Material Matters: Sugar, PGMs, Fertilisers And Gold

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By Chris Shaw

In the first half of 2010 global sugar prices ranged from US13c per pound up to US34.8c per pound, with prices remaining in the firmer end of this range through the second half of last year. The market has stayed strong in the early going of 2011, Barclays Capital noting prices have re-tested 30-year highs this week.

Market fundamentals support high prices in the view of Barclays, as demand remains firm and global inventories are at low levels. As a reflection of this, Barclays anticipates the global market will be in deficit by 0.3 million tonnes in 2010/11, the third annual deficit in a row.

The tightness of the market reflects widespread supply disappointments, with Brazilian production flat in year-on-year terms and both Thai and Australian production coming under pressure. For the latter, the full impact of Cyclone Yasi is yet to be quantified but given Australia's importance as an exporter the expectation is for further upward pressure on prices shorter-term.

Elsewhere, Barclays notes Chinese production has been weak thanks to unfavourable weather conditions, Russian output has been mixed and India's position as either an importer or exporter this year has yet to become clear.

The higher prices experienced last year saw importing nations draw down stock levels significantly and Barclays sees this as continuing to support prices given the potential for a reaction to any further supply side issues.

Demand should also remain solid, with Russia expected to cut raw sugar import duties and with Chinese imports expected to continue to increase following a rise of 66% in year-on-year terms last year. 

Barclays suggests indications of a better crop from major producers such as Brazil and India will be required to ease market concerns for 2011/12, but on the flipside the group expects higher costs of production to limit the extent of any price falls.

Given such an environment, Barclays doesn't expect sugar prices to trade sustainably below US20c per pound over the year ahead.

Turning to the precious metals, Standard Bank has been expecting an improvement in global vehicle sales and it sees recent data as suggestive this pick-up is now underway. Japanese vehicle sales pushed higher in January, growing by better than 6% in month-on-month terms, while US sales rose by 12.7% and 16.3% in December and January in year-on-year terms.

As these countries are major consumers of platinum and palladium, Standard Bank suggests the latest auto sales data is a positive for sentiment towards these metals. 

While manufacturer re-stocking of platinum group metals occurred ahead of this anticipated increase in production, Standard Bank expects improving auto sales figures should keep investment interest at solid levels in coming months. To reflect this, Standard Bank is forecasting average prices of US$1,850 per ounce for platinum and US$780 per ounce for palladium in the first quarter of the year. 

Monetary policy tightening in China has the potential to impact on that country's demand for each metal over the course of the year, but Standard Bank expects this will be offset by stronger demand from the US and also European manufacturers. By the end of the year the bank expects a platinum price of US$1,950 per ounce and a palladium price of US$950 per ounce. 

Still on precious metals Citi expects with the current environment of negative interest rates, gold's reputation as a store of value should see the price of the metal supported at the US$1,400-$1,450 per ounce level through 2011.

Having said that, Citi cautions that given some signs of improving investor confidence the gold “risk trade” of the past three years could potentially dissipate. This implies risk to the gold price outlook is skewed to the downside relative to its forecasts. 

Given such a view Citi's preference in the gold sector is for a basket of smaller growth stocks, as it sees this end of the market outperforming physical gold over the course of the year. In contrast, the broker expects physical gold will outperform the larger cap plays in the sector.

From an Australian perspective Citi rates Medusa Mining ((MML)), Kingsgate Consolidated ((KCN)) and Oceana ((OGC)) as its preferred plays, the three stocks all being rated as Buys. Elsewhere among the sector Citi rates Dominion Mining ((DOM)), Newcrest ((NCM)) and St Barbara ((SBM)) as Holds. 

The FNArena database shows Sentiment Indicator readings for these gold plays of 1.0 for Medusa and Oceana, 0.2 for Kingsgate, 0.0 for Dominion, 0.8 for Newcrest and 0.3 for St Barabara.

Citi has also updated on the agricultural commodities sector, suggesting the current political unrest in North Africa and the Middle East could impact on fertiliser exports given both regions represent significant sources of supply. Together the two regions account for about 25% of globally traded DAP, (Di-ammonium Phosphate), while also dominating the market for the key inputs for DAP production.

In Citi's view, continued social unrest in both regions raises the chances of significant supply disruptions to both DAP and its component inputs. This would likely drive DAP prices substantially above the current level of US$595 per tonne, so boosting earnings for Incitec Pivot ((IPL)) as the Australian play on the sector.

Citi currently rates Incitec Pivot as a Buy, while the FNArena database shows a total of six Buys, one Neutral and one Sell recommendation. The average price target for Incitec Pivot according to the database is $4.38, which compares to a current share price of around $4.50. 

Following the lead of other brokers, Goldman Sachs has revised its commodity price forecasts predominately higher, the changes reflecting both a marking-to-market of current prices and a perceived strengthening in market fundamentals. 

In adjusting its forecasts Goldman Sachs has attempted to take into account the fact confidence in a global economic recovery has improved, as well as improvement in the physical market balances for a number of commodities.

Across the base metals, Goldman Sachs is now forecasting average annual prices in USc per pound for aluminium of 103c in 2011 and 106c in 2012, which are unchanged, and for copper of 464c for 2011 and 494c for 2012, up from 404c and 413c respectively. For nickel the broker is now forecasting average prices of 971c this year and 875c in 2012 against 825c and 813c previously, while for zinc forecasts now stand at 101c in 2011 and 99c in 2012 against previous estimates of 94c and 95c respectively.

Among the bulks, Goldman Sachs is now forecasting iron ore fines prices of US$174 per tonne for CFR China in 2011, an increase of 14%, while its 2012 forecast increases by 4% to US$145 per tonne. Prices are expected to peak at US$190 per tonne in the second quarter of this year before easing as supply and demand become better balanced.

On the back of the floods in Queensland Goldman Sachs had already made significant changes to its coal price forecasts, so the latest changes are relatively minor. For met coal the broker has lifted its prime low-vol hard coking coal forecast for the second quarter to US$300 per tonne from US$280 previously, while thermal coal prices are essentially unchanged. 

In uranium the broker continues to expect prices will peak at around US$70 per pound in the first quarter of this year, before easing to end the year in the high US$50 per pound range. Goldman Sachs has not adjusted its gold price forecast, which stand at US$1,329 per ounce this year and $1,383 per ounce in 2012, While the broker has made only minor changes to its platinum group metal (PGM) estimates.

On the back of the changes to its forecasts, Goldman Sachs has shifted its order of preference for the various commodity sectors for 2011. In order copper is now the broker's most preferred exposure, following by the platinum group metals, mineral sands, met coal, iron ore, thermal coal and then gold.

The changes to its numbers have impacted on earnings estimates and price target across the resource stocks covered by Goldman Sachs. In terms of preferred exposures, in copper the broker likes PanAust ((PNA)) and Sandfire Resources ((SFR)) as a small cap play, while Aquarius Platinum ((AQP)) remains a Conviction Buy in the PGM sector.

In mineral sands Iluka ((ILU)) remains a Buy, as is Mineral Deposits ((MDL)) among the smaller caps. Among the major miners Goldman Sachs rates both BHP Billiton ((BHP)) and Rio Tinto ((RIO)) as Buys, the former ascribed a Conviction Buy rating, while Fortescue Metals ((FMG)) and Macarthur ((MCC)) in the coal sector are similarly rated as Buys.

The less than favourable medium-term outlook for uranium prices sees Goldman Sachs rate both Energy Resources of Australia ((ERA)) and Paladin ((PDN)) as Sells at current levels. 

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