Material Matters: Platinum, Oil, Copper And New Iron Ore Coverage

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

By Chris Shaw

Platinum prices hit a two and a half month high this week, the gains reflecting at least in part a number of potential and actual supply disruptions. In the view of Barclays Capital, these supply disruptions highlight just how vulnerable platinum is with respect to mine supply growth.

Barclays estimates platinum mine supply will grow by 2.5% in 2010 and by about the same amount in 2011, which suggests prices will need to trade at or above current levels to support future development projects.

While prices are up by about 30% over the past year Barclays suggests mine output has not shown the same growth, with reported data from key producers showing supply for the first half of this year is marginally softer in year-on-year terms.

Supply growth potential remains as Anglo Platinum, the world's largest producer, has indicated stronger demand would allow it to increase sales by about 200,000 ounces in year-on-year terms. The company has maintained its production target of 2.5 million ounces this year.

But there are risks as well as Lonmin, the world's third largest producer, has had some setbacks in re-commissioning its Number One furnace this year, while the second largest producer, Impala, continues to deal with wage negotiations and the potential for power supply issues.

Stricter safety controls are also becoming an issue in South Africa and Barclays expects this will push up costs, so while it estimates a deficit in the platinum market of around 33,000 ounces this year, the group suggests the risk is this deficit becomes a much deeper one than currently expected.

With respect to oil, Barclays suggests the fact prices have pushed through the US$80 per barrel mark is evidence sentiment is now aligning with what have for some time been more positive market fundamentals.

What has also helped the oil price, according to ANZ Bank energy commodity strategist Serene Lin, has been a rally in equity markets thanks to a robust corporate earnings season in the US and the emergence of hurricane activity in the northern hemisphere. A weaker US dollar is also seen as supportive for oil prices.

Contrary to Barclays, Lin sees crude's fundamentals as somewhat bearish at present, with US inventories still high and showing few signs of coming down in the shorter-term. Despite the poor fundamentals, ANZ expects oil should consolidate recent gains and potentially move to the upper end of the new US$80-$85 per barrel trading range.

A number of factors support this view, one being the jump in US crude oil stocks reported last week was possibly in reaction to the onset of the hurricane season, so it is unlikely to be repeated in coming weeks in the bank's view.

Standard Bank also sees scope for crude to consolidate above the US$80 per barrel level, though it suggests US data will be the key with respect to short-term price direction. From a technical perspective, Standard Bank suggests support for front-month West Texas Intermediate pieces is currently at US$79.50 and then US$77.70 per barrel, while resistance is at US$82.50 and then US$83.60 per barrel.

With respect to base metals, Standard Bank notes lead has been the best performer in recent weeks, gaining more than 20% since July 20th compared to gains of 14% or less for the likes of nickel, copper and zinc.

The metal had been undervalued relative to peers in Standard Bank's view, but it still suggests the rally has surprised many in the market. Part of the gains can be explained by the lack of any effective arbitrage to limit price gains, something that is unusual among the base metals.

Both copper and zinc tend to see significant arbitrage activity emerge on the Shanghai Futures Exchange (SHFE) and so limit price moves according to the bank, but this is not the case for lead. Given arbitrage opportunities could emerge if an efficient mechanism was in place, the bank will be looking to see if the SHFE launches a lead futures contract in the near future.

In copper, Credit Suisse estimates mined supply will be short every year from now, with the deficit to reach 770,000 tonnes by 2013. While forecast mine additions between now and 2014 are the largest since 1994-99, the broker suggests the risk is existing mine supply forecasts will actually under-deliver, so intensifying the shortage of the metal.

On the broker's numbers every possible project is needed to fill the deficit, so prices should move well above the cost curve in its view. At the same time, Credit Suisse estimates demand growth will be in the order of 6-7% from 2011 to 2013. This level would be more sustained than recent years but one seen as conservative given the potential for synchronous growth in every region as demand recovers from the lows of 2009.

Under such a scenario, Credit Suisse is forecasting average prices of US$6,954 per tonne this year, rising to US$7,716 per tonne for 2011 through to 2013. Copper prices closed overnight at US$7,415 per tonne.

In he bulks, BA Merrill Lynch continues to have a favourable view on the outlook for iron ore, expecting supply/demand dynamics will improve further into 2011 after some volatility in coming months.

The current volatility, or potentially one more dip in prices if Chinese steel production figures or stock build rates disappoint, therefore offers a potential entry point into iron ore related equities in BA-ML's view. Upside when the market turns appears attractive, the broker noting the forward curve is currently discounting a 15-25% higher price than its own estimates.

To reflect the upside potential BA-ML has initiated coverage on both Fortescue Metals ((FMG)) and Mount Gibson ((MGX)) with Buy ratings, the respective price targets of $5.47 and $2.26 suggesting upside potential of 24% and 33%.

In selecting the two stocks BA-ML looked at a number of factors, including resource base, infrastructure access, the relative capital intensity of project developments and the ability to fund any proposed projects.

Both Fortescue and Mount Gibson stood up to this analysis, the broker noting the two stocks compare favourably on all financial and valuation metrics against both local and international peers. Mount Gibson appears the cheapest seaborne iron ore exporter on an earnings multiple basis, while BA-ML suggests both companies rank well on a cash to earnings margins basis.

The FNArena database shows aside from BA-ML, Fortescue is rated as Buy three times, Hold four times and Underperform once, with an average price target of $5.09. Sentiment is more positive towards Mount Gibson as the database shows aside from BA-ML the company is rated as Buy five times and Hold once, with an average price target of $1.97.

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