Commodities | Feb 25 2016
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-Sustained demand required for iron ore
-Further gains in sugar prices likely
-LNG surplus may hasten thermal coal demise
-Macquarie calls substantial zinc deficit in 2016
-Indonesian ore supply may run down prices
By Eva Brocklehurst
Iron Ore
Prices for iron ore have rallied over the past week, against expectations of many in the market, and are now 25% above the lows of US$38/tonne reached in December. UBS asks the question: where to now?
Better steel prices and margins in China have boosted mill sentiment and driven a more substantial re-stocking, the broker maintains. Seaborne supply has remained tighter too, as Australia's exports had a soft start to the year and Roy Hill shipments languish.
UBS notes Chinese steel output tends to peak in May-June, and given the larger-than-expected re-stocking under way, prices may hold up in the near term. Further out, a more sustained lift in demand is required and the structural drivers remain bearish. UBS makes no change to its price forecasts for US$45/t in 2016 and US$47/t in 2017.
Deutsche Bank observes that for the first time, Rio Tinto ((RIO)) became the world's largest producer of iron ore in the December quarter, with an annualised rate of 346mtpa. Vale, previously top producer, was affected by the Samarco outage. This is typically the lowest seasonal quarter for Vale and Rio Tinto may, therefore, only hold the top spot temporarily.
Production for the top nine producers all up was 1.25mt in the quarter, down 3.0% on the prior quarter. The broker notes limited reductions are evident from the bigger producers, with Cliffs being the main exception, and they appear to be comfortable letting attrition do the work for them. The broker expects a 3-5% attrition rate in the industry.
Sugar
A large bounce in the sugar price has given some much-needed confidence to the bulls, ANZ analysts maintain. Sugar, up until the sudden surge this week of 10%, has been one of the worst performing commodities in 2016.
Even with the latest rebound the analysts believe 2016 and 2017 sugar futures are undervalued and the current weakness presents a buying opportunity. A global deficit in the market ranging from 4-8m tonnes is estimated by the end of the year. This will be the first such deficit in five years.
For Australian producers the changing fundamentals present a chance for a return to prices of $450-500/t. The analysts maintain that if the deficit ends up being as high as 8mt and the Australian dollar falls to the mid US60c levels, prices greater than $550/t are plausible into 2017.
Thermal Coal
Macquarie contends the bear case for thermal coal is in well in train, underpinned by a global drive towards cleaner energy, falling power intensity in economic growth and increasing power plant efficiency.
The seaborne market has been contracting since 2013, the broker observes, stemming from Chinese protectionism and India being able to supply more of the coal it needs domestically. Macquarie retains price forecasts for thermal coal out to 2020 which are below current spot prices.
The broker's oil & gas researchers have concluded that the LNG market will be in surplus for the foreseeable future, rising to a peak of 70mtpa by 2019. This peak is a thermal coal equivalent of 190mtpa, or over 20% of the current seaborne market. If a meaningful portion of this LNG manages to displace coal in regions with spare capacity, such as Europe, the broker suspects the demise of thermal coal may be even more severe than currently anticipated.
Zinc
Tightening concentrates markets suggest to Macquarie the outlook for zinc is the brightest of all the London Metal Exchange (LME) metals on fundamentals. Investors appear to be deciding whether to back further zinc upside or submit to global macro fears.
Prices have reversed the January weakness and zinc is now up 4.0% year to date, with only tin doing better. Macquarie observes the key reasons for the turnaround were strong zinc imports into China in December and the closure of the Horsehead smelter in the US.
The broker does not consider the tightness in raw materials is speculative, having conducted analysis shortly after the Glencore closure in November, which pointed to the market being short around 400,000 tpa of contained zinc.
The broker continues to call a substantial deficit in zinc concentrates in 2016, which is expected to drive an equally significant metal short fall. The situation is set to persist until 2020 on the broker's current estimates.
Nickel Ore/Bauxite
A report has surfaced that Indonesia's mining minister may relax the ore export ban, as part of a broader review of mining law to be completed this year. UBS notes the ore ban of nickel and bauxite disrupted a trade that, up until that point, accounted for around 15% of global annual supply.
The policy was designed to encourage downstream processing investment but the broker observes this has only been partially successful. Rather, it has actually facilitated bauxite mine investment in Malaysia and lifted the nickel trade from the Philippines. Current spot prices are not helpful to major capital works investment either, UBS notes.
A resumption of supply for Indonesia could widen the surplus which has been in place for three years for nickel and the broker observes this is usually bad for prices. Nevertheless, it is far from assured that Indonesian exports could reclaim their old export run rates.
In terms of bauxite, the broker believes the export ban actually induced residual market tightness for an otherwise abundant resource. Hence, there is downside price risk here as well.
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