Material Matters: Coal, Iron Ore And Copper

Commodities | Jul 20 2021

A glance through the latest expert views and predictions about commodities: resources outlook; coal; iron ore; and copper

-More volatile second half expected for Australian resource stocks
-Thermal coal prices remain elevated and production is expected to surge
-Iron ore market likely to remain tight into 2022 so price downside limited
-Short-term bearish signals prevailing for copper


By Eva Brocklehurst

Commodities Outlook

Commonwealth Bank strategists suggest the outlook for Australian listed resource stocks is favourable, as they experience strong cash flow and high dividends. Yet a more volatile second half of 2021 is likely.

The strategists expect China's demand for commodities may ease in the second half of 2021 but this will be partially offset by strengthening demand outside of China and the continuing transition to a low carbon global economy.

Commodities have come under pressure in recent weeks as the spread of the more virulent Delta variant of coronavirus affected mobility and growth expectations. Meanwhile, central banks have implied more hawkish policy stances and some have announced a slowdown in bond buying.

A third issue has been the assertive campaign in China to put downward pressure on industrial metals prices, such as steel. This means the environment in the second half will be more volatile after the run-up that sent copper and iron ore prices to all-time highs.

ANZ Bank analysts have noted Chinese steel demand started 2021 strongly although momentum has begun to wane. Infrastructure investment has been contracting and property sector growth has also softened.

Chinese steel margins eased back sharply and June recorded the first monthly decline in steel production since November 2020. High-frequency data shows steel production is slowing and in early July profitability turned negative.

China's steel exports have continued to rise and growing demand outside China could offset some of the weakness in domestic demand in the second half, the analysts suggest.

Demand has been coming from developing markets such as Vietnam, with foreign direct investment growing 6.5% in the first quarter as the country becomes a manufacturing alternative to China. The outlook for the Europeans is also improving.


Spot prices have surged for coking (metallurgical) coal since the beginning of May yet a peak may be forming, the CBA strategists point out, as some steel product margins are already in negative.

Meanwhile, supply concerns amid seasonal demand from the warmer-than-usual summer in North Asia has kept thermal coal elevated. Longview Economics also notes thermal coal prices have increased threefold since the start of the pandemic.

There was a net increase in Chinese coal power capacity of 3% over 2020 while, globally, additions excluding China were just 9GW and retirements 25GW. Hence, China continues to grow its coal capacity while the rest of the world is cutting back.

Longview Economics also notes the correlation between coal prices and supply growth suggests production will increase by over 400mt in 2021. In the US mined coal supply is growing at over 35%.

Iron Ore

Economic data from China in June is unlikely to stem concerns regarding fading growth. Hence, ANZ Bank analysts believe this could increase the downward pressure on iron ore prices.

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