Tag Archives: Base Metals and Minerals

article 3 months old

The Wrap: Online, Wealth Mgmt, Automotive

Domestic online media; Amazon in Australia; regulatory oversight of financial advisers; risks for automotive dealerships; booming electric vehicle sales.

-Are returns on invested capital sustainable for Australia's online media sector?
-Amazon entering Australia with a retail offering considered negative for incumbents
-Independent investment admin platform providers positioning as threats to incumbents
-Caution prevails as automotive dealer lending practices under scrutiny
-Lithium in strong demand in electric vehicles but excess supply still likely


By Eva Brocklehurst

Online Media

UBS is seeking answers to the question of investing in the online classifieds sector. The issue is about whether domestic online businesses are ex-growth and whether returns on invested capital are sustainable. Is there upside from international expansion?

REA Group ((REA)) may disappoint the market in FY17, UBS asserts. Performance versus expectations relies on second half volume outcomes, which are difficult to predict. The broker believes investors may not fully appreciate the potential for Australian residential revenue to re-accelerate in FY18, even without a rebound in volumes. UBS upgrades to Buy from Neutral and elevates the target to $56 from $52.

The broker notes Carsales.com's ((CAR)) domestic business is perceived as well entrenched, offsetting a lower earnings growth profile. Core domestic revenue growth has slowed to 5% in FY13-16 from 21% in FY10-13. The broker envisages incremental headwinds from retreating dealer profitability pools and competitive threats, and suspects recent initiatives may only be a partial offset. Rating is upgraded to Neutral from Sell with a $10.50 target.

The broker retains a Sell rating for Seek ((SEK)) and a $14.00 target. Drivers of domestic growth include yield, volume and new investments. UBS envisages limited near-term financial contributions from new earnings streams and, instead, expects initiatives will bolster the company's value for its two key stakeholders: hirers & applicants.

A strengthening of the network potentially adds placements but monetisation of a greater market share will be long-dated and the broker suspects consensus expectations for an expansion in margins of 8% in FY18 are unrealistic.

The broker believes, if the three companies could replicate their domestic models overseas, upside would be material, given the penetration of smart devices and rising wealth and urbanisation. On the other hand, market structures are also less favourable elsewhere and competition fiercer.


There is speculation that Amazon will enter Australia. Citi believes the probability has increased albeit this could be 2-3 years away, but the impact on Australian retailers could entail more than a 20% cut to earnings. The broker notes more detailed information has been forthcoming about the company's entry to Singapore in early 2017, with reports signalling Amazon is looking for a retail CEO.

Reports suggest more than 250 trademark applications across a wide range of retail categories have been made by Amazon. This could relate to the export of Australian brands to Asian markets. The broker conceives an entry in 2019 as more probable, given the need to build distribution centres and secure branded supply in Australia.

Citi expects electronics will be the most affected, with earnings declines of 23% predicted for JB Hi-Fi ((JBH)) and 19% for Harvey Norman ((HVN)). This would be closely followed by Myer ((MYR)) at 18% and Super Retail ((SUL)) at 17%.

Wealth Management

Shaw and Partners notes the consequences of increased regulatory oversight has meant Australian financial advisers need to evaluate their business models and, most probably, implement a fee-for-service, and annuity-style business model rather one based on transactions. The main beneficiary from the changing landscape is the customer, with cheaper fees, upgraded transparency and improving advisor education for giving retail advice.

The broker notes a number of independent investment administration platform providers which generate revenue through fees, such as HUB24((HUB)), Praemium ((PPS)), OneVue ((OVH)) and the unlisted Netwealth have experienced notable growth in recent times, positioning as competitive threats to the incumbents such as the banks, AMP ((AMP)) and Macquarie Group ((MQG)).

The broker believes their success has been driven by regulation favouring independent financial advice, competitive pricing and the growth in separately managed accounts (SMAs). Most importantly, their nimble technology has resonated with the advisor community. Nevertheless, the broker believes future growth will be hard to come by, as competitive pressures intensify and pricing models evolve.

The broker believes administration fees will evolve to a flat structure as platform technology becomes commoditised. As well. regulatory burdens will weigh on profit margins and achieving economies of scale will be hugely important for the longevity of the business and industry. The broker initiates coverage of Fiducian ((FID)) with a Buy rating and $4.60 target, Managed Accounts Holdings ((MGP)) with Hold and target of $0.33 and HUB24 with a Sell rating and $4.10 target.

Automotive Dealerships

Further data has reinforced some of the risks facing automotive dealerships. Morgan Stanley also notes BMW Finance will pay $77m to compensate customers for lending failures, which should act as a warning to other finance companies. VFACTS data has shown further underperformance in Western Australia, which is a negative for Automotive Holdings ((AHG)).

Concerns about lending practices have been underscored by the update from Carsales.com at its AGM, where the company indicated its financial services arm sustained borrowing capacity reductions in the fourth quarter of FY16 which continued into FY17. While this is mainly from BMW Finance, which provides finance through Strattons, Morgan Stanley suspects other lenders have been more cautious as well.

The broker believes tightening consumer credit will pose a headwind to new car sales, which are normally financed. The broker is uncertain of the outcome from the pending update on regulation changes from ASIC (Australian Securities and Investments Commission) but believes it will change the way finance is sold at dealerships, which will result in a period of instability as changes are implemented.

Electric Vehicles

Macquarie observes electric car sales are booming and will soon enjoy a large market share. This will have implications for a range of commodities. In 2015, China, North America, Japan and Europe, where the vast majority of such cars are purchased, accounted for 664,000 electric vehicle purchases, more than double the number of 2014. Between January and October this year Macquarie estimates year-on-year growth was another 48%.

The broker believes such sales growth can only be maintained with some difficulty. In 2015 in Europe the increase owed a lot to customers buying ahead of the expiration of generous subsidy schemes in markets such as the Netherlands and Sweden. This year, although many incentives remain, some appear to be expiring at the end of the year. Still, the impact of the burgeoning market is expected to be felt over a long period.

What are the commodities being impacted? So far electric vehicles are pitched at the small end of the market, with limited range or, as with Tesla, a decent range at a higher price point. None are cost-effective compared with standard vehicles as yet. Macquarie estimates around 14% of global lithium demand will be accounted for by electric vehicles this year. Over the long term, average battery capacity should grow.

Chinese lithium spot prices have been falling since May following a substantial rally. Inventory overhang has been blamed. The broker does not believe growth in the electric vehicle market will be fast enough to absorb a wave of supply coming from Australia and elsewhere over the next few years. Nickel, unlike lithium, is used in two of the five prevailing lithium ion battery chemistries.

The demand case for nickel is much less compelling. Assuming that around 50% of electric batteries contain nickel, nickel demand could grow to 38,000t in 2021 from around 10,000t in 2016. Macquarie expects strong growth, but from a low base.

Cobalt is more tied to consumer electronics and China's moves to secure raw material. Given a dependence on Democratic Republic of Congo for supply, there are challenges for its use in electric vehicles and the broker suspects substitution risk is high. Macquarie assumes global cobalt demand for batteries grows at around 5% compound to reach 53,000t by 2020.

Platinum group metals derive most of their demand from autocatalysts, which are found in vehicles with internal combustion engines. The situation is bleak for these metals as both platinum and palladium are expected to experience significant declines in volumes, as autocatalysts from scrapped cars are recycled.

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article 3 months old

Material Matters: Coal, Oil, Iron Ore and Metals

Coking coal uncertainty; few bearish catalysts for oil; iron ore softens; Ord Minnett raises copper forecasts, lowers gold; tight primary supply of lead.

-Seaborne coking coal prices to remain elevated over lack of clarity on China's reform program
-Is OPEC underestimating the cost curve for new US shale?
-Iron ore expected to soften with slight oversupply in 2017
-Ord Minnett upgrades Alumina Ltd and Whitehaven Coal
-Lead prices spike, expected to retrace to low US$2000/t range


By Eva Brocklehurst

Coking Coal

Price negotiations for metallurgical (coking) coal in the first quarter of 2017 are soon to begin. Morgan Stanley observes corresponding spot prices are falling from a great height, while the state of China's local mines remains a market mystery. The broker does not believe conditions have normalised. While the quieter northern winter trade has begun, seaborne spot prices are likely to remain elevated into 2017, mainly because of the lack of clarity over the ongoing reform program in China.

Morgan Stanley believes a review of China's altered import flows is now needed to re-set the price outlook, given what is known about the scale/duration of the reform program. A reasonable estimate of the potential upside risk to the market's 12-month price outlook for key coking coal products would be at least 30%, in the broker's calculations.

The broker also notes the return from bankruptcy of US-based coking coal plays, Alpha Natural and Arch Coal, highlights the extraordinarily tight conditions prevalent in global coal trades.


There are few bearish catalysts for oil in the near term, Morgan Stanley contends. Other than a complete collapse of the deal gained at the recent OPEC meeting, the broker does not envisage many catalysts that will reverse the recent rally. Evidence of falling OPEC production in January could add to bullish price action. Scepticism regarding compliance is warranted, in the broker's opinion, but any evidence to support this is unlikely to emerge before March or April next year.

Nevertheless, OPEC appears unconcerned about a US supply response and Morgan Stanley suspects the organisation may be underestimating the cost curve for new shale, and the size of the response if both OPEC and its non-OPEC allies cut production. Morgan Stanley notes positive onshore trends in the US started to emerge even before the OPEC agreement and resultant price surge. Given the amount of hedging and rig activity, US production may surprise both in magnitude and its timing.

Iron Ore

Buoyant iron ore prices are currently based on a combination of coking coal strength, resilient Chinese demand and broader risk appetite, Ord Minnett observes. As 2017 progresses the broker expects prices to soften from current levels, as the market digests a slight oversupply and coal prices ease as marginal production responds. The broker's revised forecasts envisage around 58mt of oversupply in 2018, before the market starts to look more balanced.

Ord Minnett upgrades price forecasts to US$60/t and maintains 2017 Chinese steel production growth assumptions. At the same time, the broker expects the major miners to add 77mt to the market. 2018 appears to have the weakest pricing fundamentals, in the broker's opinion and the long-term price forecast of US$50/t is unchanged.


Ord Minnett increases its price forecasts for coking coal and copper, while downgrading near-term forecasts for gold. The broker believes the mining sector can continue to re-rate based on the significant value that exists, with around half the broker's coverage trading at net present value or lower. Significant cash is being generated at base-case prices and balance sheets are also in good shape.

Ord Minnett raises 2017 copper price forecasts by 7%, although still expects copper to decline to US$2.03/lb in 2018 from the spot price of around US$2.60/lb. Coking coal forecasts for 2017 and 2018 are raised 30% to US$175/t and 7% to US$125/t, respectively. Gold price forecasts are reduced by 9% to US$1225/oz for 2017 and to US$1291/oz for 2018.

Ord Minnett upgrades Alumina Ltd ((AWC)) to Accumulate from Hold. Spot alumina continues to look strong at US$325/t and presents upside potential to the broker's earnings estimates. The broker also upgrades Whitehaven Coal ((WHC)) to Accumulate from Hold, recognising it may be late with its call but is factoring in higher coal price forecasts and the company becoming net cash within the year.

Among major miners, the broker continues to prefer Rio Tinto ((RIO)), based on more attractive valuation metrics and a higher chance of capital management. Fortescue Metals ((FMG)) remains a key pick as its strong free cash flow yield will start to migrate to a dividend yield as the company hits its US$3m net debt target in the next year.

Newcrest Mining ((NCM)) is the broker's least preferred gold stock for its stretched valuation and likely gold sector de-rating. For those seeking gold exposure, Ord Minnett recommends Regis Resources ((RRL)).


Lead prices rallied sharply in the past week, hitting an intra-day, five-year peak of US$2576.50/t before a dramatic sell-off the following day. Macquarie believes the usual suspects, Chinese investors, scooped up the relatively unfashionable metal before selling it off again. The reason is probably because lead was looking left behind by the rest of the complex.

The metal was becoming highly discounted to its sister metal zinc and, while zinc was also moving up, the subsequent rally has reduced lead's discount to well below US$400/t.

Speculative momentum aside, Macquarie notes the fundamental lead market does look a little tighter. Primary supply is tight and lead mine output has been hit by the same reductions as in zinc, although has also been experiencing a contraction in Chinese domestic output because of intensifying environmental scrutiny at the country's mines. Traceable mine output data signals a drop of 11% in the first nine months of the year versus the same period over 2015.

In the scrap market, which contributes around 51% to overall supply, battery stocks were drawn down in October, as high lead prices drew out material. The broker observes the market is somewhat lean. Nevertheless, with this side of the market well covered, buyers have felt no pressure to accept the rally in lead prices, and scrap prices have failed to keep pace.

Macquarie observes demand, which is dominated by lead acid batteries, has been supported by much stronger automobile sales and production across several regions over the year. The broker envisages a better outlook for demand. Still, while lead prices deserve to lift somewhat, the recent rally is considered to be well in excess of the fundamentals.

Macquarie expects prices will retrace back to more justifiable levels in the low US$2000/t range, with the potential for further slippage after the peak battery demand in the northern winter period. On the other hand, a sharp fall in winter temperatures would facilitate more battery failures and may create a squeeze in the scrap market, in turn causing buyers to accept some of the higher prices.

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article 3 months old

Material Matters: Outlook, Iron Ore, Steel And OPEC

Outlook for metals; iron ore outlook becoming more constructive; steel demand; the upcoming OPEC meeting.

-Supply restrictions, economic reductions should boost oil, coking coal, nickel, natural gas and zinc
-Sustained downturn in iron ore pricing looking less likely
-Chinese steel demand improving and more resilient than expected
-Oil market expected to move into deficit in 2017


By Eva Brocklehurst

Commodity Outlook

Goldman Sachs notes that historically, when the US and Chinese output gap closes and inflation begins to rise, this is a buy signal for commodities. Supply restrictions from policy actions should benefit oil, coking (metallurgical) coal and nickel in the near term, while economic reductions should boost natural gas and zinc. The analysts downgrade three and six-month gold price forecasts to US$1200/oz on a stronger cyclical outlook.

Morgan Stanley notes the shock of the US election is now passing and commodity prices are normalising, largely via currency adjustments. The broker suspects the proposal to rebuild US infrastructure is probably bullish for metal trades given the size of the US economy. The US economy currently consumes up to 20% of the world's metal ore supply and was the biggest buyer before China became fully engaged in global trade a decade ago.

The US remains heavily dependent on oil, lead and coal. Nevertheless, Morgan Stanley highlights that any lift in demand growth these particular commodities can probably be met by domestic supply. The broker calculates that a reasonable boost for the US economy would be one where consumption rates lift back to historical highs, which would represent a 2-5% lift in global demand for copper, aluminium, alumina, zinc and lead but little change to nickel.

Iron Ore

ANZ's analysts believe a sustained downturn in the iron ore prices looks increasingly unlikely. A combination of seasonally strong steel demand in China and risks for further supplier disruptions could mean the market enters a period of tightness.

Supply-side issues are seen having a greater potential impact on the market. Growth in exports from Australia have been slowing for some time but there are signs the slowdown will accelerate in coming months. Rio Tinto ((RIO)) recently announced it would shut its Hope Downs mine for two weeks in December to reduce operating costs and maximise cash. While a shut-down of this nature will only have a small impact, the analysts note this appears to signal a shift from the strategy of expansion at all costs.

Meanwhile, the potential for further disruptions over the southern hemisphere summer is also higher. The Australian Bureau of Meteorology is forecasting an above average number of cyclones in 2016/17 and the Pilbara coastline has a 63% chance of more tropical cyclones than average.

Goldman Sachs is also more constructive on the iron ore outlook in 2017. Demand has surprised to the upside in China after the credit stimulus earlier this year. Supply, on the other hand, was slow to increase because of delayed capital expenditure and operational challenges.

Besides the fundamentals, a rally in metallurgical coal prices and a weaker Chinese currency, as well as the risk-on sentiment after the US election, have also supported iron ore prices. Goldman Sachs upgrades its iron ore price forecasts for the next three months to US$65/t, six months to US$63/t and 12 months to US$55/t.

From 2018 and beyond, the broker revises up its long-term equilibrium price forecasts to US$45/t from US$35/t. The broker expects Chinese steel demand will weaken in 2018 and the iron ore inventory re-stocking process run into physical constraints. Political uncertainties at the macro level and elevated levels of port inventory at the micro level suggests significant risks to the broker's forecasts, and the high level of volatility seen in the market this year is expected to continue.


Macquarie's latest steel survey from China shows a broader based improvement in demand and sentiment. Domestic orders improved over the past month for Chinese steel mills and, while property and infrastructure demand for steel has eased, a clear improvement has been witnessed in the machinery and automotive sectors.

The analysts note steel mills continue to re-stock raw materials and coking coal inventory is falling on tight supply, while iron ore stocks are flat month on month. Despite the rise in raw material costs, such as iron ore and coking coal, steel mills report they are in positive margin territory and are maintaining stable capacity utilisation rates.

Goldman Sachs also notes steel consumption is more resilient than previously expected and demand for iron ore is likely to be supported by further incremental re-stocking across the steel supply chain.


ANZ analysts expect OPEC (Organisation of Petroleum Exporting Countries) will reach an agreement at next week's meeting in Vienna and observe money managers have been aggressively shorting oil as OPEC members have increased their output. This suggests the market remains unconvinced that the cartel will reach an agreement.

Yet the analysts note comments from various OPEC members signal an agreement is possible. Iran's oil minister has said it was highly probable that members would reach a consensus. OPEC production is near a record high, driven by strong output from Saudi Arabia and smaller members. Nevertheless, the analysts point out that any agreement must take into account Iran's production remains below its peak achieved nearly 10 years ago.

Prices have been trading in a tight range over the past six months, and strong support appears established around US$43-44/bbl. With positioning already so short, even if OPEC fails to reach agreement the analysts expect selling to be relatively limited. Instead, the risks are seen firmly skewed to the upside in the short term, with agreement on production cuts likely to mean prices test the highs seen in 2016, at around US$53/bbl for Brent.

The analysts estimate the market will move into a deficit in the first quarter of 2017, assuming OPEC cuts production by 750,000 b/d in the first half. Without production cuts the deficit would likely be delayed until the September quarter. This is because most members are pushing towards capacity and this should mean limited increases in output in 2017.

Stronger-than-expected demand growth and lower production from high-cost countries increases Goldman Sachs' confidence that the global oil market will shift into deficit by the second half of 2017, even with OPEC production at current levels. Thus, there is now stronger incentive for OPEC producers to halt inventory growth in the first half and normalise the current high level of inventories with a short duration cut to production, in the broker's view.

Goldman Sachs believes a cut to production would help OPEC grow market share by sidelining higher-cost producers and reducing oil price volatility, which would increase the valuation of members' debt and equity.

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article 3 months old

The Overnight Report: Holiday Spree

By Greg Peel

The Dow closed up 59 points or 0.3% while the S&P gained 0.1% to 2204 and the Nasdaq fell 0.1%.

Let slip the bulls

The SPI Overnight was suggesting only a 7 point gain before the opening bell on the local market yesterday – a fair call despite more records on Wall Street given the ASX200 had rallied 60-odd points the day before. Iron ore had jumped 6% that night but iron ore futures had already rallied during Tuesday so the market was on to it.

But we closed up another 71 points. The chartists had suggested a breach of 5400 would pave the way for a move to 5500 and there seemed some level of self-fulfilment yesterday. As was the case on Tuesday, the local market did not step-jump up yesterday, it started from zero and tracked a straight line up to the close, without as much as a stumble. Momentum was at work.

It seems as if the local market has been in a daze this past couple of weeks as it tries to come to terms with a Trump presidency. There have been many reports in the media warning of just how bad Trump could prove for Australia. But as each passing day indicates Trump’s policy pledges were all about winning the election and not about how he would actually run the country, those initial fears have begun to be tempered.

If it didn’t happen on Tuesday, it happened yesterday – investors suddenly saw Wall Street breaking records and decided Australia was missing the boat. Get in and buy!

Only the healthcare sector missed out on an otherwise market-wide rally yesterday, thanks to the ongoing fallout from Fisher & Paykal Healthcare’s ((FPH)) earnings result. That stock was down 7% and the healthcare sector closed flat. Otherwise, it was green-on-screen.

The resource sectors were again in the frame – materials up 2.0% and energy up 1.3% -- but the fact industrials were up 2.2%, telcos 2.1% and utilities 1.4% indicated investors were moving back into the likes of bond proxy stocks and previous high-PE names that had been trounced over the past month or more. The banks also made their contribution with a 1.1% gain.

Did anyone notice yesterday’s major data release? It seems not.

Construction work done fell 4.9% in the September quarter to be down 11.1% year on year. It was a much softer result than economists were expecting. Private sector work fell 6.6% to be down 36%. The bulk of that fall reflects the ongoing wind-down of resource sector construction. Engineering fell 3.8% to be down 23.2%.

Last year it was all about building work, particularly residential, striking the balance. Building work in general fell 5.7% to now be only 1.4% higher year on year. Within that, residential fell 3.1%. The decline in resource sector construction will soon reach its nadir, but now we see the beginning of the cooling of the housing market. The Australian economy needs a new hero.

Within those companies most impacted over the last few years by the mining downturn – engineers & contractors – a scramble has been on to diversify into public infrastructure and away from the mining and oil & gas sectors in order to re-establish themselves. In the September quarter, public construction rose by only 1.4% but it is 15.7% higher year on year. Economists estimate the overall construction number for the quarter will shave 0.4 percentage points off GDP. As housing cools, public sector spending will need to take the baton.

Happy Thanksgiving

The healthcare sector was also a drag on Wall Street last night. Test results showed that Eli Lilly’s prospective Alzheimer’s drug failed to deliver. That stock fell 10% and weighed generally on biotechs, sending the Nasdaq down 0.1% following two record-breaking sessions.

It looked for most of the session that the S&P500 would also ease back after its record thirteen-day winning streak, but the broad market index just managed to fall over the line at the death. The Dow, on the other hand, powered on.

The Trump theme continues to underscore for many of the big caps in the Dow Industrials and very much so in the Dow Transports. But there was more to be positive about last night.

Deer & Co shares jumped 11% following that company’s earnings report. Deere is not a Dow stock but peer Caterpillar is. The banks continued on their merry way last night and because of the peculiarities of the arcane price-average, recent addition Goldman Sachs is very influential because it is a US$200-plus per share stock.

US durable goods orders surged 4.8% in October when 3.3% was expected. It mostly came down to lumpy aircraft orders, but ex-transport the result was still a 1% gain.

The minutes of the November Fed meeting were released last night but no one paid any attention, given they are pre-Trump. The indications are nevertheless a rate rise next month is baked in, but everyone knows that.

There would have been no surprise had Wall Street eased off last night as traders squared up ahead of what is effectively a four-day holiday. But that was not the case. We’ll need to see what happens next week after everyone’s had a rest.


Iron ore is up another US$1.10 at US$74.90/t. At what point will the Chinese government step in with more dramatic measures to curb speculation?

And not just in the bulks, but in base metals too. Aluminium and lead rose another 1% last night, copper and nickel 2% and zinc 3%.

These moves came, yet again, despite a stronger greenback. After one little dip, the US dollar index is back up 0.6% at 101.64.

Alas, the death knell sounded for gold. It fell US$24.60 to US$1187.10/oz, accelerating once the 1200 mark was breached.

The oils were little moved last night.

The Aussie is down 0.2% at US$0.7386. On a combination of US dollar strength and the weakness in yesterday’s Australian data, we might expect a bigger drop. But look at those commodity prices.


The SPI Overnight closed down one point.

There’s no holiday in Australia tomorrow, but with Wall Street closed, it may be a case of looking to square up a bit downunder, particularly after a 130 point rally over two sessions.

Today brings September quarter capital expenditure numbers.

It is also a very big day on the AGM calendar, with highlights including South32 ((S32)) and Woolworths ((WOW)).

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article 3 months old

Unknowns Hamper Syrah Resources

Brokers remain divided over the amount of risk to apply to graphite developer Syrah Resources, given the number of unknowns in its battery strategy.

-First output at Balama expected in late 2018, with commercial plant planned for Louisiana
-Near-term pricing risk for flake graphite keeps Morgan Stanley on underweight footing
-Still expected to deliver a sizeable graphite business by 2019


By Eva Brocklehurst

Syrah Resources ((SYR)) has indicated a slower development of its battery strategy, with higher capital expenditure and a delay to its Balama project. The company expects demand for its natural graphite to increase to 1mtpa by 2025, with 2019 coinciding with the time frame it expects for the commercialisation of its downstream facility. The company also expects further demand upside potential in the fixed energy storage market.

At the time of the ramp-up of Balama, with first output expected by the fourth quarter of 2018, the company intends to complete a Bankable Feasibility Study (BFS) for a commercial plant to be located in Louisiana, US, for an initial 20,000tpa, expected to be raised to 60,000tpa.

The company plans to sell uncoated and, eventually, coated spherical graphite products and expects the total capital cost of the facility to be US$125-160m. If demand outstrips this capacity, Syrah Resources has ascertained it can make a quick decision on a second commercial plant in the Asian region, although Credit Suisse points out the advantages of this pale in comparison to the US.

Morgan Stanley acknowledges Balama is a world-class reserve and that building downstream processing is a sensible option. Yet the broker envisages near-term pricing risk for flake graphite, which may lead to significant working capital requirements, financing and execution risks that do not appear to be factored into the market at current levels.

Based on the broker's graphite price deck and weightings applied to both its bear and bull case valuations, the equity is considered to be trading above fair value. This keeps the broker on an Underweight rating which, along with a overweight view on the Australian resources sector, makes the stock a relative underweight.

The announcement of any new offtake agreements would likely be positive but the broker notes actual pricing, and the existence of any discounts to achieve offtake contracts, will only be clear once revenue recognition commences. This latest update drives a lower valuation for the stock, although Morgan Stanley accepts that the company is showing a renewed focus on quality and getting its battery strategy right.

The company has signalled it is organising a working capital facility but the broker expects limited cash in 2017 and 2018 will constrain its ability to fund the equity component of the battery strategy.

Credit Suisse is at the other end of the spectrum. Strong US government support and potential incentives such as low-cost power, skilled labour and infrastructure underpin expectations that permits and approvals will come faster. The broker was disappointed by the lack of an update to capital expenditure and operating expenditure numbers versus 17 months ago, but acknowledges that expecting this detail before the BFS was ambitious.

Credit Suisse recognises the uncertainty around market demand for the spherical offering, but points out knowledge is yet to be gained from the BFS in order to provide performance expectations. Still, the broker believes existing offtake agreements signal 2019 will start at 20-30,000tpa and end at least at 60,000tpa.

Credit Suisse accepts the risk of guessing the profile for 2019 and beyond, given this is totally unguided in terms of operating costs at sub-nameplate production, other than that initial scale could be a little higher than guidance for 20,000tpa on commissioning.

Macquarie took the strategy update as a positive development. The broker believes the company has made significant advances and appears well placed to deliver a very sizable global anode material business. While the broker believes the project has been somewhat de-risked, it now takes a more conservative view of what can be achieved. The records continue to tumble on Wall Street. Dow up 67. Valuation falls accordingly, with the broker's target downgraded to $5.40 from $6.60 previously.

Deutsche Bank notes there is nothing in the update that supports the share price slump, as ramp-up delays are common. The company has confirmed its downstream strategy is intact and also that negotiations to sell flake concentrate to existing parties in the battery supply chain are continuing.

Deutsche Bank likes the fact that the company has at least five active discussions under way with new potential downstream customers, which could be a significant catalyst for upside. Moreover, short interest in the stock has more than doubled in the last five months. The broker estimates the current share price implies a flat US$700/t realised price for graphite and ascribes no value to the downstream enterprise whatsoever.

There are three Buy ratings on FNArena's database with one Sell (Morgan Stanley). The consensus target is $5.74, suggesting 103.1% in upside to the last share price. This compares with $6.29 ahead of the update. Targets range from $2.75 (Morgan Stanley) to $7.80 (Credit Suisse).

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article 3 months old

The Overnight Report: Dow 19,000

By Greg Peel

The Dow closed up 67 points or 0.4% at 19,023 while the S&P rose 0.2% to 2202 and the Nasdaq gained 0.3%.

Buy Everything

Surging commodity prices were the major trigger but new all-time highs on Wall Street also seemed to spur investors into diving back into the Australian stock market as a whole yesterday, given no sector finished in the red in a 1.2% rally for the ASX200. Rotation of any sort was not apparent, although not every sector performed equally.

Materials (up 2.8%) and energy (up 2.6%) led the charge on stronger base metal and oil prices, despite a weak overnight session for iron ore, and helped by little counter-movement in gold. Iron ore futures went the other way and traded “limit up” in the session, negating that offset. In contrast to trading over the past couple of months, the next best sector was utilities, up 2.1%.

It has been typical in recent times for resources and other cyclicals to trade inversely to yield stocks and defensives. Yesterday was different; seemingly more of a case of buying anything that looked sufficiently cheap. Not joining the party were the banks and telcos, up only 0.3% each.

Telstra ((TLS)) has been a volatile stock of late – not what you’d normally associate with a supposedly defensive telco. It seems talk of an NBN-related “earnings gap” ahead has investors thinking twice. And the lingering possibility of the banks having to raise new capital to meet new regulations, or at the least cut their dividends, may also have investors shying away from that sector.

Yesterday’s rally was not a step-jump but a classic case of moving steadily upward as the day progressed. This suggests “real” buying. In sights was the technical level of 5400 for the index which was surpassed late morning, sparking some brief profit-taking, but once the rally resumed it fed on itself.

If the index holds over 5400, chartists suggest then 5500 is in play.

Blue Sky

Donald Trump must be starting to think he’s a bit of a hero, if he didn’t already. The S&P500 has now posted a thirteen-day winning streak since Trump’s victory speech, to the tune of almost 3%. Nixon managed to spark a similar response, but Trump is still well behind Republican pin-up boy Ronny Ray Guns, whose election was worth over 8% in the same period.

The Dow has closed over 19,000 for the first time in history. The S&P has closed over 2200 for the first time in history. The Nasdaq and Russell small cap indices also hit new all-time highs last night, marking the second consecutive session of all four doing so – a feat not seen since 1998. The thirteen-day day winning streak for the S&P is the first since 1996.

Across Wall Street all talk is of just how far this rally can run on election promises (that are already being broken – “lock her up” is now off the table) which will take time to implement. Surely the honeymoon must fade at some point.  Tonight in the US is all about trains, planes and automobiles. A mass exodus will begin from lunch time. A good day to take profits ahead of the Thanksgiving holiday?


Recent volatility in bulks and base metal prices has had a lot to do with the Chinese government increasing margin requirements to curb rampant speculation, offsetting Trump euphoria. We’ve seen some sharp dips in iron ore and coal prices lately as a result. But is Beijing winning?

Iron ore is up US$4.00 or 5.7% at US$73.80/t. Thermal coal is up 6.2%.

There were some very big moves up for base metals on Monday night, with aluminium a smaller mover. Last night aluminium jumped 2% while copper, lead and nickel all added a further 1% and nickel fell 1%, having jumped over 5% in the prior session.

West Texas crude has now rolled into the January delivery contract and last night it fell US17c to US$48.07/bbl after Monday night’s big move.

The US dollar didn’t much come into play last night, ticking up less than 0.1% to 101.07.

Gold is flat at US$1211.70/oz.

The Aussie is up 0.5% at US$0.7399 despite the steady greenback, driven by commodity prices strength and, presumably, all this sudden talk of the next move in Australian interest rates being up. There are plenty of economists holding the opposite view.


The SPI Overnight closed up 9 points.

Locally we’ll see September quarter construction work done numbers today.

Japanese markets are closed.

Wall Street will see a big dump of data tonight, including the minutes of the November Fed meeting, before the evacuation begins.

Programmed Maintenance ((PRG)) will release its earnings report today while the centres of attention in another round of AGMs will likely be Estia Health ((EHE)), following its torrid few months, and one of the most volatile stocks on the market at present, lithium producer Orocobre ((ORE)).

Rudi will appear on Sky Business today, 12.30-2.30pm, instead of his usual Thursday appearance.

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article 3 months old

Newcrest Outlines Growth Ambitions

Gold and copper miner Newcrest has provided further clarity on growth plans for its key producing mines. Not all brokers are convinced.

-Options being considered to lift Cadia output to, potentially, 40mtpa
-Rising cost profile at Lihir and more work required to firm up viability of 17mtpa
-CEO suggests US-based investors find deep value in the stock, brokers less convinced


By Eva Brocklehurst

Gold and copper miner Newcrest Mining ((NCM)) has put more flesh on the bones of its key producing mines, ahead of site tours to Cadia Valley and Lihir Island, with further clarity on the growth plans for the two sites.

Newcrest is on track to hit its 13mtpa target for Lihir and has lifted this goal to 14mtpa by December 2017. The company also provided a more detailed grade profile for Cadia East for the medium and long term, with a focus on options to lift throughput rates to, potentially, 40mtpa.

Ord Minnett observes Newcrest continues to prioritise internal growth opportunities, by reducing bottlenecks and expanding core assets, while acknowledging a desire for more development-stage assets in its portfolio. The broker suspects throughput and grade at Cadia could be weaker than consensus estimates.

No constraints were identified in the expansion of Cadia to 32mtpa but issues with permits, tailings and water need solving in a 40mtpa scenario. The company expects to achieve a 28mtpa rate by FY18.

At Lihir the conceptual target of 17mtpa involves a fines bypass crusher and scrubber and needs more metallurgical work, in the broker's opinion, to firm up the viability of the option. Ord Minnett forecasts a rising cost profile at Lihir, as grades decline and material movement increases, noting the company can combat rising costs by increasing throughput and completing the fines bypass project.

Meanwhile, Newcrest has committed to invest in its Telfer mine until FY19, ahead of a future decision to proceed with the $70-90m in cut-backs required from FY19 onwards.

Macquarie welcomes the detailed guidance, believing this presents upside risks to its base case forecast, but retains a Neutral rating. The indicative mine plans broadly match its forecasts and the upgrade profile presents upside risk for the next six years for production, and downside risk beyond that.

There was also more details on the life-of-mine guidance for other operations, which highlight the comparatively short life compared with the two core assets. The outlook for Telfer was mixed, the broker notes, with higher grades in the open pit offset by lower throughput rates and lower grades from the underground.

Guidance for Gosowong and Bonikro highlight the comparatively short life of these projects. Overall, FY17 guidance is unchanged for gold and copper production, costs and capital expenditure.

UBS understands why the operation of of the company's projects has improved over the last two years. Big data, the EDGE program and an overhaul of the approach to safety have all contributed to the turnaround. Yet, while the outlook and confidence have improved, it still does not justify a premium valuation, in the broker's opinion.

The CEO has suggested that some US-based investors find deep value in the stock, and that a marketing push into the US in 2017 is on the cards. UBS counters this with the observation that while Newcrest might appear favourable on a simple enterprise value/reserve metric, a large part of its reserves are tied up in undeveloped, or long-life, assets, which carry a good deal of uncertainty. This, subsequently, makes a high-level comparison for the company quite difficult.

The main new piece of new information, the broker notes, was the grade profile at Cadia East. Near-term earnings are expected to improve at Cadia but UBS calculates that after FY18, grades decline steadily to 0.54-0.57g/t gold by 2023/25. This would mean annual production halves to 430-460, 000ozs per annum. Copper grades are maintained over this period and, at spot prices, this should mean the revenue mix shifts to 55% gold from the current 70%.

UBS observes this production decline includes expansion to 32mtpa in 2020. With a declining production profile in view, it appears clear to the broker why the company is keeping its options open on expanding to 40mtpa. The broker's target and Sell rating are based on a long-term decline in the company's production profile, amid concern that the market may not be pricing in the size of this decline.

Deutsche Bank notes the focus is returning to growth and believes Cadia provides one of the best growth options in the global gold space, while acknowledging the strategy at Lihir is less certain. The case for expansion at Cadia is contingent on the Cadia East panel cave operation being able to deliver at the required rate but, overall, the broker supports the company's desire to assess the potential to push to 40mtpa.

Deutsche Bank notes the merger and acquisition conversation is strengthening, and believes the company's caving expertise is a point of difference and could be a critical element when justifying transactions, such as buying into an open pit asset where there is caving potential at depth.

FNArena's database shows two Buy ratings, one Hold and five Sell. The consensus target is $20.96, signalling 1.2% upside to the last share price. Targets range from $12.25 (UBS) to $27.05 (Morgans not yet updated on the investor briefing).

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article 3 months old

Material Matters: Strategy, Gold And Gold Miners

Expectations for the metals market and the impact of Donald Trump's election on gold and gold stocks.

-Base metal prices likely over-reacted as US accounts for under 10% of global demand
-Sell off in Oz gold equities seen more than capturing weakness in gold prices
-Deutsche Bank, Macquarie take constructive views on the ASX gold sector


By Eva Brocklehurst

Commodity Strategy

The market hopes, after the surprise win by Donald Trump in the US election, that proposed infrastructure spending will boost demand for base metals. Yet Commonwealth Bank analysts observe that base metal prices have probably over-reacted, as the US only accounts for under 10% of global demand for the major commodities.

China, which accounts for 40-60%, is expected to remain the primary driver of demand for a while yet. With regulators stepping in to lift margin requirements at Chinese commodity exchanges, the analysts expected speculative demand to slow immediately.

The analysts have upgraded price forecasts for iron ore and coal over the next year, amid expectations Chinese demand will remain more resilient and the recent uptick in mining commodity prices indicates deficit concerns are increasing. The analysts still expect prices to ease next year as China steps up to take the heat out of its property sector.

The analysts observe producers are yet to respond to rising commodity prices with much investment in new greenfield project. On current numbers spot prices provide the returns for a number of new projects, particularly in the coal and iron ore market. Yet, miners are justifiably cautious, suspecting Chinese demand for additional volumes may not exist when these projects reach completion in a few years time.

Instead, the analysts observe producers are looking to re-start idled operations, such as the Glencore Integra coking coal mine, where the capital costs are low and the returns more immediate. While the analysts believe miners will remain reluctant investors in new projects for now, should prices remain elevated for another six months they could change their views.

Meanwhile, precious metals are noted to have fared worse since Donald Trump's victory, amid expectations his policies will be stimulatory and increase the likelihood the US Federal Reserve will boost interest rates. The analysts expect the Fed to lift the Fed Funds rate in December and have downgraded gold and silver price forecasts, given the recent deterioration.

Gold And Gold Miners

Market expectations of US fiscal stimulus should lead to higher 10-year bond yields and an increase in inflation, albeit not at the same pace, Deutsche Bank contends. Despite this, the Australian dollar gold price is only 10% below its record high of $1820/oz. Meanwhile, the ASX gold sector has de-rated 25% in the last four months and is now on the lowest multiples since early 2016. The broker believes the sell-off more than captures the fall in the US dollar gold price and expectations of further weakness.

The broker believes the economic advantages in the incoming US administration outweigh the risk factors for now, and the big move in yields has been priced in. Deutsche Bank moves to a more constructive outlook for the ASX gold sector, having previously been bearish.

In a stronger US dollar environment, Australian dollar currency benefits allow the ASX gold sector to outperform global gold peers. The broker upgrades OceanaGold ((OGC)) and St Barbara ((SBM)) to Buy from Hold, and Regis Resources ((RRL)) and Northern Star Resources ((NST)) to Hold from Sell.

Macquarie expects near-term volatility in gold as markets continue to focus on the implications of the election of Donald Trump. The broker remains positive on the medium to long-term outlook and envisages current weakness in the equities as a buying opportunity.

Overall, the broker considers the argument that a Trump economic policy is negative for gold is rather weak, as his policy is not certain and its consequences even less so. After the rise and subsequent fall in gold prices over the election process, the broker observes gold did not fail as a safe haven as investors decided safe havens were not needed.

Moreover, the broker believes gold takes its lead from bigger markets, such as equities, bonds and FX. Markets appear to have decided that, not only is the incoming administration not as worrying, it may actually be economically positive. Macquarie also distinguishes between a more hawkish stance from the US Fed because of a change in personnel and a response to rising inflation. The latter is more plausible at present as the US economy is nearing full employment and wages and prices have accelerated recently.

In a case of where the Fed cannot raise rates as fast as it wants because of political pressure or personnel changes (Janet Yellen's term as Fed chairman expires in February 2018), this would mean faster growth and higher inflation that could get out of hand. Macquarie ascertains that this would indeed be bullish for gold.

The broker's gold forecast already has a constructive view on the US economy and the fact that rate hikes are likely. The broker expects the gold price to rise in 2017. Macquarie notes FY16 was a record earnings season for all the Australian producers and growth should continue into FY17.

The broker continues to favour Evolution Mining ((EVN)) and St Barbara for their earnings potential and strong de-leveraging stories. Northern Star is favoured for its cash generation and aggressive organic growth. Outside of Australian-based producers, OceanaGold is also a key pick for the broker as it is trading at a significant discount to valuation.

Significant falls in the share prices of Alacer Gold ((AQG)) and Doray Minerals ((DRM)) in the past few days has led the broker to upgrade their respective recommendations to Outperform and Neutral. Whilst valuations imply upside for both stocks the broker is cautious over the near-term, given both are engaged in the construction phases of the respective growth projects.

Macquarie also upgrades Regis Resources to Outperform from Neutral. For domestic development exposure the broker flags Gold Road ((GOR)) as it has just secured joint-venture funding for Gruyere and offers low risk upside, as does Dacian Gold ((DCN)) for its Mt Morgans project.

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article 3 months old

The Overnight Report: Commodity Price Surge

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.8% to 2198 and the Nasdaq rose 0.9%.


It was a quiet session on the local bourse yesterday. Volume was weak as the ASX200 meandered its way in a minimal range to a soggy close. But again the lack of movement in the index belies what was going on underneath amongst the sectors.

It would seem investors are simply not sure how they should be positioned going into year-end. I have highlighted in the previous couple of sessions that it appeared the long sell-off of yield stocks and defensives was finding a bottom and the abrupt run-up in resource stocks was tipping over. But yesterday, we went back the other way once more.

On a tick-up in the oil price, energy was the best performer on the day with a 1.7% gain. It would seem traders were heartened by the WTI price rising back through the US$45/bbl mark on cautious confidence of an OPEC agreement being reached, rather than tanking down through 40. That buying will prove rather prescient today.

Materials chimed in with a 0.3% gain but other than a flat day for the banks, all other sectors finished in the red. Notably, consumer staples and healthcare each fell 1.3%, telcos fell 0.9% and utilities fell 0.5%. The theme of the previous couple of sessions was reversed. Perhaps the seemingly relentless rise of US bond yields is just too much.

The US bond yield stalled last night and the US dollar index dipped for the first time in several sessions. The door was opened for commodities to take centre stage.


APEC meetings are not what we’d normally think of as market movers but aside from the attention being drawn by it being President Obama’s final outing, the attendance in Peru of Vladimir Putin and Xi Jinping has provided us with some headlines.

The Russian president sees “a high probability” of an agreement being reached in Vienna on November 30, when OPEC tries to implement a production freeze. Russia will cooperate, Putin suggested, as a production freeze “is not an issue for us”.

Those comments were worth 4.2% for the West Texas crude price, which rose US$1.92 to US$47.49/bbl.

What is good for oil is seen as good for other commodities. Meanwhile, the Chinese president used his speech in Peru to confirm China’s support for a free trade area in the Asia-Pacific. The Chinese government is pushing for a Regional Comprehensive Economic Partnership of 16 countries. The now dead-in-the-water TPP was to involve 12 countries, including the big one, the US. We might presume China sees an opportunity to further step-up its global strength as the trade wall goes up around the United States.

Free trade offers up the possibility of increased Chinese imports of raw materials, including lead, up 1% on the LME last night, aluminium and zinc, up 1.5%, copper, up 2.5%, and nickel, up 5%.

Xi Jinping did not, however, manage to light a flame under the bulks, which few disagree have run too far, too fast. The thermal coal price was steady last night and iron ore plunged US$2.80 to US$69.80/t.

The 0.3% dip in the US dollar index to 100.97 provided a green light for those commodities that did rally to do so, and also allowed gold to tick back US$3.30 to US$1211.90/oz.

And the Aussie to tick back 0.3% to US$0.7361.

Quadruple Watching

The energy sector duly led Wall Street higher last night with materials trailing in its wake. But otherwise the positive mood was market-wide. The Dow, S&P and Nasdaq all simultaneously hit new all-time highs, for the first time since August. Back in August, US small caps were underperforming. Last night the Russell 2000 index also hit a new all-time high, marking a rare quadrella.

What’s good for M&M Enterprises is good for the country. Except in this case Milo Minderbinder is Donald Trump and no one can yet identify the Catch-22.

Outside of the commodity story there was no real new news to drive Wall Street higher last night. Only the dip in the greenback after a long run higher could be seen as any particular incentive. And the ten-year bond rate stalling.

Donald Trump continues to interview prospective cabinet members but there has been no new news on that front either. Either way, US business television currently features commentator after commentator suggesting a Trump presidency cannot be anything other than positive for the stock market. They just can’t see any other scenario.

The previous couple of sessions showed signs the Trump euphoria rally might be losing steam. Not so last night.


Fresh all-time highs on Wall Street and surging commodity prices. How will this affect the Australian market today? Forget iron ore, the SPI Overnight has closed up 40 points or 0.8%.

Earnings results are due out today from CYBG ((CYB)), Fisher & Paykel Healthcare ((FPH)) and Technology One ((TNE)). There is another round of AGMs to digest including another prominent Kiwi, The A2 Milk Company ((A2M)).

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

Material Matters: US Energy, Coal, Chrome, Steel And Oz Miners

Trump and US energy; coking coal's price surge; improved outlook for alumina, chrome and steel; positive trends for Oz miners.

-If Trump policies survive Raymond James estimates the US to have the lowest energy costs globally
-Supply response to higher coking coal prices not expected to impact until second half of 2017
-Macquarie more confident on upside case for alumina, chrome market remaining tight
-Credit Suisse envisages rapid de-gearing likely over 2017 for key Australian miners


by Eva Brocklehurst

US Energy

In assessing what a Donald Trump presidency and Republican-controlled Congress may mean for the US energy complex in coming years, researchers at Raymond James suspect the "attack dogs" that have waged war on the US oil and gas industry over the past years will be called off. This includes the Environmental Protection Agency, the Endangered Species Act, and numerous executive orders that have catered to the US environmental lobby.

Longer term, more access to federal lands and less government regulation should mean lower US energy costs. If these policies survive the next decade, the researchers expect the US to have the lowest energy costs in the world. Yet there are variables that influence short-term oil prices and who sits in the Oval Office, or controls Congress, is not one of them.

Given that one of Trump's hallmark issues is the Iranian nuclear deal there is the possibility that Iran's oil supply could be interrupted by a revival of US sanctions. That said, Raymond James observes this agreement was a multi-country arrangement and it may not matter if the US backs out. The sanction that impacted Iran the most was the European Union's oil embargo.

The researchers note Trump's deregulation agenda may prove to be a gusher for energy and petroleum companies. The possibility of a federal anti-fracking legislation is less likely and there are also other benefits that would trickle down from the relief of regulatory pressure on pipeline construction. Oilfield services also stand to benefit from more drilling activity.

The lower cost of production means that the market share gains in the US should increase versus the rest of the world as relative returns improve, and activity gains in the US are also likely to outpace those in offshore arenas. For the refiners a much more favourable regulatory environment is likely to emerge but quantifying this is difficult, the researchers assert.

Yet a return to substantial US oil and gas production growth over the medium term is likely to further cement the structural advantages of the US refining system. In terms of coal, its market share in the electricity mix has fallen to 33% in 2015 from 50% in 2005. Coal will see some relief from the lack of a federal de-carbonisation mandate, but Raymond James still expects coal to continue to lose share.

Cheap natural gas from fracking and increasingly cheaper wind and solar are expected to be too powerful for coal to go back to where it was a decade ago. In sum, the researchers believe the winners from Trump policies are the US economy, US consumers, US oil & gas companies, US oilfield services, US mid-stream companies, US coal, and US renewable power.

Coking Coal

Chinese policies on coal have prompted a significant surge in import demand at a time when the major exporters have been reluctant or unable to respond, resulting in a price spike. As a result, ANZ analysts upgrade coking (metallurgical) coal forecasts. The analyst expect contract prices to average US$178/t in 2017 and US$135/t in 2018.

Higher spot prices are expected to induce a global supply response, led by North America, but not until there is some sustainability in prices. The analysts do not expect this to occur until the second half of 2017 and do not envisage major exporters raising output immediately. Australian producers are already at capacity and are now being hampered by wet weather.

Chinese coking coal production is also expected to decline over the next two years and recent strength in steel production is unlikely to continue, which should help alleviate the tightness in coming years. The analysts suggest upgraded coking coal price forecasts have implications for the broader Australian economy. Their estimate of Australia's terms of trade is improved by 3% with a resulting small lift in nominal GDP.

India is expected to drive long-term demand for coking coal, with its government aiming to triple steel production by 2025. India's focus on infrastructure investment should underpin greater demand for coal imports for the remainder of 2016 and for 2017. Yet, the analysts observe a large fiscal deficit has restricted investment by the Indian government, while complicated project approval processes and land acquisition issues have made completing large-scale steel projects difficult.

As a result, they envisage only mild growth for Indian coking coal imports, rising to around 55mt by 2020, and accelerating more quickly after that. Australian metallurgical coal producers are likely to be the greatest beneficiaries of higher imports by India, with Australia supplying around 85% of that country's total import requirements.

Alumina, Chrome And Steel

Macquarie notes three commodities for which the price outlook in 2017 has improved markedly. The broker raises forecasts for alumina, ferrochrome and steel, upgrading alumina price estimates by 27% for 2017, ferrochrome contract prices by 33%, and steel prices an average of 17% for the next three quarters.

The broker has become more confident in the upside case for alumina as Chinese aluminium smelter re-starts are finally under way and this is resulting in accelerating growth in demand after a stagnant 2016. Meanwhile, Chinese alumina production re-starts are not keeping pace, hindered by environmental inspections and a shortage of caustic soda.

The issues may be transient but the broker still expects a Chinese market deficit in 2017 and 2018, a gap which will have to be filled by the international market. The broker reiterates its observation that significant ex-China supply is still coming to the market.

Macquarie notes rises in chrome ore pricing over October were most dramatic. Chrome is a clear raw material constraint in a market that relies heavily on South Africa for global supply and where China has no substantial domestic resource.

As stainless steel output continues to look strong in China, and growth in Indonesia is ramping up, tightness in the chrome market appears set to persist. With no chance of direct substitution in stainless steel, Macquarie is looking at an ever tighter chrome market in 2017 and beyond.

The broker notes steel makers are doing their best to offset the recent surge in raw material prices. Steel prices so far have not encompassed a full passing through of the cost push that has been exerted. Steel margins, therefore, remain under pressure, both in China and globally. While the expectation of strong infrastructure expenditure offers some hope for demand, the scale of over capacity in the steel industry signals to Macquarie that a sustained margin recovery will be difficult to achieve.

Oz Miners

Macquarie retains a positive stance on most of the bulk commodity producers. The broker envisages material upside to base case forecasts for coking coal, manganese, iron ore and thermal coal. Incorporating updated commodity price and exchange rate forecasts has translated into solid upgrades to earnings estimates for South 32 ((S32)), and Alumina Ltd ((AWC)) - upgraded to Neutral from Underperform - but more modest updates for most other stocks.

Marking to market the broker upgrades its iron ore price expectations for the December quarter, which leads to upgrades to FY17 forecasts for BHP Billiton ((BHP)), Fortescue Metals ((FMG)) and Mount Gibson ((MGX)), and to the 2016 forecasts for Rio Tinto ((RIO)).

Credit Suisse expects that commodity prices, led by coal, are unlikely to stay at current levels yet they may be materially higher than its current base-case forecasts suggest. This could have the effect of re-setting balance sheets and re-invigorating investor demand for capital management.

The broker is yet to revise its base case forecasts but envisages a rapid de-gearing in balance sheets and strong uplift to earnings. While South 32 is already under-geared, the broker envisages Rio Tinto, Whitehaven Coal ((WHC)) and BHP could all move to an under-geared position by the end of FY18.

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