Material Matters: Bullish Expectations For Gold, Coal and Corn

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

By Chris Shaw

With gold hitting a new record high this week UBS attributes much of the gains to a lack of confidence in Europe's response to the sovereign debt crisis.

While the Greek rescue package will calm concerns about debt management for a while, the broker doesn't see it as solving the underlying issue. To do this there needs to be a restructuring of debts, fiscal consolidation and measures to encourage reforms designed to enhance growth and change society.

As such, measures are by no means certain investors have turned to gold as a safe haven investment, so pushing up the price of the metal. At current levels UBS notes scrap supply is available, but far from excessive. This implies the rally in gold has further to run.

To reflect this, UBS has lifted its price forecasts for the precious metals, its one-month gold price forecast increasing to US$1,300 per ounce from US$1,200 previously. Its three month forecast has also increased to US$1,200 per ounce from US$1,150 previously.

Silver forecasts have also been increased, UBS lifting its one-month forecast to US$18.50 per ounce from US$16.00, while its three-month forecast has risen to US$17.25 per ounce from US$16.50.

Among the soft commodities, Barclays Capital continues to rate corn as its preferred pick. This reflects changes to market fundamentals given the emergence of US ethanol and rising demand from China that has essentially removed the country from the export market.

Prices have reacted dramatically to changes in market conditions, hitting all-time highs in 2008 and essentially halving since then. But there are prospects for better prices going forward, Barclays noting the May WASDE report contained some good news, including lower current US production and higher exports. This saw prices edge higher.

Not all the data are positive as the US Department of Agriculture's first estimates for 2010/11 balances suggest high supply levels given high planting rates in the US. Globally, production in 2010/11 is expected to hit an all-time high of 835 million tonnes.

Global stocks are projected at 154.2 million tonnes, which would be the highest in 10 years, but Barclays notes stocks as measured by weeks of consumption are projected to remain subdued.

According to Barclays, the market is currently unsure about the supply side of the market and its potential to push prices lower, especially as demand is showing signs of improvement.

With Chinese corn imports picking up, this is seen as boosting positive sentiment, especially as it portends stronger demand in the future. This is the wildcard for prices that is attractive to Barclays.

Among the bulks, RBS Morgans has revised its coal price forecasts higher, the changes reflecting both the switch to short-term pricing and tension around security of supply as China has emerged as a significant buyer.

One key for Australian producers in RBS's view, is there is a quality differential between Australian output and that of competitors, which is driving demand for low-quality metallurgical coal as blending feedstock.

RBS expects ongoing cost escalation in the Australian coal sector and this has also supported the increases to its coal price forecasts. As well, there are seen to be ongoing cost pressures in the Chinese coal industry that may see that nation become an importer beyond the near-term.

RBS sees this as being reflected in long-term metallurgical coal prices, while the thermal coal market should benefit from lower export tonnes and poorer quality coal coming out of Indonesia. To reflect all of this, the broker has lifted its long-term prices by 15-25%, while two-to-three year price forecasts have been increased by 6-60% to reflect growth in non-traditional seaborne demand.

In terms of actual numbers, RBS has lifted its hard coking coal forecast in 2011 to US$220 per tonne from US$185 previously, while in 2012 its forecast has risen to US$200 per tonne from US$170. The broker's long-term forecast has increased to US$125 per tonne from US$100.

For semi-soft coal, RBS's forecasts increase to US$175 per tonne in 2011 and US$165 per tonne in 2012 which compares to US$110 per tonne and US$105 per tonne previously. Its long-term forecast rises to US$85 per tonne from US$74 per tonne.

Changes to LV PCI coal forecasts are equally as significant, RBS lifting its 2011 and 2012 forecasts to US$180 and US$170 per tonne from US$128 and US$115 per tonne previously, while the broker&s long-term forecast has risen to US$100 per tonne from US$80 previously.

Thermal coal forecasts see the smallest changes in percentage terms, RBS increasing its estimates to US$100 per tonne in 2011 and US$90 per tonne in 2012, up from US$87.50 and US$85 per tonne. Long-term the broker's price forecast has risen to US$75 per tonne from US$65 per tonne.

This has resulted in some changes to RBS's ratings and price targets in the Australian coal sector, Whitehaven Coal ((WHC)) the big beneficiary given an upgrade to a Buy rating from Hold previously. New Hope Coal ((NHC)) is also rated a Buy, while RBS has Macarthur Coal ((MCC)), Centennial Coal ((CEY)) and Gloucester Coal ((GCL)) as Holds.

The FNArena database shows sentiment indicator readings across the coal sector as 0.4 for Whitehaven, 0.3 for New Haven, -0.1 for Macarthur, 0.1 for Centennial and -0.3 for Gloucester.

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