Material Matters: Base Metals, Iron Ore Prices And Support For Platinum

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By Chris Shaw

July and August is typically a period when inventories in copper, tin and nickel build the most among the base metals but as Barclays Capital notes, the opposite has occurred this year. The decline has been extreme in tin as inventories have declined by around 20%, while copper stocks have dropped by about 10%. This compares to a usual build of around 30% this time of year.

Given markets are still looking for a clear direction, Barclays sees the fall in stocks as a sign of a dislocation in market dynamics, the result being an increased call on inventory. While this has come at the same time as the supply side for both nickel and copper has underperformed, the fact this supply underperformance has not worsened leads Barclays to suggest the stock draws reflect stronger demand.

This implies while there continue to be concerns over the potential for a sharp slowdown in global economic growth, inventory trends for the base metals continue to hold firm. The importance of this, according to Barclays, is when buying ramps up from September onwards the market will be starting from a lower rather than a higher inventory base. This has positive implications for prices.

Not everyone is reading nickel market conditions so bullishly however, as JP Morgan sees fundamentals in this market as evolving somewhat poorly. This is despite a 27% fall in LME stocks this year pushing up prices by around 19% on a year-to-date basis.

The price performance delivered so far this year has been underpinned by a strong recovery in the stainless steel sector and disruptions to mine supply, but the broker sees both of these factors as now drawing to a close.

JP Morgan points out nickel production in May was about 9% higher than year ago levels, this response coming without the influence of improved Canadian output as production in that country remains well below peak levels.

Global stainless steel production for May was also very strong, reaching an all time record on an annualised basis of more than 34 million metrics tonnes. But as JP Morgan notes, since the end of May the pace of production has moderated sharply as production cuts have been announced.

In the broker's view this implies still subdued underlying demand, as well as improved inventories for both stainless service centres and for end users. As an example, JP Morgan estimates while underlying stainless demand in the US rose by 14% in the June quarter, inventory levels increased by 25%.

Given nickel production rose 9% without Canadian help in May and that he strike by workers at Vale has now been resolved, JP Morgan sees a stronger nickel supply response likely in coming months. On the broker's numbers the nickel market is now expected to swing from a deficit this year of around 50,000 tonnes to a surplus of as much as 20,000 tonnes or more in 2011.

This suggests prices will move towards US$18,500-$19,000 per tonne, with additional pressure on front end spreads in the broker's view. This compares to current prices of around US$21,900 per tonne.

With respect to iron ore, UBS notes while the contract price has been set at US$147/t fob for the July-September quarter, producers are not actually receiving such a price for their output. Actual prices are likely to be 20-25% below this level in the broker's view.

The reason, according to UBS, is while BHP Billiton ((BHP)) has the market power to ensure its announced contract prices are honoured, the company is believed to have been continuing to push as much trade as possible to the spot market. As spot prices are falling, UBS sees scope for many steel mills to accept spot material over higher quarterly contract terms.

At the same time, UBS suggests many producers are likely to accept lower prices to keep delivery rates high, so the stockbroker expects prices for the current quarter of around US$120 per tonne. This has a minor revenue impact on Australian iron ore producers and sees the broker trim its revenue and earnings estimates.

Among the iron ore stocks covered by UBS, it rates Rio Tinto ((RIO)), BHP, Fortescue ((FMG)), Mt Gibson ((MGX)) and Murchison Metals ((MMX)) all as Buys, this despite the changes to forecasts stemming from lower iron ore prices.

Among the precious metals, Standard Bank notes platinum continues to find support at prices around the US$1,500 per ounce level, a level the bank sees as fundamental support based on its latest cost curve analysis.

While accepting prices could decline below this level in the shorter-term, Standard Bank sees any such dip as brief as the risk/return scenario heavily favours the return side at a price of US$1,500 per ounce. This reflects the bank's view auto sales are likely to enjoy a seasonal pick-up towards the end of this year, one that should be enough to drive the metal price to a level of US$1,800 per ounce on a six-month view.

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