Material Matters: Base Metals; Iron Ore And Oil

Commodities | Sep 21 2021

A glance through the latest expert views and predictions about commodities: aluminium; base metal miners; large cap miners; and energy stocks

-Upside risk has emerged for alumina miners
-Macquarie upgrades forecasts for copper miners, more neutral on nickel miners
-Iron ore miners, large caps, becoming more attractive
-UBS upgrades outlook for oil, anticipates LNG demand will soon outstrip supply


By Eva Brocklehurst


Supply constraints, combined with demand created by governments that are stimulating economies, have boosted aluminium and alumina prices. These supply constraints have largely stemmed from a fire at the Jamalco refinery and the coup in Guinea. Evans & Partners highlights a gap which has emerged between its estimates for aluminium and alumina and spot pricing, which implies upside risk to earnings and dividend forecasts for the miners.

The analysts retain a positive view on Alumina Ltd ((AWC)), being constructive on the AWAC assets and attracted by management's commitment to return cash to shareholders. Unlike peers, the AWAC assets are well resourced and can support production over the medium to longer term. As a result expenditure requirements are low.

The analysts are also positive on South32 ((S32)) which has progressed with its growth options and delivered a robust operating performance. The lack of iron ore exposure may also make the stock more attractive should that price weaken further.

Base Metal Miners

Macquarie has recently upgraded forecasts for copper miners, incorporating changes to its copper, gold and FX assumptions. On average, earnings estimates rise 10-20% for FY22-23 across the coverage. The broker now forecasts refined supply growth of 3.5mt in copper by 2025 on the back of recent approvals for new projects.

A deficit is still expected in 2021 of around -259,000t, which could be reduced to -100,000t if China sells down reserves of around 150,000t. A balanced market is then expected in 2022 before surpluses occur in 2023 and 2024.

Macquarie retains a preference for OZ Minerals ((OZL)) as it has several catalysts led by the Prominent Hill expansion. Sandfire Resources ((SFR)) and 29 Metals ((29M)) are also preferred for copper leverage while Chalice Mining ((CHN)) is a preferred exploration play.

Meanwhile, movements in nickel prices that vary compared to the broker's forecasts present the main risk to earnings estimates and valuation for Nickel Mines ((NIC)). The company has recently confirmed Indonesia is considering an export tax on products that contain less than 70% nickel.

Macquarie retains a cautious outlook for nickel miners and reiterates Neutral ratings for Nickel Mines, Mincor Resources ((MCR)) and Panoramic Resources ((PAN)).

Large Cap Miners

Citi considers iron ore miner valuations are now attractive, despite heightened concerns regarding China's property market and the risk to iron ore prices, as monetary conditions point to stabilisation. Moreover, the easing of lockdowns, reflected in the traffic congestion across China, as well as the peak construction season in September, should ensure demand stays strong.

Despite sluggish data in August, Citi notes demand for key commodities remains positive while acknowledging steel consumption is underperforming. It is evident production cuts in China have forced steel consumption to decouple significantly from underlying industrial demand. Consumption was down -15% in August.

Meanwhile, the gap between China's property sales and commencements has widened which suggests some de-stocking. Property accounts for around a third of steel demand in China and China, in turn, is around half of global steel consumption.

Evans & Partners notes, while the demand shock that comes with China curtailing steel production has been a significant obstacle to iron ore prices, supply is also constrained. June quarter production reports from major producers have all shown that short-term supply is hitting constraints.

The coup in Guinea could also delay progress at Simandou, which is expected to be a source of increased supply longer term. As a result, the analysts suspect the risk to iron ore prices, and therefore the performance of BHP Group ((BHP)) and Rio Tinto ((RIO)), is now more balanced. The stocks appear to offer better value and the analysts upgrade recommendations to Positive for the pair.

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