Material Matters: Iron Ore, Oil, Aluminium, Nickel & Copper

Commodities | Sep 28 2022

A glance through the latest expert views and predictions about commodities: Lower iron ore price forecasts; oil prices may collapse; economic slowdown to weigh on aluminium and forecasts for nickel and copper prices.

-JP Morgan lowers iron ore price forecasts 
-Is the oil price set to collapse?
-Economic slowdown to weigh on aluminium prices
-Forecasts for nickel and copper prices

By Mark Woodruff

JP Morgan lowers iron ore price estimates

JP Morgan lowers iron ore price estimates after forecasting flat 2023 global steel production and ore supply growth from the major producers.

The broker’s 2022 and 2023 price forecasts fall by -11% to US$121/t and US$94/t, respectively. 

The 2022 forecast is impacted by lower second half estimates due to a mixed news flow. While China’s second largest property developer Evergrande has removed project freezes, the analysts highlight covid lockdowns have spread and inventory levels at ports have risen.

The greatest risks to JP Morgan’s weaker price forecasts are better steel production in China and/or seaborne iron ore supply falls short of expectations.

The broker expects 2022 Chinese steel output will be flat against 2021, following a recovery in August/September in the wake of sharp falls in July. 

JP Morgan acknowledges Chinese steel demand may take alternative paths. Demand could either be bolstered by unexpected government stimulus measures or fall due to greater-than-expected property sector weakness.

China’s August steel production improved by 3% on July, and year-to-date production has been stronger than JP Morgan anticipated. As a result, forecasts are raised to flat this year, up from a previous forecast for a fall of -2%, while 2023 output is now expected to fall by -1%.

The analysts also note rest-of-the-world (RoW) steel production remained at low levels in August, and they trim world ex-China steel forecasts due to an expected downturn in European and Commonwealth of Independent States (CIS) output. 

This declining output is expected to lead to a fall in RoW steel output of -5% in 2022, followed by only a partial recovery of 1.6% in 2023.

Both Rio Tinto ((RIO)) and South American mining house Vale should deliver sequential iron ore volume increase in 2023 and 2024, while Fortescue Metals’ ((FMG)) Iron Bridge project ramps-up next year, explain the analysts. After including BHP Group’s ((BHP)) production, the four companies are expected to provide over 100Mt of new supply over 2023/24.

Longview Economics takes a contrary view and notes total capital expenditure growth for these big four iron ore miners is growing at a slow rate. Even if this growth rate speeds up, several years are expected to lapse before any meaningful supply expansion occurs, as new mines take between three and five years before commencing production.

Based on this poor supply outlook and a growing number of Chinese stimulus measures for the economy, Longview sees an increasingly encouraging outlook for iron ore prices, with one main caveat: China’s attachment to zero covid policies.

JP Morgan reduces its FY23 earnings forecasts for BHP Group, Rio Tinto and Fortescue Metals by -15-20% as a result of its lower iron ore price forecasts.

The 12-month target price for BHP Group, the broker’s most preferred ASX-listed iron ore exposure, falls to $42 from $43, while next-preferred Rio Tinto’s target falls to $100 from $102. Including Fortescue Metals (target $17.50, down from $19.00) all companies are rated Neutral.

The broker’s valuations are little changed, in line with its modest forecast amendments beyond FY23.

Longview Economics predicts US$50/barrel oil

Longview Economics expects oil prices will collapse in a similar style to what occurred in both 2008 and 2014, and reach around US$50/barrel.

A better supply outcome and recent rising concerns about a US/global recession, explains Longview, has resulted in a fall of -35% for oil prices since June highs.

US oil production has grown by 2.4mb per day since pandemic lows. Added to this, Russian oil supply has been reasonably stable since the Ukraine war escalated in June, notes Longview, and OPEC supply has trended higher.

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