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Material Matters: Coal, Iron Ore And Oil

Commodities | Sep 16 2021

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

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

-Tight seaborne coal market underpinning robust prices
-Volatile iron ore prices, yet miner cash flow remains solid
-Will OPEC move to balance the market in 2022?

 

By Eva Brocklehurst

Coal

The seaborne coal market has tightened significantly. Demand is surging as global power consumption recovers along with steel production. Supply challenges in South Africa, China and Mongolia as well as Australia relating to the pandemic have aided tightness.

Hence, Goldman Sachs upgrades benchmark price forecasts for both thermal and metallurgical (coking) coal. Benchmark thermal coal is expected to hit US$190/t in the December quarter and average US$137/t in 2022 while metallurgical is expected to average US$230/t in the December quarter and US$175/t in 2022.

Specifically, thermal coal exports from key producers were up 8% on average in May and June, largely because of a rebound in exports from Indonesia, yet as Goldman Sachs points out, Australian exports set the benchmark and exports from Australia, South Africa and Colombia were down. Meanwhile, on the import side, volumes were up 16% in June amid demand from South Korea, Japan and China.

For metallurgical coal the rally in prices have been driven by a decline in China's domestic production along with lower exports from Mongolia, Australia and the US. Demand has strengthened in Japan, Taiwan, India and South Korea. Goldman Sachs expects metallurgical coal prices will ease back in the December quarter as China makes cuts to its steel production and supply recovers in Australia.

The broker retains a Buy rating for Whitehaven Coal ((WHC)) and pure metallurgical coal operator, Coronado Resources ((CRN)), as well as diversified miner South32 ((S32)). New Hope Corp ((NHC)) is downgraded to Neutral on valuation.

Iron Ore

Following maintenance during July and August at Port Hedland, Australian weekly shipments of iron ore have increased. Volumes for BHP Group ((BHP)) increased 15% while Rio Tinto ((RIO)) rose 8.4%. Macquarie notes this offset sequentially by lower volumes from Fortescue Metals ((FMG)).

The combined shipping rate for the three in September to date has rebounded above the 800mtpa level. On the other side of the Pacific, Macquarie notes shipments from Vale have trended lower because of low throughput at one of its mines along with port maintenance work.

The broker notes the iron ore price has been volatile, having recently breached the US$130/t low point registered in mid August. Yet the miners are still enjoying bumper cash flow and at spot prices free cash flow yields for the majors remain in double digits.

Meanwhile, steel prices have increased as the market contemplates additional production cuts in China and Macquarie assesses the current strength in seasonal demand is likely to continue into October.

The broker is positive on those stocks with iron ore exposure because of the cash flow and the potential for upgrades. Rio Tinto is the preferred large exposure while the broker is also positive on both Fortescue and BHP.

Mid-cap picks include Mineral Resources ((MIN)) and Champion Iron ((CIA)) as both offer leverage to the price of and expenditure cycle in iron ore. Deterra Royalties ((DRR)) also offers exposure to iron ore via its royalty derived from BHP's production at Mining Area C.

Oil

While most market participants are anticipating oil market balances will weaken in 2022 as new volume from OPEC and US shale enters the market, Morgan Stanley suspects OPEC will move to slow production.

The broker acknowledges valid reasons exist for a deterioration in market sentiment as consensus GDP forecasts have been pushed lower and all the main agencies have lowered their forecasts for 2022 oil demand. Importantly, a large volume of supply is expected to enter the market.

[This week OPEC significantly raised its 2022 oil demand forecast to above pre-pandemic levels – Ed]

Yet, the calls for Brent to fall back to US$55-60/bbl are considered overly pessimistic and Morgan Stanley suspects OPEC will not increase production by 400,000 b/d through 2022.

The broker explains that previously, OPEC often had to trade off the oil price against the long-term prospects for market share but the fundamentals have now changed. The reason why OPEC did not cut production in late 2014 was because shale production was growing strongly at the time and if OPEC had cut its supply, growth in US supply would have continued unchecked.

Hence, if long-term prospects for market share are still strong, balancing the market is the optimal choice. Morgan Stanley suspects the cartel will be quite willing to balance the market in 2022, which should support Brent prices in the mid-US$70/bbl range.

Why? Inventory drawdown is signalling a tighter market than previously estimated. It appears that all excess inventory build in 2020 has been eroded. An aggregated view of global inventory suggests that in some areas, observable stocks are now below 2019 levels.

What is even more significant is the draw-down has been regular, with Morgan Stanley noting global stocks are effectively being drawn down at a "remarkably" stable rate of around 1.74m b/d.

As supply data tends to be more accurate, the broker believes this implies upside to estimates of demand. Moreover, refinery outages have largely dissipated while an improvement in mobility statistics is a supportive trend for oil consumption.

The broker expects US shale production will still grow in 2022, at around 600,000 b/d, but will not stage a recovery like that seen in 2016-18. Rystad data in the US shows that in the last three months both the number of active fracking spreads and the commencement of new fracking jobs have actually declined.

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CHARTS

BHP CIA CRN DRR FMG MIN NHC RIO S32 WHC

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: CIA - CHAMPION IRON LIMITED

For more info SHARE ANALYSIS: CRN - CORONADO GLOBAL RESOURCES INC

For more info SHARE ANALYSIS: DRR - DETERRA ROYALTIES LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: NHC - NEW HOPE CORPORATION LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED