More Commodity Price Cuts

This story features NEWCREST MINING LIMITED, and other companies. For more info SHARE ANALYSIS: NCM

The company is included in

By Chris Shaw

Earlier this week FNArena reported on cuts to forecasts for commodity prices (See “Down Come Commodity Price Forecasts”, FNArena 21/10/08), with the story highlighting how the previously invincible outlook for bulk commodities such as coal and iron ore were now being revised lower as the reality of weaker global demand sets in.

More revisions have now been issued, with GSJB Were dropping its estimates for the bulks just weeks after having previously adjusted its expectations of further price hikes in the upcoming Japanese financial year starting April 1st, 2009 to a rollover of current prices.

Following a recent meeting with industry players in China, the broker now expects prices to start falling for both iron ore and coal, with the former now expected to see prices decline by 15% in JFY09/10 and coal prices to fall by around 13% for hard coking coal to more than 30% for semi-soft coking coal.

With respect to iron ore, the broker notes the continual weakening in market conditions means what had looked like a balanced market in the coming year is now likely to show a surplus of as much as 30 million tonnes, with the size of the surplus now expected to continue to increase in later years. With such an outlook, the broker takes the view price risk is now firmly to the downside as power is now returning to the buyers and away from the miners.

Similarly, a strong supply side response to previous shortages in semi-soft coking coal, low volume PCI and thermal coal mean these sectors of the coal market are also at risk of significant price adjustments and the broker’s estimates reflect this. It has cut its forecasts by 33% to US$160 per tonne, 18% to US$200 per tonne and 20% to US$100 per tonne respectively.

To highlight how quickly conditions have deteriorated further, only a few weeks ago the broker had been expecting rollover pricing outcomes for both PCI and thermal coal and only an 8% decline in semi-soft coking coal contract prices.

Hard coking coal remains the broker’s preferred exposure because here, unlike with the other coals, supply remains concentrated in the hands of only a few major producers and so there is a greater degree of pricing pressure. Even with this though, the broker has chosen to be conservative and has lowered its forecast by 13% to US$260 per tonne.

This brings its forecast for hard coking coal in line with that of JP Morgan, which made an identical cut in its estimate from a previous forecast of US$300 per tonne. The broker is a little less negative on the outlook for thermal coal than is GSJB Were however, cutting its price forecast to US$115 per tonne from US$150 previously.

With respect to iron ore prices, the broker is also less negative than Weres, cutting its forecast for iron ore fines in Asia for the coming year by 10% to US133.8c per dry metric tonne unit, compared to Weres at US123c. According to JP Morgan, the price falls in the coming Japanese financial year will be followed by falls of a similar magnitude in the next two years as well.

Both brokers have also lowered their estimates for base metal prices, with GSJB Were noting the changes are necessary, as the credit crisis will further damage demand through at least the first quarter of 2009. Taking a longer-term view, the broker actually sees some upside from the current situation, pointing out lower prices and tougher credit conditions now will mean fewer planned or proposed projects actually going ahead in the future. This will at some point recreate supply side issues similar to those of a year or so ago and so see prices go higher.

But in the meantime, the reality is lower demand means weaker prices and the broker has adjusted its numbers accordingly, cutting its 2009 forecasts in US cents per pound for aluminium to 112c from 123c, for copper to 248c from 334c, for lead to 64c from 66c, for nickel to 738c from 827c and for zinc to 70c from 81c.

Again, JP Morgan has followed suit and cut its aluminium price forecast for 2009 by 11% to 108.9c, its copper estimate by 29.7% to 221.7c, its nickel forecast by 36.3% to 606.7c and its zinc forecast by 22.2% to 68.6c. All of its forecasts are in US cents per pound.

The revised forecasts for the two brokers are in some cases higher and in some cases lower than those of Barclays Capital, Natixis Commodity Markets and Deutsche Bank as reported on earlier this week.

Only gold has survived the cuts and the broker’s forecasts have actually increased slightly for both 2008 and 2009, which has boosted the earnings outlook for both Newcrest ((NCM)) and Lihir Gold ((LGL)). Of the two, the broker rates Newcrest as Overweight and Lihir as Neutral, reflecting the fact the former’s earnings estimates have been revised higher by a far greater amount on the back of the broker’s changes to metal and foreign exchange forecasts.

Elsewhere, the broker retains its Underweight rating on Alumina ((AWC)), its Neutral ratings on both Fortescue Metals ((FMG)) and Energy Resources of Australia ((ERA)) and its Overweight recommendation on Centennial Coal ((CEY)).

GSJB Were however has downgraded a few of the resource stocks under its coverage to account for the changes to its commodity price forecasts, with Alumina, Equinox ((EQN)) and Aditya Birla ((ABY)) all being downgraded to Hold from Buy to reflect lower earnings and a lack of positive share price catalysts in a falling metal price environment. As well, the broker has cut its price targets for most of the resource stocks it covers to reflect a lower metal price environment in the medium-term.

At the same time, Macquarie has adjusted its expectations for oil prices and cut forecasts through to 2010, meaning it now expects average prices of US$107 per barrel this year, US$77 per barrel in 2009 and US$81 per barrel in 2010. These are down US$4.50, US$26 and US$11 from the broker’s previous numbers.

To reflect both this and the fact funding for exploration and new projects in the sector is becoming more difficult, the broker has lowered its target prices on the second tier stocks such as Tap Oil ((TAP)), Nexus Energy ((NXS)) and Beach Petroleum ((BPT)). Given current conditions, it favours heavyweights such as Woodside ((WPL)) and Oil Search ((OSH)).

Click to view our Glossary of Financial Terms