Material Matters: Platinum, Oil, Bulks and Fertilisers

This story features INCITEC PIVOT LIMITED. For more info SHARE ANALYSIS: IPL

 – Support for platinum
 – Oil's impact on base metals
 – Positives for iron ore, thermal coal, fertiliser prices
 

By Chris Shaw

Following three years of falling supplies, platinum mine output from the five largest producers in the world rose by 5.5% last year but Barclays Capital notes this was not enough to deliver anything better than a mostly flat global mine output result in 2010.

In the early stages of 2011 platinum prices have traded above U$1,800 per ounce, their highest level since July 2008. With prices rallying, Barclays questions whether platinum supply will also continue to grow.

According to Barclays, most of the production growth potential rests with expansion by the major producers rather than start-ups entering the market. As an example, Barclays notes Anglo Platinum, the largest producer, intends lifting output to 2.6 million ounces this year from 2.57 million ounces in 2010, while Impala Platinum similarly anticipates boosting output to 1.85 million ounces this year from 1.74 million ounces last year.

Barclays had previously estimated prices would need trade above US$1,500 per ounce to support output growth, but higher cost pressures from factors such as higher wages now imply this floor is also somewhat higher. 

Additional challenges are coming from lower head grades and delays to a new coal-fired power station in South Africa, which leads Barclays to suggest mine supply in 2011 is likely to grow by just 3.7% in year-on-year terms. 

This should see the market swing into deficit in 2011, so if any supply disruptions materialise over the course of 2011 Barclays suggests prices will be pressured to the upside.

In the oil market, Citi notes the current oil price spike has spooked markets somewhat as investors factor in the potential for an energy price shock. But this may be an over-reaction, as Citi notes higher oil prices alone don't cause recessions and drive up inflation.

As an example, Citi notes in the 1970s labor costs tied to cost of living adjustments meant energy supply disruptions had a far greater impact on inflation than would have otherwise been the case. Current conditions are also not directly comparable given technology, productivity and outsourcing advancements and slack in the labour force.

Looking at markets relative to present inflation data by using correlation statistics such as trailing earnings multiples versus core inflation, Citi finds a strong argument for US market strength over the next six to 12 months. 

This can be explained at least partly by the fact while inflation data shows some recovery in prices for items such as food, prices for items such as beverages, utilities and apparel are subdued and are weakening for the likes of autos and healthcare. This means higher input costs are to some extent being mitigated, leading Citi to suggest the implication is any inflation scare may be more short-lived than is generally considered.

Turning to iron ore, Credit Suisse points out despite recent market nervousness with respect to stockpiles, liquidity issues in China and political uncertainty in the Middle East, prices continue to trade at near record levels in a range of US$180-$185 per tonne. 

In Credit Suisse's view it will be demand that drives the next leg up in prices, as March-May is seasonally the strongest period for the global steel industry. There is evidence this is already underway, as global steel production enjoyed a strong January of equal to 820 million tonnes on an annualised basis. 

This equates to additional iron ore demand of 100-105 million tonnes on Credit Suisse's numbers. The lack of any significant global ex-China restocking of iron ore offers further upside as utilisation rates pick up, while Credit Suisse suggests supply disruptions are another wild card given recent lost production in both Australia and Brazil.

This leads Credit Suisse to suggest the iron ore market is set to remain “stronger for longer”, with a return to long-run pricing of around US$70 per tonne FOB Pilbara unlikely to occur prior to 2017-2018.

The key concern is a liquidity squeeze in China, as Credit Suisse accepts this could impact on iron ore demand via less availability of funds for the general manufacturing and housing industries. Data in coming months will be monitored, Credit Suisse suggesting if stronger trading patterns in commodities don't emerge from March 1st there will be increased cause for concern.

RBS has looked at commodity markets generally in the wake of the unrest in the Middle East, suggesting the turbulence is boosting oil prices but hurting the base metals at the same time. The issue is if the problems in the region continue and spread further some oil production could be lost, so driving prices higher.

As RBS notes, this has the potential to impact on global growth, so influencing demand for base metals. Regardless, the coming year is more about supply growth and pricing in RBS's view, meaning any sell-off in coming months would be a trading buy opportunity.

Those metals with the worst fundamentals, which RBS suggests are zinc and lead, are most vulnerable to any correction, while copper and aluminum are seen as more resilient.

In coal, Commonwealth Bank notes Newcastle spot thermal coal prices rose 4% last week to US$131.71 per tonne, which was stronger performance than either Richards Bay (South Africa) or North Europe prices. 

The relative performance reflects the easing of cold weather conditions and continued weak demand in Europe in CBA's view, while also highlighting Asia's stronger demand outlook. CBA expects further support for Newcastle coal prices in coming months as both Indian and Chinese domestic coal production is falling short of demand and the gap between Indian domestic prices and international seaborne coal prices narrows.

Given the currently positive environment for thermal coal, CBA expects prices will trade above US$100 per tonne for the next few years.

Finally, Goldman Sachs notes Di-Ammonium Phosphate (DAP) prices continue to firm across most regions, which offers some upside risk to forecasts given current spot prices are above the broker's estimates for both FY11 and FY12.

Credit Suisse agrees and sees this as an ongoing supportive factor for Incitec Pivot ((IPL)), as market upgrades to fertilizer price forecasts should continue, so pushing up earnings estimates for the company. At present Credit Suisse is above consensus with its earnings per share (EPS) estimate of 36.5c for FY12, while it is broadly in line with its FY11 forecast of 32.5c.

Credit Suisse rates Incitec Pivot as Neutral, while the FNArena database shows a Sentiment Indicator rating of 0.5 and a consensus price target of $4.60.

 

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