Commodities | Mar 24 2014
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-China expected to achieve GDP forecast
-Thermal coal price rebound to be slow
-Near term coking coal rebound unlikely
-Chinese smelters well stocked with zinc
-Strong price rise unlikely in nickel
By Eva Brocklehurst
Amid widespread angst over China's slowing growth this year, CIBC is still confident that, with key policy levers being pulled, China will be well positioned to meet or even top Beijing's 7.5% GDP growth forecast for 2014. The analysts concede that the purchasing manager surveys and industrial production numbers showed a slow start to the year but other figures have not been as disheartening. A drop in exports was affected by a misleadingly elevated prior year comparison. Also, the commodity-led 10% pace of import growth is evidence there's no stalling in economic growth.
The CIBC analysts consider some moderating in China's growth profile was inevitable and it was also fairly likely some projects would prove ill conceived. CIBC suspects Chinese bond holders have woken up to the reality that capitalism entails risks as well as rewards. Chinese policy makers have fiscal and monetary cards to play to sustain growth and the analysts thinks they will play their hand, given there's no meaningful inflation threat.
CLSA suspects coal prices are near a bottom but a rebound will be slow. Chinese thermal coal prices have fallen 11 weeks in a row and erased gains from late last year. CLSA thinks these prices have overshot to the downside because of de-stocking and a producer price war, and should rise soon. The latest rumours regarding fiscal year settlements in Japan are suggesting prices of around US$80-83/t, down from US$95/t last year. As the Australian dollar has fallen over the equivalent period from US$1.04 to US90c the decline in contract prices will be substantially less for Australian miners in local currency terms. The analysts have reduced Newcastle spot price forecasts and look for a recovery to US$78/t in the second half of 2014 and a cost push appreciation to US$87/t by 2016.
Macquarie notes the annual Japanese negotiations started last week and expects they will settle at around US$82/t FOB Australia. These contracts back an estimated 60mtpa of Australia-Japan trade and are significant for the earnings of Australian thermal coal miners. Macquarie also believes the declining Australian dollar will provide some compensation for the decline in prices. Macquarie also observes that, while Japan's share of global demand is falling steadily, its share of high-quality coal demand is probably not falling.
The wider issue Macquarie raises is whether miners, which are high-grading output and pushing more material out the door, are squandering their resource base in what looks like to be a prolonged period of trading into the cost curve. Macquarie thinks the smarter approach may be to save resources for a better market. The analysts believe increased Asian coal burning capacity is due in 2016 and the lagged impact of slowing coal capex means output will stagnate at the same time, making for a misaligned investment cycle which may see the coal market tighten. Nevertheless, Macquarie acknowledges it would take a brave miner to decide to preserve resources now.
Metallurgical, (coking) coal also appears to have a lack of supply discipline and, as hopes of a recovery in steel demand have been disappointing, CLSA notes prices have underperformed even the broker's below-consensus forecasts. The analysts see supply growth remaining strong out of Australia and maintain little hope for prices to recover near term. The analysts also think, should China's environmental focus increase, that the price differential between types of coking coal will widen and demand for higher quality material will increase at the expense of lower quality, higher sulphur coking coal.
Macquarie notes the recent selling in zinc on the London Metals Exchange but does not expect the Chinese market, which lags its London counterpart, will tighten. Chinese domestic zinc supply is expected to rise as smelters ramp up production and demand from construction remains muted. Chinese smelters are well stocked with zinc concentrate at present. Macquarie notes major smelters currently hold over two months of use. There has also been some building of refined zinc stocks in China, but the inventory overhang is milder than for the same time last year. Macquarie finds it hard to believe the market would tighten further as the import arbitrage would need to improve to provide incentive for Chinese buying.
The Indonesia nickel ban appears to be holding up, but Credit Suisse does not expect strong price rises in the near term. The broker observes that nickel has never had a demand problem, but previously it was expected supply would continue to expand at rates of 4-5% into an already oversupplied market. Indonesia was the wild card. Credit Suisse had expected that, once the ban was introduced, a compromise would emerge in the form of exemptions for entities that plan to undertake the building of processing capacity. Now such exemptions seem increasingly unlikely as the ban appears to have broad political support. The Indonesian mining analyst at Credit Suisse expects first beneficiation plants under construction to begin operating in 2015, meaning Indonesian supplies could be withheld for more than a year.
In terms of the Australian nickel stocks the broker thinks the nickel sector is fully valued. Australian dollar nickel prices are up more than 20% since December and the equities have increased even more so. Credit Suisse has taken the opportunity to review preferences and Western Areas ((WSA)) remains number one pick. It offers a pure play exposure to rare high grade nickel, and is upgraded to Neutral from Underperform. Going the other way, Credit Suisse downgrades Independence Group ((IGO)) to Underperform from Outperform, as that stock has performed strongly since January and the broker struggles to see how the valuation stacks up.
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