Material Matters: Outlook, Iron Ore & Copper

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A glance through the latest expert views and predictions about commodities. Resources and mining outlook; iron ore; and copper.

-Value emerging in Australian bulk miners
-High-quality miners with catalysts preferred by Ord Minnett
-Iron ore expected to stay firm as Chinese imports strengthen in January
-Copper supply discipline likely to continue
 

By Eva Brocklehurst

Resources Outlook

UBS believes the fundamentals underpinning 2019 remain strong with restrained supply growth amid the ongoing impact from China's environmental policy. Capital discipline has become the norm and prices remain robust. Cash returns should stay healthy. Nevertheless, volatility will continue because of the trade tensions between the US and China and uncertainty over Chinese stimulus packages.

If the trade war decelerates, sentiment towards base metals is expected to improve, as inventory is low, premiums are supportive and the infrastructure stimulus in China will reinvigorate demand after the winter. The coal trade is expected to stay tight in the medium term and the broker prefers base metals over bulks. UBS remains overweight on miners and upgrades Northern Star ((NST)) and Independence Group ((IGO)) to Buy, believing the sell-off has been overdone.

Despite record free cash flow and strong balance sheets, Goldman Sachs observes the Australian large-cap bulk miners retraced around -15% from their highs in October, and believes they are now undervalued. The broker expects the February reporting season will be a key catalyst for these miners, which are supported by record returns and further disciplined investment in high-returning projects.

While parts of the Chinese economy are likely to be soft over the next few months, the broker believes a trough is imminent and commodity fundamentals will remain positive in 2019 because of solid demand and supply-side discipline. Goldman Sachs reiterates a Buy rating for BHP Group ((BHP)).

Ord Minnett is more cautious for 2019 and believes concerns about the growth outlook in China will feed through into lower commodity prices. Given the highly uncertain outlook, the broker recommends investors position for safety in the highest-quality stocks which have valuation support and potential catalysts.

The broker reduces 2019 iron ore forecast by -7% to US$62/t and reduces base and precious metal forecasts by -5-13%. The rating on BHP is downgraded as a result, to Hold from Accumulate. The broker retains a strong view on the gold sector as a relative safe haven, given the softening in US monetary policy and concerns over global growth. The ASX gold sector leads its peers on margins, cash flow and balance sheet strength and Ord Minnett's top picks are Newcrest Mining ((NCM)) and Northern Star.

Macquarie downgrades nickel and alumina price estimates and upgrades coal. The broker makes the most significant changes to nickel, with reductions of -20% and -18% for 2019 and 2020 forecast, respectively. This is because of increased Indonesian nickel pig iron supply and softening demand growth. Alumina forecasts are reduced -17% for 2019 because of the easing of potential supply shocks.

Meanwhile, iron ore and coking coal spot prices continue to outperform expectations and the broker lifts 2019 hard coking coal and manganese price forecasts by 7%. Cobalt and lithium prices are increased 20% and 5% respectively for 2019 because of lower supply growth. 2019 and 2020 and aluminium price estimates rise 3% and 6% respectively, as capacity reforms take effect. Thermal coal prices are raised 8% for 2020.

Macquarie upgrades New Hope ((NHC)), Whitehaven Coal ((WHC)), Sandfire Resources ((SFR)) and Alacer Gold ((AQG)) to Outperform. Galaxy Resources ((GXY)), Regis Resources ((RRL)) and Orocobre ((ORE)) are downgraded to Neutral.

Iron Ore

Morgan Stanley observes the iron ore price has corrected in spectacular fashion, as winter production cuts are now happening in China, reducing consumption. However, supplies are rising as Australian shipments recover from disruption after the BHP train derailment.

Morgan Stanley believes the iron ore should be protected from further weakening of steel demand, as scrap-consuming electric arc furnaces are the marginal rebar producers and would be the first to cut back output.

The broker expects China's iron ore imports will strengthen from January, as mills typically re-stock ahead of the Chinese New Year. Steel production and iron ore imports are expected to hold firm in 2019. UBS also believes the iron ore price should hold up at around US$65/t, as Chinese mills cut the use of scrap.

Copper

While several copper projects have materialised in the last few months, the time to first production is, at the very least, three years away, Morgan Stanley points out. On the broker's assessment, the equity market needs to be convinced that supply discipline will continue to address the impact of any shortfall in demand. There is some anxiety that the industry may be returning to a growth focus just ahead of a potential retreat in demand.

Morgan Stanley does not believe this is the case, asserting that the long-term assumptions by miners are quite realistic. Copper remains a preferred commodity and, even for brownfield expansion, there are issues such as water, power, tailings and the social licence to be negotiated. These are increasingly difficult and time-consuming processes.

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