the key Overweight rating in the sector but the broker notes clients are split regarding whether to own the gold sector.
JPMorgan acknowledges it may be modelling too much growth, too soon for Newcrest Mining but when adding up all the prospects rebuffs a more cautious view with the question: what is 10mt copper and 40m ounces of gold worth?
Macquarie expects stainless steel prices will rise in 2021, even with conservative assumptions regarding a slowdown in the second half. The most notable feature of the market this year has been the strong rise in all regions, the broker points out, not just in China and Indonesia.
Stainless steel pricing has risen sharply in the US and Europe, partly because of trade protection and steel shortages that have emerged in these regions. Moreover, the latest data from the international Nickel Study Group has shown a significant supply/demand deficit has re-emerged.
Global nickel consumption is estimated to have risen 18.9% in the first quarter and production is up 7.9%, leading to a deficit around 18,800t.
Macquarie prefers IGO ((IGO)), Nickel Mines ((NIC)) and Western Areas ((WSA)) for nickel production and assesses Panoramic Resources ((PAN)) offers the greatest leverage to nickel prices for both FY21 and FY22.
Mincor Resources ((MCR)) and Chalice Mining ((CHN)) are key development plays. OZ Minerals ((OZL)) and Sandfire Resources ((SFR)) are preferred for copper exposure, with the latter having the greatest leverage to copper prices over the next two years.
LNG prices are rallying on the back of strengthening oil. LNG prices, JPMorgan notes, hitting a peak of US$10.45/MMBtu in May. Global output has been relatively steady, with production growth on a monthly basis from African and European plants.
The broker estimates global annualised LNG production in April was 366mt, with plants operating at a capacity utilisation rate of 82%. Despite the rise in spot prices, which at an average of US$8.06/MMBtu in April were up 20% on the prior month, there have been further delays in production and development.
Project delays during the past month include the plant at Hammerfest in Norway, where the investigation into a fire has pushed back the re-start date to March 2022. This represents a reduction in global capacity of 4.2mtpa, JPMorgan asserts.
Jordan Cove LNG in Canada is now on hold and the sanctioning of Port Arthur (US) is pushed back until at least 2022. Meanwhile, Woodside Petroleum ((WPL)) has exited Kitimat LNG.
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