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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.

A sharp correction is not envisaged, nevertheless, as the market remains tight. While demand outside of China can offset some of the weakness, iron ore prices are expected to trend lower in the second half, although the downside will be limited.

ANZ analysts expect momentum in the second half in China will largely rely on domestic demand as the global recovery is soft while the pandemic still rages. The analysts retain a three-month target of US$185/t.

They expect iron ore prices will decline to US$170/t by the December quarter and continue to decline in 2022 as Vale's iron ore production increases more noticeably.

On the supply side, Vale had a number of pandemic-related disruptions over 2020 that affected rectification work on its dams while Australia struggled to meet the shortfall. The analysts expect total exports from the four largest producers – Australia, Brazil, South Africa and India – will rise by only 16mt in 2021.

Most of this will come from Brazil as Australian production is expected to be relatively flat. While small operators are taking advantage of a rise in prices, the analysts suggest output is small and costly and they are unlikely to stay in the market for longer.

Meanwhile, Western Australia is reviewing its Aboriginal Heritage Act and the proposed new legislation will put greater onus on operators such as the iron ore giants to come to agreement with traditional landowners.


While the long-term outlook is bullish, there are several developments which have signalled to Longview Economics that copper should break to the downside. Growth and inflation expectations have peaked at high levels. Fund managers believe the global economy has reached "peak boom" and are less convinced about high inflation.

This view, Longview suggests, should result in lower break-even inflation and, in turn, copper prices. The US Federal Reserve's potential tapering of bond purchases adds to the case for weaker copper prices as this will lead to reduced liquidity.

There is also some sign that copper production is picking up as Glencore will re-open the Mutanda copper and cobalt mine in Congo this year. At its peak the mine produced around 200,000t of copper annually before closing in late 2019 as a result of low prices.

The CBA strategists have upgraded long-term copper price forecasts by 27% to US$3.20/lb and expect demand will lift strongly as decarbonisation goals encourage electrification and electric vehicles.

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