Commodities | Sep 20 2021
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A glance through the latest expert views and predictions about commodities: copper and iron ore
-Copper could test key support levels amid slowdown in China
-Macquarie anticipates balanced copper market before surpluses emerge in 2023
-Iron ore fundamentals deteriorating faster than previously expected
By Eva Brocklehurst
Longview Economics notes, after a sharp rally, copper has consolidated gains. A fundamental analysis of the market suggests copper will be affected by weakness in some of the cyclically sensitive parts of China's economy including construction and power.
All major slowdowns in Chinese credit growth, which is expected to fall further in this current cycle, have either led or accompanied a significant slowdown in activity and this is closely correlated with the copper price.
Moreover, it appears Chinese government is not yet willing to to respond to the current weakness in the Chinese economy. Longview Economics expects copper will test its key support levels of US$4.15/lb, which is a 200-day moving average. [Beijing injected US$14.9bn in short term liquidity on Friday – Ed]
Lows from March, April and August at around US$4/lb are also expected to be tested, and potentially broken. If this happens this would push the analysts' technical models convincingly into Buy signals.
At that point Longview would reassess the outlook for Chinese monetary policy. Longer term, the copper price trend is up, the analysts assert. As a result a sell-off in the price back to key support would be an opportunity to increase copper exposure.
In reviewing copper supply and demand Macquarie expects a fairly balanced market in 2022 before surpluses emerge in both concentrate and refined metal in 2023 and 2024.
Mine supply has increased because of a number of projects have been approved, while refined production has also risen amid increased smelter capacity. Macquarie forecasts 5.8% growth in Chinese domestic copper supply this year with global supply growth of 1.1%.
Committed mine output is expected to peak in 2024 before decreasing on the back of grade decline and some closures. The downside risk to new project approvals occurs amid growing political risk in some producers such as Chile, Peru and the Democratic Republic of the Congo, which may delay or halt new investment.
ESG issues are increasingly weighing on new projects, translating into increased operating and capital costs, and that may make some projects uneconomic. In some cases, the broker points out, new legislation relating to glaciers, water or other environmental factors could prevent some projects going ahead.
On the consumption side, Macquarie has a more bullish view of the energy transition, and therefore expects demand will increase. While 2022 forecasts have been marginally revised higher 2024 and 2025 are revised lower.
The broker assesses short-term spikes in the price of copper should not change project economics and is yet to find any producer using a price greater than US$3.50/lb, other than than as a sensitivity analysis.
Macquarie does not believe high prices will motivate miners to advance to construction decisions, rather they are more likely to simply add production through continuing the operations of marginal mines.
Macquarie believes there is more than enough copper in the project pipeline to meet the growth in demand that is expected in 2026, yet this largely depends on how many mines are approved in the next few years. In turn the number of new projects will determine the size of a hypothetical supply gap or whether this continues to be pushed out.
Weak steel production in China has driven a sharp fall in iron ore prices. UBS cuts its iron ore price forecasts for 2021-23 by -10% and now expects the market to be in surplus from the second half of 2021.
The broker expects a price to fall below US$100/t before the end of 2021 and average US$89/t in 2022. UBS reduces steel demand and production forecasts for China by -5% for 2021-23 and expects a material slowdown in the second half.
Fortescue Metals ((FMG)) is downgraded to Sell from Neutral, as UBS ascertains iron ore fundamentals are deteriorating faster than previously expected. Since the peak in July the stock is down -34% and the iron ore price has more than halved.
The broker also envisages a risk there is further delay to Iron Bridge if border restrictions relating to the pandemic persist in Australia. A Sell rating on Rio Tinto ((RIO)) is reiterated as well, now that UBS is more cautious on iron ore.
The correction in iron ore has driven a sharp slowdown in property activity in China and the broker believes these two aspects – the iron ore price and the macro environment in China – will be the driver of Rio Tinto over the short term. UBS envisages -5-10mt downside risk to the company's 2021 Pilbara shipment guidance of 325mt and the start up at Oyu Tolgoi may have to be delayed.
Morgans was always concerned about the speed and magnitude of growth that was occurring in China and now credit policy has played a hand, demonstrated by the property developer Evergrande being in default. China is also wanting to keep annual steel output for the year at no greater than 2020 levels. To achieve flat steel production Morgans expects a further fall over the remainder of the year.
The pain of this is keenly felt by lower-grade iron ore producers, as steel mills prioritise higher grades to minimise the amount of coke required. Hence, as the broker believes iron ore prices have further to fall, a Reduce rating is maintained for Fortescue Metals and Hold ratings for BHP Group ((BHP)) and Rio Tinto.
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