Material Matters: Mineral Sands, Zinc, Coal And Iron Ore

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-Zircon weak, excess rutile
-Balranald mine likely delayed
-Zinc resource depletion
-Will China change coal policy?
-Upside risk to iron ore supply
 

By Eva Brocklehurst

A price recovery in mineral sands is unlikely to materialise until 2015, in JP Morgan's opinion. A cyclical rebound in zircon remains on the cards but the analysts observe that the big three producers have reintroduced supply this year. There is some evidence demand is improving but prices remain weak and the analysts suspect producers are prioritising the reintroduction of supply rather than higher prices. The broker has lowered zircon price forecasts by 10% for 2014 and by 21% for 2015. Titanium dioxide feedstock (rutile) prices continue to ease and excess inventory is depressing demand growth. JP Morgan believes this situation could entice further restrictions on rutile supply but, in any case, prices are not expected to recover until the next northern hemisphere summer.

Iluka Resources ((ILU)) produces most of its rutile from the WRP mine in the Murray Basin, which is due to expire next year. JP Morgan believes the Balranald mine, which is to be a replacement, is uneconomic at current prices and its development could be delayed. The broker lowers rutile price forecasts by 13% for 2014 and by 22% for 2015.

Several mine closures from the past couple of years have started to impact on zinc supply, as the market pushes further into deficit. ANZ analysts point out this has occurred just as the macro environment has picked up and results in a steady drawing down of inventory on the London Metal Exchange. The analysts believe prices will need to push higher for the market to rebalance. Increasingly stringent environmental measures, declining ore grades and relatively low zinc prices have eroded the profitability of Chinese zinc mines. Zinc consumption growth is forecast to rise to 4.8% from 3.9% this year and the analysts believe the depletion of resources will result in the market moving deeper into deficit.

Recent and upcoming closures include the Century, Lisheen, Brunswick, Perseverance and Angas mines. The analysts expect the longer term outlook for zinc consumption is robust, with high leverage to the ongoing urbanisation and industrialisation of developing economies, particularly China.

UBS suspects China may announce policies and import controls for coal. A conference was recently held, chaired by the deputy director of the NDRC, to discuss issues facing the coal sector. The country became a net importer of coal in 2009. The utilities and steel mills have absorbed excess capacity in the seaborne trade by arbitraging against domestic supply. Australia (41%) and Mongolia (20%) are the largest suppliers of metallurgical (coking) coal to China while Indonesia (43%) and Australia (36%) account for the majority of thermal coal imports. UBS notes China's coal policies have had mixed success in the past. A safety and consolidation drive in 2009 was effective in closing small mines but the province of Shanxi produced 963mt in 2013, 21% above approved capacity.

Import restrictions pose a bearish risk to the seaborne trade and UBS suspects these may be challenged by the World Trade Organisation. Restrictions may, therefore, come via a previously flagged ban on low caloric value coals. In this instance Indonesian coal wold be most at risk. Nevertheless, the analysts suspect enforcing the ban would be difficult and require a widespread compliance and sampling regime. At present, the speculation on any policy change just adds uncertainty to price forecasts.

BA-Merrill Lynch observes Chinese demand for iron ore has improved and mills were re-stocking at the end of July. Moreover, incremental supply growth from Australia has been muted and prices remain stable, with discounts narrowing substantially for 58% grades. Meanwhile, the potential for a strike at Port Hedland seems to have been averted for up to five weeks, because of an administrative error. The analysts note Port Hedland exports in June of 36.1mt were up 7% month on month. Merrills observes recent commentary from both Vale and BHP Billiton ((BHP)), as well as developments in India, may mean upside risks to supply estimates moving into FY15.

Following a visit to Vale's Brazilian assets the Merrills' analyst expects itabirite ore projects will improve Vale's consolidated price realisation and margins, through higher quality at reasonable costs and low capex. In India, it appears the local government in Goa is pushing ahead with re-starting the mining of iron ore and Merrills estimates India will export 14mt of iron ore in 2014 and 20mt in 2015.

Major producers have exceeded expectations recently with Goldman Sachs noting combined iron ore supply from Australia and Brazil was up 33mt quarter on quarter in June. Brazil is starting to play a greater role in driving supply growth as new capacity is commissioned at Minas Rio and Itabiritos. Supply growth is expected to moderate in the second half of the year and Goldman expects, on the demand side, steel production will be seasonally weaker. Inventory levels appear adequate. In Goldman's view, current prices are low enough to be competitive in China and to pressure high-cost marginal supply. Prices could remain range bound for the rest of 2014, while price upside is likely to be limited in the absence of any policy moves by the Chinese government and/or supply disruption.

As the market remains in the early stages of oversupply, the shift starting six months ago, Goldman observes there may be further downside to the consensus outlook for prices below US$100/t. Seaborne supply is likely to accelerate again in 2015. While the market has homed in on the closure of high-cost Chinese producers as a key mechanism for price support, Goldman suspects these closures affect the smaller mines rather than the sector as a whole, so production cuts to date may reflect idled capacity rather than permanent closures. In all, the structural drivers behind a bearish view on iron ore remain in play. Goldman notes supply growth exceeds demand growth by a ratio of 3:1. The broker retains a US$80/t price forecast for 2015.

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