Material Matters: Iron Ore, Gold & Coal

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A glance through the latest expert views and predictions about commodities: potential impact on iron ore from trade tensions; gold sector stock preferences & the outlook for a range of commodities.

-The impact of trade tensions on the iron ore market
-Updates on iron ore price forecasts
-Goldman Sachs’ preferences in the gold sector
-The outlook for coal and other commodities 

By Mark Woodruff 

Iron ore: the impact of trade tensions and price forecasts

While tariff hikes by the US in 2018 had modest and temporary effects on the US steel balance, Morgan Stanley points out iron ore demand continued to expand globally, driven by Emerging Market growth, mainly centred on China.

Net imports of steel in manufactured goods continued their rising trend, reflecting the limited impact of tariffs on steel-containing goods, highlights the broker.

In the event of a Trump win in the upcoming US Presidential General Election, the analysts note potential for 10% tariffs on all imported goods and 50% on Chinese goods.

This time around, Morgan Stanley feels the impact of these actions by the US could be more than offset by emerging market steel growth which is shifting to India, Southeast Asia, Africa and the Middle East, as Chinese demand plateaus at a high level.

China is a relatively small steel supplier to the US, representing just 2% of direct imports, and less than 20% of indirect imports, explains the broker.

Partly due to re-routing, the analysts explain China has grown its direct and indirect steel exports, despite tariffs, as it stays competitive on costs and meets rising Emerging Market growth.

Greater impacts could be felt should there be actions from a wider group of countries or barriers focused on indirect exports, cautions the broker.

Morgan Stanley highlights the risk to overall economic output posed by any worsening in trade tensions.

Iron ore price forecasts

Citi’s latest bi-monthly update on the iron ore market shows the broker’s FY24 forecast price has been trimmed by -4% to US$110/t.

The analysts expect the price to drift lower during the next three months over concerns relating to steel demand amidst lower steel output targets and ample port inventories.

The broker also points to a seasonal slowdown in the third quarter when prices may dive below US$100/t.

Citi sees scope for the price of 58% ore to move up against the benchmark price. Currently, benchmark (62%) ore is more expensive by around US$14.00/t for China’s blast furnace operators, while 65% ore is cheaper than the benchmark price by circa -US$3.00/t.

Goldman Sachs forecasts the benchmark iron ore price will average between US$100-105/t over the remainder of the year, while UBS sees limited downside with cost support between US$90-100/t.

UBS is not anticipating a material price bounce either, with iron ore inventories now above normal, and supply stronger-than-expected in the first half of 2024.

This broker is cautious on the medium-term price outlook as supply lifts in Australia and Brazil from next year, and in Guinea (West Africa) from 2026/27 on the ramp-up of the Simandou project. Steel scrap is also expected to displace some iron ore demand.

Costs and incentive prices remain high and support a US$85/t long-term real price, according to the analysts.

In the iron ore space, the broker’s 12-month target price for Fortescue ((FMG)) falls by -15% to $18.70 on lower forecast price realisation.

Also, UBS has upgraded its rating for Deterra Royalties ((DRR)) to Buy from Neutral as the announced acquisition of UK-listed Trident Royalties, and the subsequent negative impact on available dividends for shareholders, is seen as distracting investor attention from underlying asset quality.

Goldman Sachs’ preferences in the gold sector

When it comes to investing in the Australian Gold sector, Goldman Sachs prefers near-term margins/returns over long-term ounces. Assets with less execution risk and those best positioned to capture increases in gold pricing are also favoured.

While the gold price has continued its run through the second quarter of 2024, rising by around 5% quarter-on quarter and by 15% year-to-date, gold equities have in recent times broadly underperformed the Australian dollar gold price, partly due to escalating costs.

Over the past five years, margin expansion has been crimped as costs (AISC) have worsened by circa -40% on average, explains Goldman Sachs, during a period when the Australian dollar gold price has risen by around 70%.

The broker still suspects absolute costs are likely to continue rising for Australian gold companies over the next 12 months.

While Goldman Sachs continues to see a constructive setup for the gold price, noting the metal offers the best protection against very high inflation and geopolitical supply shocks, the analysts remain wary on gold stocks continuing to underperform during upcoming quarterly results on higher costs/capex guidance for FY25.

UBS, which has a US$2,700/oz gold price forecast by the end of 2025, recently lowered its price targets for Northern Star Resources ((NST)), De Grey Mining, ((DEG)), and Regis Resources ((RRL)) by -14%, -14% and -12%, respectively, for exactly that reason.

Australian Gold stocks are currently pricing in an average US$1,850/oz gold price, pretty much in line with Goldman’s long-term gold price forecast of US$1,800/oz.

Gold Road Resources ((GOR)) and De Grey Mining remain the standouts at a discount to the rest of this broker’s coverage with shares priced closer to US$1,650/oz.

Both Northern Star Resources and Evolution Mining ((EVN)) have the best gold production outlook, in Goldman’s view, with production growing in nearly each of the next five years.

Bellevue Gold ((BGL)) also rates a mention for its strong production outlook through ramp-up of the Bellevue mine, along with low-cost expansion optionality. It’s felt the company has an attractive long-term cost profile due to superior gold grades.

Bellevue’s story was recently recounted in greater detail at: (Bellevue Gold For Better Grades & Margins – FNArena.com).

Supporting de-leveraging, both Bellevue Gold and Evolution Mining have some of the strongest near-term free cash flow (FCF) yields in the sector, notes Goldman.

On the whole, larger producers have a more consistent cash cost and, hence, margin profile versus smaller peers.

Elsewhere, Capricorn Metals ((CMM)) has a strong five-year production outlook on the ramp-up of the Mt Gibson gold project, and the McPhillamys mine may arrest production decline for Regis Resources ((RRL)).

The second half of 2024 outlook for commodities

Goldman Sachs remains positive on the second half pricing outlook for copper, aluminium, and metallurgical coal because of anticipated market deficits.

UBS agrees on copper and likes the outlook for gold equities into the second half, as mentioned previously.

On the other hand, Goldman remains bearish on thermal coal and battery materials (lithium, nickel) on forecast market surpluses. 

UBS is also cautious on the lithium sector based on both current equity valuations and future lithium prices due to robust supply and weak (ex-China) demand, but target prices for stocks under coverage remain generally unchanged.

On the supply side, some areas UBS will be focusing upon in the second half of 2024 are the magnitude of copper smelter cuts and the speed of aluminium smelter ramp-ups.

Regarding coal, the analysts anticipate thermal prices will moderate with seasonally weaker demand/lower gas prices, while metallurgical coal has a more constructive outlook.

For the short-term, the met coal price should lift to US$275/t after the fire at Anglo American’s Grosvenor coal mine in Queensland. UBS has raised price targets for Whitehaven Coal ((WHC)) and Coronado Global Resources ((CRN)).

Based on Goldman’s estimate of a long run met coal market deficit, this broker increases its long-run forecast price to US$220/t from US$205/t, along higher estimates for pulverised coal injection (PCI) and semi-soft prices.

This broker forecasts a deficit from 2027 driven by under-investment in new premium met coal supply in Australia and Canada. A Buy rating is retained for Coronado Global Resources, while New Hope ((NHC)) and Whitehaven Coal have ratings of Neutral and Sell, respectively.

On copper, UBS believes the fundamental outlook remains compelling. A deficit is expected this year, a situation which should persist (and grow) over the coming years with a strong supply recovery considered unlikely.

Top picks by UBS among its coverage of Australian Resources are South32 ((S32)), Newmont Mining ((NEM)), and Coronado Global Resources.

Goldman Sachs continues to see good free cash flow (FCF) yield support for the major diversified miners like BHP Group ((BHP)) and Rio Tinto ((RIO)), with South32 ((S32)) also a standout with a 13% yield, mostly due to the recent rally in the alumina price to around US$500/t.

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