Material Matters: Iron Ore, Copper, Queensland Projects And Price Revisions

This story features RIO TINTO LIMITED. For more info SHARE ANALYSIS: RIO

 – Iron ore market expectations updated
 – Credit Suisse lists its preferred iron ore plays
 – Citi revises commodity price estimates
 – Macquarie surveys Chinese copper market participants
 – UNESCO could delay some Queensland resource projects

By Chris Shaw

Having factored in June data, Macquarie notes the common theme in iron ore markets evident over the past 18 months continued in 1H12. This theme is one of Australian exports surpassing expectations given solid volumes and reliability, at the same time as Indian and Brazilian volumes continue to disappoint.

Accounting for June numbers, Macquarie now expects iron ore volume growth of 59 million tonnes in 2012, up from the 52 million tonnes recorded in 2011. Iron ore prices continue to trade in a range of US$130-$150 per tonne and this is seen as reasonable when Chinese steel data is also taken into account.

Given the efficiency of the Chinese iron ore market, Macquarie suggests incremental requirements for Chinese domestic ore remain crucial for spot prices, which will move according to whether or not ore is attracted to or pushed off market.

For the Australian market, Macquarie now expects total iron ore exports for 2012 of 532 million tonnes, which would be an increase of 15% in year-on-year terms. This compares to Macquarie's previous estimate for exports this year of 508 million tonnes. 

Expectations for Brazil and India have gone the other way, Macquarie now expecting total Brazilian exports of 325 million tonnes, down from 330 million tonnes previously, while Indian forecasts decline to 49 million tonnes from 60 million tonnes. Macquarie suggests there remains a lack of near-term catalysts to push iron ore up through the US$130-$150 per tonne range in coming months. 

Deutsche Bank goes further and suggests iron ore markets are again starting to weaken, with prices expected to fall to the US$120 per tonne level in the next month or so. This reflects still weak global steel market conditions, where prices are falling in response to weakness in the Chinese market in particular.

Iron ore inventories in China have been rising and could potentially reach record levels during the northern summer, leading Deutsche to suggest the forward curve for iron ore could move from backwardation to modest contango in coming weeks. 

This may prompt some buying in the view of Deutsche, especially leading into October when government action for economic support may be more forthcoming given the new government will be in place at this time.

Credit Suisse agrees, seeing risk prices break below US$130 per tonne in the September quarter before a likely return to a trading range of US$140-$150 per tonne. Long-term Credit Suisse continues to forecast a price of US$90 per tonne. 

Lower prices have prompted Credit Suisse to adjust its models for iron ore companies under coverage, this ahead of the upcoming results season next month. In the broker's view share prices for Australian iron ore plays have been heavily discounted on the back of global economic issues, to the point none of the stocks covered are close to a full discounted cash flow valuation. This implies the market is using a much higher discount rate in its models than is Credit Suisse.

On a 12-month basis Credit Suisse sees solid value in all the Australian iron ore names, assuming there is some improvement in terms of macro-economic stability in the meantime. To reflect this, Fortescue ((FMG)), Atlas Iron ((AGO)), Mount Gibson ((MGX)) and Gindalbie ((GBG)) are all rated as Outperform.

In terms of order of preference, Credit Suisse suggests Mount Gibson remains the safest stock for those fearing the worst for the global economy. In contrast, those with the strongest catalysts for a re-rating are Fortescue and Gindalbie as both offer near-term expansions or production starts.

Following on from a number of downgrades to commodity price forecasts last week, Citi has also taken the time to revise its estimates to reflect further reductions to global growth expectations. New growth forecasts stand at 2.6% this year and 2.7% in 2013, down 0.1 percentage point and 0.2 percentage points respectively.

The changes flow through to cuts in base metal price forecasts of 5-10% on average, with aluminium experiencing the largest cuts. In the bulks Citi has cut its iron ore price estimates by 2-7% through next year, while coal price forecasts are reduced slightly for coking coal and by 15-17% for thermal coal. Oil price forecasts have also been cut by 11-26% for West Texas Crude.

Factoring in the changes mean cuts to earnings forecasts for Alumina ((AWC)), BHP Billiton ((BHP)) and Rio Tinto ((RIO)). For BHP forecasts have been lowered 6-15% through FY14, the result being price target falls to $37.00 from $41.00.

It is a similar story for Rio Tinto, where Citi's numbers have been cut by 11-13% through 2014. This brings down the broker's price target for the stock to $80.00 from $86.00. Alumina's target falls to $0.60 from $1.00 at the same time, while Citi cuts its rating to Sell on the back of the lower forecasts, with Alumina one of the least preferred exposures in the sector. Both BHP and Rio Tinto continue to be rated as Buy.

By way of comparison with Citi, the FNArena database shows Consensus Indicator readings for Alumina of 0.1, for BHP of 0.6 and for Rio Tinto of 1.0.

Macquarie has conducted a Chinese copper data survey, questioning 10 major smelters, 20 copper trading companies and 30 fabricators. Three takeaways from the survey are larger copper fabricators enjoyed higher sales volume in June than in May, while order books appear decent leading into summer. In contrast, smaller smelters are struggling to maintain current operational levels.

As well, Macquarie notes inventory levels currently sitting at Chinese smelters, traders and consumers are all at below average levels, while financing conditions have also improved from those experienced in 2011.

UNESCO's World Heritage Committee has formerly threatened to add Queensland's Great Barrier Reef to a list of world heritage sites in danger if developments are permitted. In the view of Deutsche Bank, this could delay approvals for resource projects as there would be a 12-18 month strategic review of the reef's management.

Deutsche notes only a small number of projects are close enough to the coast to have a direct impact on the reef, though others are in the catchment area of rivers that flow into the reef's marine park. Projects that may impact include the Wongai coal mine, the Fitzroy Terminal Project, the Blackwater to Gladstone gas pipeline project, expansion of the Port of Townsville and the LNG facility at Curtis Island.

 
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms