Material Matters: Recession Pains Ahead For Commodities

Commodities | Oct 12 2022

A glance through the latest expert views and predictions about commodities: Goldman Sachs lowers base metals price forecasts; Citi forecasts a -20% fall in base metals prices in the next six months and UBS expects commodity demand to slow over the same period.

-Brokers see short-term pain, medium-term gain for commodities 
-Goldman Sachs prefers bulks over base metals on a three-to-six-month view
-Citi forecasts a -20% fall in base metals prices in the next six months
-Two brokers raise ratings for Alumina Ltd and Deterra Royalties

By Mark Woodruff

Goldman Sachs on the outlook for the Australian mining sector

Despite near-term demand headwinds, Goldman Sachs lists several key reasons to remain positive on the broader commodities complex and the Australian mining sector over the medium term.

The broker cites ongoing supply-side disruption and under-investment as key positives, along with an anticipated  recovery in Chinese infrastructure and property construction in 2023. Deficits in base metal markets are also expected to result from the decarbonisation push.

Goldman Sachs considers the Mining sector is undervalued. Despite rising costs and increasing sustaining capital expenditure, free cash flow remains strong. There is also thought to be incentives for big miners to grow, given there are fewer M&A targets on offer.

Over the shorter term, encompassing the next two to three quarters, the broker anticipates a tough period for base metals and steel, as European and global demand continues to weaken, and the US dollar continues to strengthen. 

However, the broker notes exceptions for some commodities, either due to tight supply and resilient demand and/or favourable substitution dynamics. These commodities include high energy thermal coal, met coal (being diverted into the thermal market), rare earths (NdPr), zircon and high-grade titanium dioxide (TiO2) feedstock.

Ongoing Chilean mine production issues may also provide a fillip for copper prices, note the analysts.

Overall, Goldman prefers bulks over base metals on a three-to-six-month view, based on recent conversations with Chinese steel mills, which pointed to an uptick in demand. 

The broker raises its rating for Deterra Royalties ((DRR)) to Buy from Neutral, with the company relatively less exposed to escalating industry operating and capital expenditures. In addition, there’s now some expectation for increased production at BHP Group’s ((BHP)) South Flank, from which Deterra receives ongoing royalties.

Regarding base metals, Goldman lowers aluminium and nickel price forecasts after reducing European demand forecasts. It’s noted the industrial supply chain is currently undergoing an aggressive de-stocking cycle, given extreme uncertainties over demand conditions into winter. 

Despite the lower aluminium price forecasts, the broker increases its rating for Alumina Ltd ((AWC)) to Neutral from Sell on valuation, as shares have fallen by -22% since June 9, when originally downgraded to Sell.

Partly due to a forecast drop in copper and zinc prices, Goldman lowers its rating for Sandfire Resources ((SFR)) to Sell from Neutral. Other reasons include the growth capex required for the Motheo copper mine in Botswana and an elevated gas price at the Matsa operations in Spain.

While South32 ((S32)) has a supportive dividend yield, a current share buyback program and compelling long-term base metals growth, the broker lowers its rating to Neutral from Buy on lower base metal price forecasts.

By accessing the FNArena Broker Call *Extra* Report - October 12, 2022, readers can look up 12-month price targets for the four stocks mentioned above, along with ratings and targets for the remaining 13 stocks under Goldman Sachs coverage of mining and steel stocks.

This special edition of the Broker Call *Extra* Report will be published shortly after the publication of this story.

Citi generally agrees with Goldman Sachs on the outlook for metals

Just like Goldman Sachs, Citi is bearish on metals over the next six months on a weakening demand trajectory, and is bullish thereafter. 

The broker sees short-term headwinds for metals demand as China's economic momentum will likely remain sluggish and the Federal Reserve in the US is expected to continue to raise interest rates, despite global weakness. Ongoing US dollar strength is also anticipated.

The broker expects the European power crisis will weigh on regional growth in early 2023 and impact metal consumption in Europe, with likely spill over impacts for metals demand in other regions.

The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE