Commodities | Sep 15 2021
A glance through the latest expert views and predictions about commodities: base metals; coal; iron ore; zircon; oil & gas
-High demand, subdued supply underpinning momentum in base metals
-Coking coal prices surge in China, reduced traffic on Chinese/Mongolian border
-Pick-up in infrastructure activity in December quarter may arrest iron ore price decline
-Tight supply of zircon sends prices sharply higher
-Substantial incentive for shale gas suppliers to ramp up production
By Eva Brocklehurst
Momentum keeps on keeping on in the electric vehicle market, benefiting nickel. Macquarie notes, while non-nickel/cobalt batteries are gaining share in China, they are still only a quarter of the global market. Orders for batteries with higher nickel content are still strong, boosting nickel usage.
Meanwhile, lower zinc production and higher copper output in Peru was recorded in July, and in Chile copper production was down -3%, primarily because of lower output from Chuquicamata.
Macquarie prefers OZ Minerals ((OZL)), 29 Metals ((29M)) and Sandfire Resources ((SFR)) for copper with Chalice Mining ((CHN)) the preferred stock in exploration. 29 Metals has a strong production trajectory and provides unique exposure to zinc within the broker's coverage. Sunrise Energy Metals ((SRL)) offers exposure to Macquarie's long-term bull case for cobalt.
The coup in Guinea has put China's aluminium raw material supplies at risk, Longview Economics notes, with aluminium prices breaching another multi-year high. Guinea supplies over 50% of Chinese bauxite requirements.
The analysts also note the microchip shortage shows little sign of easing and the order backlog from Renesas, the Japanese supplier where the plant was set on fire in March, is now four times greater than it was before the pandemic.
Coking (metallurgical) coal prices have reached new highs in China's domestic market, equivalent to US$497/t, while Macquarie notes Australia's F.O.B. index has reported prices at A$279/t. This indicates an arbitrage opportunity, in the broker's view, or at the very least provides support for Australian coal miners.
Macquarie cites a Reuters report that China's NDRC has recently banned a coal trading firm from publishing price assessments in an effort to manage hefty pricing.
The broker notes, too, the the Chinese/Mongolian border has been closed again after one week of operation. Macquarie's commodities team estimates daily crossings could be constrained at 180-200 trucks per day after the reopening, which compares with 800-1000 pre-pandemic.
After a strong first half, Chinese steel production has slowed significantly through July and August. JPMorgan suspects the drop is related to general economic weakness that has been influenced by tightening controls on pollution and relatively low steel mill profitability.
Weakness through the September quarter leads the broker to reduce 2021 steel production growth estimates to 4.0% from 6.5% and demand growth to 0.8% from 2.8%.
After hovering around US$220/t in June and July JPMorgan notes iron ore has corrected to US$120/t. This is on the back of a significant change in sentiment combined with lower Chinese steel output and has led to a cut in its forecasts for 2021 and 2022 to US$165/t and US$125/t, respectively.
As a result, JPMorgan lowers earnings estimates by -10-35% for BHP Group ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and Mineral Resources ((MIN)), downgrading the latter to Neutral on wider iron grade spreads and lower free cash flow.
The broker assesses the other three are generating impressive cash flow at current prices, supporting capital management potential. JPMorgan acknowledges, on the upside, China could address weak GDP growth through increased infrastructure expenditure, which may provide a positive fillip for iron ore prices.
Exports from Australia are down -4% over the year to August while Brazil's exports are up 3%, highlighting a lack of growth in supply from the major miners despite the strong price.
JPMorgan also points out Vale has maintained 2021 guidance although lowered 2022 capacity targets to 370mt from 400mt. Negative sentiment is likely to continue over the short term while a pick-up in the fourth quarter in infrastructure activity may help arrest the decline in prices.