Material Matters: Support For Gold And Nickel, Aluminium Fundamentals Remain Poor

This story features NEW HOPE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: NHC

By Chris Shaw

Over the past 12 months the world nickel market has, according to the International Nickel Study Group, shifted from a surplus of 44,700 tonnes to a deficit of 5,500 tonnes as at the end of February.

For Morgan Stanley the clear signs of an expanding deficit in the market justify the 45% rise in the LME nickel price seen so far in 2010, an increase supported by falling LME nickel stocks. These have declined by 14.4% in a little more than two months.

This decline reflects strong demand from the stainless steel sector and ongoing supply disruptions, mostly associated with a protracted strike at Vale Inco's operations in Canada. In terms of demand, Morgan Stanley notes global manufacturing as measured by PMIs (Purchasing Managers' Index) suggests industrial output is increasing, with strengthening global melt production supporting this view.

As prices have risen so too has production, a trend expected to continue into the second half of the year. In such an environment of strengthening demand, Morgan Stanley suggests the nickel price should remain well supported for longer than the market currently expects.

Given this, Morgan Stanley suggests the risk to the nickel market deficit it forecasts of 55,200 tonnes for this year is to the upside, which also implies upside to its price forecasts. At present Morgan Stanley is forecasting annual average nickel prices of US$20,236 per tonne in 2010, rising to US$21,743 per tonne in 2011 and US$22,708 per tonne in 2012.

Credit Suisse has also turned more positive on the outlook for nickel prices over the next year or so, given the current strength of demand from stainless steel makers and the slide in nickel stocks as strikes impact on supply.

Longer-term Credit Suisse remains of the view supply growth will be significant as new nickel laterite projects come on stream, meaning the potential for massive surpluses remains intact. But shorter-term Credit Suisse has lifted its 2010 price estimate by 28% to US$22,572 per tonne and in 2011 by 10% to US$18,150 per tonne.

Elsewhere the major changes to Credit Suisse's commodity price forecasts come in iron ore and coal and account for 2010-2013, as its long-term forecasts are largely unchanged. The iron ore changes are substantial, the broker's fines forecasts increasing by 43% to US$128.80 per tonne for 2010 and by 54% to US$132.50 per tonne for 2011.

Hard coking coal forecasts have increased by 24% this yer and by 31% in 2011 to US$325 per tonne and US$230 per tonne respectively, while for PCI coal Credit Suisse has lifted its forecasts by 21% and 15% for 2010 and 2011 to US$170 per tonne and US$155 per tonne.

From a listed company perspective Credit Suisse sees little value in the coal sector at present despite its forecast price changes, this reflected by its downgrades to Centennial ((CEY)), New Hope ((NHC)) and Whitehaven ((WHC)) to Neutral ratings from Outperform previously.

Credit Suisse retains its Outperform ratings on both Rio Tinto ((RIO)) and BHP Billiton ((BHP)), preferring Rio Tinto at present given a bullish short-term view on iron ore prices. Citi also rates both BHP and Rio Tinto as Buys, this despite the diversified material companies trading at a premium to base metal peers.

A market where Citi is not so bullish is aluminium, as it suggests of late this market has become increasingly dislocated from the rules that have governed it for many years. These rules were based on metal prices being linked to inventory levels, something Citi suggests has now broken down.

The current rule appears to be high inventories are no problem as they are tied up in financing deals and will be locked away in ETFs (Exchange Traded Funds). Given this, Citi suggests the launch of an aluminium ETF could be a deciding moment for the metal, as if the market doesn't prove to have an appetite for these surplus inventories there would be significant implications for aluminium equities.

The most direct aluminium exposure on the Australian market is Alumina ((AWC)), the FNArena database showing this stock is rated as Buy six times, Hold twice and Sell once.

Turning to gold, GSJB Were takes the view the metal continues to perform its traditional investment role as a store of value quite well, though this is more evident in gold priced in currencies other than the US dollar.

While it has range traded against the greenback between US$11,00 and US$1,150 per ounce for most of this year, GSJB Were notes gold has hit record highs against both the euro and the British pound. This fits in with the broker's theory, which is gold performs as an investment when the purchasing power of a major currency and not just the US dollar is under threat, with the euro being the current example.

As well, GSJB Were points out macro events have previously triggered shifts in the relationship between the euro/US dollar rate and the gold price in US dollars. Each breakout has lifted gold's trading range relative to the euro/US dollar rate, something the broker suggests is again occurring.

This supports a positive bias towards gold, GSJB Were forecasting a trading range for 2010 of US$1,075-$1,200 per ounce. The major gold exposures on the Australian market are Newcrest ((NCM)) and Lihir ((LGL)).
 

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