Commodities | Mar 04 2013
-Iron ore rebound near term
-Coal still plentiful
-Copper surplus to erode
-Gold price to ease
By Eva Brocklehurst
The iron ore market has recovered from its lows in price and Cyclone Rusty has added a filip to market tightness – for the near term. Deutsche Bank analysts suspect spot prices will peak by early in the June quarter and weakness may be the name of the game again. The critical ongoing influence here is low growth in steel demand. Chinese steel consumption growth has started to fall from the levels of the past decade. Deutsche Bank suspects the next 10 years will only produce growth rates of 1-2%.
There's another headwind. Steel scrap availability in China has been growing quickly and the analysts expect this scrap will drive growth in Electric Arc Furnace steel, offsetting iron ore demand. A deceleration in Chinese steel demand growth within the next two years could push iron ore prices down to the level of to marginal costs, in terms of Chinese domestic iron ore production, which the analysts estimate is at around US$110/tonne.
Making DB analysts cautious is that, while there is growing confidence in economic recovery, there appears a malaise is affecting many heavy industries within China. Re-stocking activity may provide some residual strength and there is a disruption to shipments from Port Hedland (half Australia's seaborne iron ore) caused by Rusty. This is the near-term lift. National Australia Bank analysts concur, noting factors underlying the current price rally should soon work out of the market causing prices to steadily ease over coming months.
After that, DB analysts suspect the underlying macro trends of declining steel demand and EAF growth will return. This, for DB, represents the bigger picture and the return of the other half of the commodity cycle. Factors that may provide a wobble to declining demand here include India's policies. NAB analysts note that bans on Indian production and exports have contributed to tightness and this may continue for longer than previously thought. Indian officials are expected to allow only a few mines to resume production over the next years. This suggests additional upside risk to prices, NAB contends.
Coal prices have been more subdued compared with iron ore prices since the end of 2012, but have managed to move higher as marginal production is taken out of the equation, NAB observes. Supplies have also been disrupted by bad weather in Queensland. Despite this, coal supplies remain plentiful, which is limiting the degree of upside to prices, and this should be the state of play for the medium term. China's cold winter and strengthening manufacturing production have bolstered demand for thermal power generation and helped cap the build in thermal coal stockpiles. NAB notes European demand has also improved early this year from a shift back to thermal power generation in response to higher natural gas prices.
The price of thermal coal has remained above US$90 per tonne (Newcastle FOB) since early December, recovering from a low of US$78 per tonne in mid October. NAB accepts there may be some downside risk to forecasts of US$100 per tonne for the next Japanese fiscal year negotiations (due this week), although Japanese utilities normally pay a premium to the spot for prime coal. Another potential headwind to thermal prices is the recent announcement by Chinese officials to cap national energy consumption. NAB notes authorities set the target growth rate of annual average consumption at 4.2% from 2011-2015; down from 6.6% between 2006 and 2010.
Copper's demand balance was in a surplus for the first time in 12 months in November, driven by strong growth in Chilean mine supply in the second half as well a a 2% contraction in global demand. Macquarie analysts believe the market will be sequentially tighter over the next six months. The greatest risk to the forecast copper surplus this year is Chinese consumption. The analysts estimate that construction and infrastructure, combined, account for around 65% of copper consumption in China and leading indicators for both sectors imply a rebound in growth in the near term. Infrastructure investment in the power sector (around 40% of copper consumption) has also rebounded after a two year hiatus. Macquarie's discussions with copper fabricators in China has shown that improved funding takes approximately six months to feed through into order books, which points to a strong first half for Chinese consumption.
Gold prices are not expected to rise much, according to NAB analysts, that's if the rally in equities is squarely based on fundamentals and not on simple exuberance by market participants. The analysts expect some support to gold prices over the remainder of the year from central bank purchases and consumer demand in India and China. These factors will be offset by gradually improving economic conditions, diversifying investments into riskier assets.
Demand from India, the world's largest consumer, is also expected to moderate as a result of the recent decision to increase the import duty on gold, to reduce a record current account deficit. On the supply side, gold production is anticipated to increase solidly in the medium to longer term, which will place further downward pressure on prices. NAB expects the price of gold to ease by around 12% through 2013, to be around US$1,510 per ounce by the end of the year, before easing an additional 10% through 2014.
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