Material Matters: Copper, Oil Price Risks And JP Morgan Reviews Commodity Prices

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By Chris Shaw

According to Commonwealth Bank iron ore, coal, steel and LNG analyst Lachlan Shaw, London Metals Exchange (LME) copper stocks have declined by almost 28,000 tonnes over the past four weeks.

In the view of Shaw, this is a positive indicator of demand for copper at present. But Chinese copper numbers suggest something of a different story, MF Global noting the latest import data from that nation released last week were disappointing.

Chinese imports of unwrought copper fell 17.3% in June compared to May, which was an opposite outcome relative to market expectations for an increase. Barclays Capital doesn't expect this weakness will continue though, pointing out a widening in the arbitrage between LME and Shanghai Futures Exchange prices is making Chinese imports more attractive.

But in the view of RBS this call might come a bit too early. History shows, reports the stockbroker, copper inventory levels typically rise in August. This reflects seasonal factors, as the July-August period is traditionally the weakest for copper demand given summer holidays in the Northern Hemisphere mean many manufacturing facilities are closed for up to three weeks.

In advance of this consumers generally stock up on copper, RBS noting while LME inventories of copper have risen in August in 24 of the past 25 years, inventories have fallen in June in 21 of the past 25 years.

This inventory drawdown appears to be underway in 2010 as well as RBS notes combined copper exchange inventories have now had 12 weeks in a row of drawdowns. Inventories are down by 148,000 tonnes or 19% from their highs of February.

For RBS the current data suggest preparing to go long copper is the appropriate strategy, as LME week in October is likely to be the next catalyst for commodity price upside. Copper looks good value at current levels in the broker's view, so it would look to buy on any dips.

From a technical perspective, MF Global suggests price support for copper currently stands at US$6,300 per tonne, while resistance is at US$7,050 per tonne.

More generally for commodities, JP Morgan has revised its price estimates for both 2010 and 2011, with mixed changes this year and increases for both base and precious metals in 2011. This reflects the broker's view sentiment towards the sector will continue to suffer this year, while beyond 2010 the incremental increase in demand will exceed incremental supply for many commodities, particularly copper.

The changes to JP Morgan's estimates see its aluminium price forecast cut by 5% this year to US94.9c per pound, for copper a 5.1% cut to US312.3c per pound, for nickel a 10.1% cut to US947.6c per pound, for zinc a 12.8% cut to US92.7c per pound and for lead an 8.8% cut to US91.6c per pound. For both gold and silver the broker has lifted its 2010 price forecasts by 1.6% to US$1,208 per ounce and US$18.54 per ounce respectively.

For 2011, JP Morgan has lifted its gold and silver forecasts by 6.4% and 6.2% respectively to US$1,250 and US$19.23 per ounce. For aluminium the broker has lifted its forecast by 6.5% to US97.8c per pound, for copper by 3.9% to US315.2c per pound, for nickel by 9.6% to US907.2c per pound and for lead by 6.2% to US97c per pound.

At the same time JP Morgan has revised its iron ore and copper price forecasts, though changes here have been relatively minor. All of the changes have seen the broker revise its earnings estimates for companies within its coverage universe in the sector, the result being some changes to price targets.

For BHP Billiton ((BHP)), JP Morgan's price target rises to $49.19 from $46.91, while for Rio Tinto (RIO)) the increase is to $99.77 from $95.23. For Newcrest ((NCM)) the broker's target increases to $44.30 from $40.57, for Lihir ((LGL)) the increase is to $5.37 from $4.23 and for Oz Minerals ((OZL)) the increase is to $1.55 from $1.47.

JP Morgan has lifted its target for Alumina ((AWC)) to $2.56 from $2.40, while for Iluka ((ILU)) its target increases to $5.26 from $4.91. The only decrease in price target was for Fortescue ((FMG)), where JP Morgan lowered its target to $4.08 from $4.33.

There have been no changes to ratings associated with the changes in earnings and price targets, which means JP Morgan's Overweight ratings in the sector continue to be Rio Tinto, Newcrest, Lihir, Alumina, Oz Minerals and Iluka. The broker remains Neutral on BHP, Fortescue and Paladin ((PDN)) and is Underweight on Energy Resources of Australia ((ERA)). Targets for Paladin and ERA are unchanged at $3.70 and $17.92 respectively.

Turning to oil, Barclays Capital takes the view the gradual tightening in the physical market over the past quarter may turn into a more severe one over the next two quarters for both demand and supply reasons.

While the pace of increase in demand in the second quarter is unlikely to be matched, Barclays still sees solid oil demand growth in the second half of the year, while in its view non-OPEC supply has already peaked this year. This view stands in contrast to International Energy Agency forecasts, which suggest a peak in non-OPEC supply in the final quarter of this year.

Assuming its views on the market prove to be correct, Barclays sees the oil market tightening enough in the current half year to force prices to make a sustained move above the US$80 per barrel level.

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