Material Matters: Energy & Copper/Aluminium

Commodities | Oct 08 2021

A glance through the latest expert views and predictions about commodities: coal; energy; Oz energy stocks; and copper/aluminium

-Coal prices likely to remain higher for longer
-High-priced gas signals potential rise in oil usage in northern winter
-Opportunities prevail in ASX energy stocks
-Demand for copper/aluminium hit by power rationing/restrictions in China

 

By Eva Brocklehurst

Coal

Globally, seaborne coal shipments are actually down slightly over the year to date. UBS has accumulated data that shows higher shipments from US producers, up 22%, and slight rises from Indonesia and Australia, up 2% and 1%, respectively, are offset by Russia, down -17%, Canada down -8% and South Africa down -7%.

Thermal coal prices have continued to rise, reaching US$230/t in the week to October 1, and UBS has materially upgraded 2021-23 estimates to reflect tightness across the energy complex, as gas shortages lift demand. Prices are expected to remain elevated in 2022 amid limited supply growth and low inventory.

Metallurgical (coking) coal prices ex-Australia remain relatively flat, at around US$390/t. Prices have risen steeply over the year because of tight supply fundamentals and strong steel output. This is expected to continue amid supply constraints and weak imports from China.

For the longer term, the broker suspects coking coal prices will hold near the marginal cost of production at around US$150/t, although remains unsure about the enduring fundamentals because of an increased focus on carbon emissions.

Energy

The new energy dynamic continues to play out as ESG considerations and renewables investment increasingly trump investment in traditional energy sources, Petra Capital asserts.

The analysts expect heightened international gas prices into the foreseeable future. Why? This time around mass substitution for high-priced gas is unlikely as coal prices are also at all-time highs and a lack of coal feedstock is emerging in China and India. Asian LNG and European gas prices are US$30-35/MMBtu, representing a tenfold increase over the past year.

What may happen, the analysts suggest, is a switch to high sulphur fuel oil and diesel for electricity generation, particularly in developing economies which favour cost economics over ESG considerations. This in turn is likely to boost refining margins and improve crude demand.

JPMorgan, too, suspects this may be the case and increases its 2021 Brent crude target to US$84/bbl on gas-to-oil switching. In response to such expectations, the broker notes oil prices have been rising.

At current gas prices and assuming normal winter conditions in the northern hemisphere, the broker expects a 550,000 b/d boost in fuel oil demand for power generation, mostly in Japan and elsewhere in Asia.

In North America, the broker assesses the US natural gas price would need to double from the current US$5.70/MMBtu to trigger gas-to-oil switching but could add another 175,000 b/d of combined demand from the US and Mexico.

Still, the broker believes downside risks for oil are under-appreciated. News has filtered through that cargoes of Middle Eastern and Kazakh crude oil are going unsold because these regions are unable to connect with their normal Asian buyers. This confirms Chinese refiners are cutting runs or going into maintenance, in the broker's view.

In light of this, and weakening physical market indicators in China, JP Morgan does not envisage an incentive for the OPEC alliance to boost oil production beyond current commitments.

Australian Energy Stocks

The ASX200 energy index is up just 7% over the past six months despite the rally in Brent and a huge rally in spot LNG so Petra Capital believes this presents opportunities throughout the domestic market. Petra notes QCLNG, GLNG and APLNG are running at 75-95% capacity signalling Australia's gas market is tight.

Among the major producers, Petra considers Woodside Petroleum ((WPL)) the most sensitive to rising LNG spot prices. Others with significant leverage include Senex Energy ((SXY)) and Blue Energy ((BLU)). Among the small caps, Horizon Oil ((HZN)) is most leveraged to higher oil prices.


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