Material Matters: Steel, Coal and Palladium

This story features BHP GROUP LIMITED. For more info SHARE ANALYSIS: BHP

By Chris Shaw

Global stainless steel output fell by 5% in 2009 to 24.6 million tonnes but 2010 is shaping up to be a stronger year. Industry consultant MEPS notes March quarter output should come in at almost 7.5 million tonnes, which would be an increase of 54.6% from the same quarter last year.

Such an outcome would be significantly higher than its previous forecast, MEPS attributing much of this to stronger demand in both the EU and US markets. Stronger demand in both is being driven by buyers placing orders ahead of the expected effect of soaring alloy surcharges.

While there has been some pick up in stainless consumption activities in these regions, MEPS notes overall end-user demand hasn't grown in line with the rate of production. This suggests some degree of correction during the second and third quarters.

Even allowing for this, MEPS has lifted its forecast for global full year production this year to 28.5 million tonnes which would beat the previous record production of 2006 by 0.3 million tonnes. The gain won't be uniform however, as MEPS expects combined EU, Japan, US, South Korea and Taiwan output will be 20% lower than in 2006, while Chinese and Russian production combined will be around 78% higher.

In China, the January to March period saw production of more than 2.4 million tonnes, which MEPS notes is the second best quarterly result ever behind only that of September last year. Russian output of 51,000 tonnes was up 36% from the same quarter last year but is still below pre-recession numbers. Demand in both Japan and South Africa remains weak, so production in both countries is well below capacity at present.

Turning to the coal market, UBS notes JFE Steel has confirmed a settlement for hard coking coal quarterly contract prices with the alliance between BHP Billiton ((BHP)) and Mitsubishi. The settlement is at a price of US$225 per tonne FOB. (Free on Board: price excluding freight or shipping and insurance costs).

UBS points out the settlement price represents an increase of US$25 per tonne in quarter-on-quarter terms, which equates to an increase of 12.5% over the April-June quarter. Given the big players involved in this settlement the price is likely to become a benchmark for similar quarterly priced contracts among other players.

While the price is higher than the previous quarter it is below UBS's forecast of US$240 per tonne meaning a slight decrease to its JFY10 (Japanese Financial Year) price estimate to US$211 per tonne FOB, from US$215 per tonne previously.

The deal leads UBS to suggest the risk for prices over the short-term is to the downside given seasonally the global steel trade is quieter in the second half of the calendar year.

In the view of Standard Bank, the resignation of Japanese Prime Minister Yukio Hatoyama has dampened hopes for a strong Japanese economy, which together with concerns over growth in both China and Europe has put some pressure on platinum group metal prices.

The bank notes palladium has been the harder hit relative to platinum during recent weakness and given a large amount of speculative long positions remaining in the palladium market it suggests this trend may continue for some time yet.

From a technical perspective, Standard Bank suggests platinum support stands at US$1,530 per ounce and then US$1,500 per ounce, while resistance is at US$1,579 per ounce. In palladium it sees support at US$443 per ounce and then US$425, while resistance is at US$475 per ounce.

Despite these short-term issues GSJB Were has lifted its palladium price forecasts to account for ongoing production constraints in South Africa in particular, more conservative Russian government inventory sale forecasts and changes to its assumptions for demand from the automotive, jewellery and investment sectors in 2010.

The latter reflects the launch of US-based, physically backed Exchange Traded Funds (ETFs) for the metal, which has added significantly to the level of investment demand in its view.

The changes result in GSJB Were lifting its palladium forecasts from 2011 to 2013 to US$575 per ounce, US$600 per ounce and US$650 per ounce respectively. These are up from previous forecasts of US$500 per ounce in each year. There is no change to the broker's 2014 forecast of US$700 per ounce.

The changes mean increases to GSJB Were's earnings forecasts for both Aquarius Platinum ((AQP)) and Platinum Australia ((PLA)) that range from 2-12% for forecasts through to FY13. The changes don't impact on price targets for either stock, which remain at $7.90 for Aquarius and $1.10 for Platinum Australia. This compares to consensus targets according to the FNArena database of $8.48 for Aquarius and $1.15 for Platinum Australia.

GSJB Were rates Aquarius as a Buy and Platinum Australia as a Hold, while the FNArena database shows Aquarius overall is rated as Buy four times. Only Were and Citi among the brokers in the database currently covers Platinum Australia and both rate it as a Hold.

Click to view our Glossary of Financial Terms