Commodities | Nov 03 2022
A glance through the latest expert views and predictions about commodities:Lower base metal price forecasts; recommended resource shares; a greater iron ore surplus in 2023and signposts for an easing of Chinas zero-covid strategy.
-The odds of a synchronised 2023 global recession sit at 50%
-Citis resource stocks for a hard and soft landing
-An even greater iron ore surplus in 2023
-Identifying first signs of an easing in Chinas covid zero strategy
By Mark Woodruff
Dire base metal price forecasts
Citis weekly take on commodities appears under the headline: a global recession could quickly spook the bulls.
The odds of a synchronised 2023 global recession sit at 50%, according to the broker. A series of rolling recessions is expected, with measurable downturns in the EU and UK this northern winter and in the US by mid-2023.
Investors are reminded that commodities post negative returns during recessions, while positive returns coming out of a recession occur largely in the first six months. The demand for commodity-intensive goods increases with a rebound in economic activity, explain the analysts.
Citi expects the worst is yet to come for base metal demand as economic activity deteriorates further, and forecasts price declines of up to -20% by the first quarter of 2023, varying by metal.
This sell-off would be consistent with industrial metals price returns heading into and during a global recession, point out the analysts.
For gold, Citi sees a struggle for the bulls in the short term, but also notes signs of price stabilisation. Price support is evident at US$1,575-1,600/oz.
The broker is more bullish on palladium, with current prices presenting a potential dip-buying opportunity. Its felt US$2,250-2,300/oz may be reached in the next three to six months, as global auto production continues to recover on improved microcontroller chip supply.
Precious metals tend to outperform during recessions, says Citi, as investors turn to less risky assets, and prices may also be assisted by central bank policy easing.
In the case of uranium, a 9% price increase in October is supported by increasing appetite for nuclear energy globally, according to the analysts. Recent delays in closures for European nuclear reactors represents a stabilisation of Western uranium demand.
As a result of this stability, Citi now believes nuclear power growth in Asia will provide positive incremental demand growth, as opposed to a mere shifting of demand from West to East.
Recommended resource stocks for hard and soft landings
Citi recommends different Resource sector (mining, oil & gas) stocks for each of its base level, hard-landing and soft-landing scenarios for 2023 global GDP.
In the case of a soft-landing, the broker sees clear upside to the miners (especially those in the second tier) with lower margins and higher operating leverage such as South32 ((S32)) and Fortescue Metals ((FMG)). Newcrest Mining ((NCM)), 29Metals ((29M)) and Mineral Resources ((MIN)).
The likes of Santos ((STO)) and Woodside Energy ((WDS)) should be eschewed if a soft landing arises but would be the most preferred under a hard landing, explain the analysts.
While miners, especially mid-caps, will underperform the overall market due to materially lower earnings during a hard landing, Oil & Gas sector exposures would be relatively defensive, according to the broker, given the current Ukraine crisis and its expected impact on Asian gas markets.
The analysts point out the Oil & Gas sector has outperformed the ASX300 Metals and Mining index by 25% over the last six months due to events in the Ukraine.
Least favoured by Citi in a hard landing include the soft-landing favourites of South32, Fortescue Metals and 29Metals, as well as Sandfire Resources ((SFR)).
Sticking for now with the brokers base case, both Mining and Oil & Gas sectors offer value, with large cap mining cheaper than large cap oil & gas. Here, Rio Tinto ((RIO)), South32, Santos, Mineral Resources and Allkem ((AKE)) are preferred, while Whitehaven Coal ((WHC)), New Hope ((NHC)) and Pilbara Minerals ((PLS)) should be avoided.
Citi points out key oil & gas names are at a different point in the earnings cycle to other Resource sector stocks, with brokers raising gas price expectations given the European Union gas crisis.
Earnings momentum for Santos has largely remained positive since mid-2020, while Woodsides earnings momentum has been positive since late October 2021.
Citi sees a greater iron ore surplus during 2023
Iron ore prices are now trading at their lowest levels since 2020, driven by a downturn in sentiment following disappointing policy emanating from Chinas recent 20th Congress, explains Citi.
The broker cuts its (up to) three-month iron ore forecast to US$70/t from US$95/t andlowers its 2023 forecast to US$95/t from US$110/t, due to a gloomy outlook for demand globally.