Material Matters: Iron Ore, Oil & Base Metals

Commodities | Oct 13 2021

A glance through the latest expert views and predictions about commodities: iron ore; energy; and base metals.

-Despite flagging iron ore prices, JP Morgan considers Rio Tinto, Fortescue Metals oversold
-More downside expected for iron ore with Chinese steel prices poised to fall
-Re-start of US shale production in 2022 could boost oil supply
-Power cuts likely to hit supply/demand of base metals over the next six months


By Eva Brocklehurst

Iron Ore

JPMorgan downgrades iron ore price forecasts -4% for 2021, -16% for 2022, and -13% for 2023.

The broker concedes more downside is likely but considers both Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) oversold, and recommends investors accumulate on any weakness.

Rio Tinto does enjoy a greater spread of commodities which reduces its valuation by just -4%. The company is also net cash and has an estimated dividend yield of more than 10%, assuming an 80% pay-out.

The broker asserts that once sentiment towards China improves so could the share price, most likely after the winter Olympics in February 2022.

Fortescue Metals enjoys significant valuation support despite earnings pressure.

Sure, there is uncertainty regarding the Fortescue Future Industries expenditure and the widening of discounts for low-grade iron ore as well as potential escalation in capital expenditure on Iron Bridge. Yet JP Morgan says the stock is a value play and retains an Overweight rating.

The outlook for Mineral Resources ((MIN)) is more challenging given the sharp fall in cash flow.

Previously, gains from existing iron ore mines were expected to fund the 30mtpa Ashburton project, and potentially South West Creek. Now the timing of the former is uncertain and there is no news about the latter.

Morgan Stanley agrees there is more downside to come for the iron-ore price, which has recovered to US$125/t and is outpacing fundamentals.

The broker suggests China's steel-mill margins are supporting the price for now but that, eventually, iron ore should set its own supply/demand fundamentals.

Morgan Stanley points to the overhang in rising iron-ore port stocks in China, and the 200-plus vessels that are queueing to discharge an estimated 25mt of ore, and remains bearish on iron ore (it is the broker's least preferred commodity for the next six months).

Despite China's steel prices being poised for a correction (which should trigger further weakness in iron-ore prices) the broker spies some demand for iron ore given China's power-intensive, scrap-based electric-arc production has fallen more than blast-furnace output that uses iron ore. It expects this should provide mitigate downside and provide a floor.

A supply response is also starting to emerge as swing producers are reducing production. Domestically, China's operating iron ore mines are down -10% and India's low-grade exports fell to just 1mt in August.

Meanwhile, seaborne costs are rising because of the higher dry bulk freight costs and Morgan Stanley believes rising energy costs will further raise the cost curve (energy constitutes about 30% of iron-ore mining's cash costs).

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