Material Matters: Coal, Base And Precious Metals

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– Outlook for coal bleak
– Brokers suggests stock preferences
– Goldman Sachs updates commodity price forecasts
– Base metal preferences discussed

By Eva Brocklehurst

A high Australian dollar, a drop in prices, delays in government approvals, a lack of funding options – it's not a good look for coal, according to Credit Suisse. The broker has re-visited its valuations of the Australian coal sector and cut its outlook for both metallurgical and thermal coal, although the latter's revisions are more minor. Credit Suisse describes metallurgical coal's short-term fundamentals as 'torrid' and sees only a modest recovery in prices for this coal – perhaps back towards USD190/t by 2015. The broker has cut its price forecasts for metallurgical/coking coal prices by an average 17% in 2013 and 10% in 2014. Others are not so severe. Goldman Sachs still ranks coal amongst its top tier of commodities for equity investment purposes and sees prices recovering going into 2013. The broker expects the production cuts currently in train will be supportive of prices down the track.

In downgrading the earnings outlook for producers by average 51% in FY13 and 26% in FY14, Credit Suisse believes picking the right stocks helps. The broker flags Whitehaven Coal ((WHC)) and Bandanna Energy ((BND)) as its preferred players in this sector. Whitehaven, having recently been toyed with and then dropped as a takeover target by mining entrepreneur Nathan Tinkler's interests, has made brokers a little shy of the company. Nonetheless, all those covering the stock on the FNArena database consider it a Buy and RBS thinks WHC may become a bid target again when the dust settles. Bandanna is covered by UBS as well and the broker also rates the stock as Buy.

Credit Suisse's thermal coal price revisions are down 3% in 2013 and 2% in 2014 while the broker's assumed long term price is now US$110/t versus US$120/t previously. Bathurst Resources ((BTU)) and Yancoal ((YAL)) sustain the broker's largest earnings downgrades in the sector, down a substantial 77% and 72% respectively. Bathurst is affected most as it is small, while Yancoal is hit as a higher cost producer with a big debt burden. This concern over Yancoal is reflected in the other brokers' views and four out of the five covering it on FNArena's database rate it Hold with BA-Merrill Lynch initiating it as a Sell back in August. Credit Suisse sees continued supply surplus in coming years, combined with the lower growth profile for steel production, making it unlikely that metallurgical coal will return to prices substantially above US$200/t. Thermal coal prices are expected to remain trapped in a subdued range into 2013, supported by relatively robust demand on the one hand and persistent excess supply on the other. The broker expects this market should move into a more balanced position through 2013, creating the possibility for prices to stabilise around US$100/t in late 2013 and into 2014.

The blame for coal's fall from grace comes from slower Chinese economic growth and steel production. However, Credit Suisse notes increased exports from the US (typically a swing producer) have also weighed on prices. Macquarie thinks so too. The broker observes the thermal coal story of 2012 from the swing of supply from the Atlantic to the Pacific region, estimating it to be almost 20Mt on an annualised basis through August. The largest swing supplier has been South Africa, with Pacific shipments increasing to 75% of total exports – a trend Macquarie expects to continue. The broker sees exports from the US as slowing in recent months, but continued weakness in European prices coupled with steady stock levels suggest the market is adequately supplied in the near term. Moreover, Macquarie notes the largest seaborne coal producers have all grown exports strongly in 2012 and the strongest growth rates have come from Columbia and the US. This leaves the Atlantic oversupplied and pushes South African producers to increase shipments into the Pacific, with Chinese and India the largest customers.

Goldman sees commodity markets adjusting to the slower pace of growth in the Chinese economy. In base metals it has changed 2013-14 forecasts on the back of its recent analysis of the housing sector in China. Looking over a 12-month horizon the broker makes copper its number one preference, as it has upside risk from the maturing of the Chinese construction industry. The broker also likes gold because of the monetary easing taking place as well as the aforementioned coal. The platinum group metals are in the middle tier of Goldman's rankings. It has updated price views on platinum in the light of supply disruptions from industrial strife in South Africa but expects oversupply to return in 2013. It finds new European regulations for controlling gas emissions in car engines, an important industrial use for platinum metals, a complicating factor in demand. The upshot, the broker feels, is likely to be increasingly smaller engines. Citi has cut its titanium price forecasts, citing weak 2012 industrial demand, which signals surplus stocks will persist across next year. The broker still expects demand from the aeronautics sector – Boeing and Airbus – will be robust. Nevertheless, based on new titanium pricing forecasts, Citi has lowered earnings estimates for titanium producers.

Zinc and its sibling, lead, have outperformed on the London Metal Exchange this year but the two may now start to diverge. Citi sees zinc as the most buoyant metal in 2012, with prices 13% higher than at the opening of the year. This is despite LME inventory surging by 170,000 tonnes since January. However, the broker suggests the LME price rally is coming to an end, to be replaced by surging physical premiums, particularly in the US. Citi maintains LME warehousing has also hit zinc, noting that currently just over 36% of LME zinc inventory is on cancelled warrants and therefore not available to the market. Furthermore, Citi's analysis suggests that as much as 88% of LME inventory could be unavailable to the market due to both financing and cancellations.

Macquarie takes a look at lead after finding the LME lead price has rallied sharply. It believes this rally is warranted, with seasonal support on the demand side, reduced stocks and high raw materials prices. As an example, the broker cites North American shipments of lead-acid batteries being up 2% on the same period of 2011. It says lead's short-term outlook is also good, for seasonal reasons at least. Lead demand tends to increase in the fourth quarter of each calendar year. Macquarie notes a tightening of the physical market in lead, narrowing spreads and physical spot premiums rising sharply in North America and Europe. 

 

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