Material Matters: Iron Ore, Oil, Gold, Potash And Nickel

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-China's steel market consolidating
-More deficits needed for rally in oil
-Buy gold equities on pullback – RBC
-Pressure building on potash price
-Philippines unlikely a strong catalyst
 

By Eva Brocklehurst

Iron Ore

Rising steel prices in China have dragged up the price of iron ore, with ANZ Bank analysts suggesting the news regarding a possible restructure of the Chinese steel industry is behind the firmer prices. Baosteel and Wuhan Iron & Steel have announced a joint strategic restructuring, resurrecting the hope over-capacity in the industry could be addressed.

The analysts cannot envisage iron ore prices staying at current levels for too long and consolidation in the steel market is expected to be, ultimately, bearish for iron ore demand. Supply growth in iron ore remains relatively high as well. The analysts recommend producers use the current rally to forward-sell some production.

Oil

Sentiment in the oil market has turned bearish on the back of rising rig activity in the US amid signs of weak demand. This is in contrast to what the ANZ analysts consider is a constructive fundamental backdrop.

The analysts expect the tightening in the oil market to continue, but the extent of the current increase in activity is also considered unlikely to be sustained at current prices. The analysts do not expect US output to stabilise until the December quarter, even assuming prices over US$50/bbl.

A high level of inventories remains a concern and will likely require a market deficit over a period to fall back to a more sustainable level. The analysts suspect any further declines in price will accelerate supply closures and set the stage for an even stronger recovery in 2017.

Gold

RBC Capital Markets expects gold prices to strengthen from the current US$1,340/oz, as investors choose gold as a safe haven investment. This comes amidst elevated levels of geopolitical uncertainty, and higher systemic risk associated with declining real rates and increasing amounts of sovereign debt offering negative returns.

The analysts increase gold price assumptions to US$1,500/oz in 2017 and 2018, 12% above the current spot price, before forecasting a decline to US$1,300/oz in 2020. Investment demand for gold has outshone the decline in jewellery demand, the analysts note, and this situation is expected to continue with investors buying on any pullback in the price.

The analysts recommend investors take advantage of any pullback to buy gold equities, with a focus on operating companies that have attractive margins, solid balance sheets and organic growth opportunities. Preferred Australian stocks include Silver Lake Resources ((SLR)) and Saracen Minerals ((SAR)).

Potash

Contracts have finally been settled for potash shipments to China. At US$219/t CFR Macquarie notes the agreement set by Belarus is more than 30% below the price in 2015. This suggests a commodity space fast turning into a battle for market share while the discipline of the old producer cartel has been broken. Further capacity is being added so the pressure on prices is building.

Potash has recently been the only commodity trading out of its cost curve but now Macquarie observes market economics have taken hold. One area of hope for the market in 2017 is the recent recovery in agricultural prices, which points to better future demand. Chinese imports are now also expected normalise after a weak period.

Still, the broker does not expect spot prices to recover to levels seen at the start of 2016 in the foreseeable future. Macquarie acknowledges it has long been a bear on potash, but the latest contract settlement was even lower than it expected.

The broker also reiterates a view that the contract system is starting to break down and heavy discounts to this benchmark could well be done. Such a process would be a further de-rating event for producers.

Nickel

Deutsche Bank observes the new administration in the Philippines could mean, if a large enough swathe of the country's nickel ore mines are closed because of environmental infringements, there will be a second supply shock to the market in as many years.

The Philippines accounted for just over 20% of the mined nickel units in 2015. Still, the broker does not believe the drawdown of inventories will reach critical levels. The lesson from the last shock, when Indonesia applied a nickel ore export ban, is that support for the metal is only temporary, given the abundant supply of laterite ore.

Indonesia is coming back into the market as its smelting capacity ramps up while New Caledonia could potentially allow more ore exports. Deutsche Bank concludes that the Philippines will not be a catalyst for a complete re-basing of the nickel price overnight but could help along the way to a more sustainable price range.

See also, Nickel Price Hike Likely on July 18 2016.

Syrah Resources

Syrah Resources ((SYR)) has secured its funding for Balama after recently raising $194m in a placement. With the funds secured the company has earmarked up to US$45m to progress the company's spherical graphite project in the US.

It now appears likely the company will assess the viability of an enlarged plant compared with its prior consideration of a 25,000 tpa plant, given offtake agreements with Morgan Hairong and Marubeni now point towards demand being stronger than anticipated.

Canaccord Genuity updates its model to account for the equity raising and the timetable for construction at Balama. The broker looks to updates on construction as it progresses at Balama and considers further marketing and offtake arrangements are the next de-risking catalysts. Canaccord Genuity retains a Buy rating and raises the target to $7.00 from $6.15.
 

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