Commodities | Jul 23 2010
By Chris Shaw
While still bullish on thermal coal over the medium-term, Deutsche Bank suggests current market conditions could easily deteriorate enough over the next quarter to bring about a modest correction in pricing.
The main reason this is possible in Deutsche's view is related to Chinese growth, as a slowing in the Chinese economy overall is expected to translate into a deceleration in Industrial Production (IP). As this measure is strongly linked to power production and consumption, the broker expects a corresponding weakening in thermal coal demand in the near-term.
On Deutsche's estimates there is scope for power consumption growth to fall from more than 20% earlier this year to closer to 6% in year-on-year terms by the fourth quarter of this year. In addition, the current quarter is typically a weak one for coal imports for China, which largely reflects seasonal factors.
This combination leads Deutsche to suggest thermal coal prices are likely to come under pressure in coming weeks, with scope for a correction of around US$10 per tonne.
In contrast to thermal coal, Deutsche suggests the bottom may have been seen with respect to the iron ore market, as steel market news has slowly turned more positive. The latest example was the stabilising of steel prices and mills increasing their offers over the past week, an outcome the broker suggests was a surprise to many in the market.
In terms of Chinese steel prices, Macquarie notes the rise recorded over the past week was the first since mid-April, though this is believed to be more the result of trader activity than a real demand recovery.
In Macquarie's view it remains a little too early for any real recovery in Chinese steel demand thanks to the summer slowdown. Any demand improvement is more likely to come in mid-August to early September.
Paper markets appear to support the view iron ore prices have bottomed, Deutsche noting prices for the fourth quarter have moved higher in recent sessions as sentiment in China in particular has improved thanks to an announcement of a stimulus related to building low income housing.
As well, Deutsche notes Shanghai steel charts continue to look positive, so as long as prices can continue to strengthen there the broker expects iron ore prices will also move higher.
As RBS points out, Chinese bulk commodity imports have been much more resilient than have base metal numbers through the first half of 2010. Even after falling for the past four months, iron ore imports for China are still 4% higher year-to-date. Chinese net coal imports have also stayed robust, being up 94% year-on-year over the first half of 2010.
In the base metals, RBS notes from the record levels recorded in 2009 imports for all metals except copper have fallen back to more normal levels so far this year. As examples, net refined imports of aluminium are down 95%, zinc 76% and nickel 54%, while copper import numbers have remains relatively resilient falling by just 13% year-to-date.
This decline in base metal imports in recent months has largely been offset by increased Chinese refined metal production, leading RBS to suggest there has not yet been a significant enough erosion of the large unreported base metal stockpiles the Chinese accumulated in 2008 and 2009. The broker's view is these need be eroded before the base metal markets enjoy genuine pricing tension.
The fact Chinese copper imports have remained at reasonable levels is a good sign in Macquarie's view, particularly as demand for the metal is expected to increase in coming years thanks to infrastructure projects such as a rural power grid build out.
While some indications this could consume as much as 1.75 million tonnes of copper appear excessive, Macquarie sees it as a positive for copper demand regardless, meaning these infrastructure projects offer continued upside risk to Chinese demand for the metal.
Generally, Macquarie notes apparent copper demand in China is estimated to have risen by 8% over the first four months of 2010, while real consumption is estimated to have risen by almost 20%. Globally, real demand for the metal is estimated by the International Copper Study Group to have risen by 13-14% in the first half of the year.
Such numbers suggests strong supply/demand fundamentals heading into the latter part of 2010, though not everything is in the metal's favour. Chinese property sales have fallen in recent months and construction is set to slow, while Chinese demand for the metal via imports is expected to moderate in coming months given seasonal factors. There should also be a slowing in demand in other countries through the end of August in Macquarie's view.
While this should be enough to see the market move into balance in the latter months of this year, Macquarie expects the copper market will tighten again in 2011, its forecasts calling for the price to reach US$3.80 per pound by the second quarter of next year.
