Material Matters: Quarterly Resources Previews, Copper And Crude

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-Higher Sep Q iron ore exports
-Longwall moves impact coal
-Pressure on energy stocks
-Soft copper demand, supply cuts
-US oil inventories in focus
 

By Eva Brocklehurst

Resources Previews

Alcoa has spearheaded the run of September quarter production reports, with the lack of a distribution from the AWAC joint venture for Alumina Ltd ((AWC)) the main surprise to brokers, although they also noted this is likely to be more an issue of timing.

UBS suspects longwall moves may mean coal production is below expectations for Whitehaven Coal ((WHC)) and South32 (S32)). The broker expects nickel names such as Western Areas ((WSA)), Mincor Resources ((MCR)) and Panoramic Resources ((PAN)) to be focused on preserving cash, having all recently cut high cost production or expenditure.

The broker highlights Independence Group ((IGO)) as potentially providing more detail on the Nova acquisiton and production intensions. OZ Minerals ((OZL)) is forecast to deliver another strong quarter as it integrates its two underground mines. UBS expects further output volatility will be revealed at Newcrest Mining ((NCM)) while another key gold stock, Evolution Mining ((EVN)), has already reported strong quarterly production.

Uranium miner Paladin Energy ((PDN)) has already guided to weak sales in the quarter because of timing, but UBS believes confirmation of this could still surprise the market.

Iron Ore Previews

UBS is looking for a continued lift in iron ore exports in the September quarter which should support Rio Tinto ((RIO)), following the lifting of capacity at Pilbara. Port Hedland statistics show further quarterly growth, which the broker attributes to BHP Billiton ((BHP)) sweating its assets hard while Fortescue Metals ((FMG)) has maintained its 165mtpa run rate.

Goldman Sachs agrees the prime focus will be on Pilbara volumes for Rio Tinto while Fortescue's quarterly report will all be about costs. The company has guided to US$18/t for FY16. Arrium ((ARI)) is expected to update on progress from restructuring and how it intends to achieve a new lower FY16 break-even price of US$47/dmt.

Energy Previews

UBS expects Woodside Petroleum's ((WPL)) LNG price will decline by up to 11% in the September quarter versus June, whereas pricing for Oil Search ((OSH)) and Santos ((STO)) could increase by up to 12%. Woodside should be boosted by a full quarter's output from Pluto LNG, partly offset by lower oil and LNG pricing. Oil Search is expected to sustain marginally lower production with the key variable being PNG LNG.

Lower oil prices and a flattening of the forward curve hit Santos the hardest in the September quarter but its recovery at the start of October was nothing short of spectacular, UBS observes. The broker believes mergers and acquisitions will remain key themes in the sector following Woodside's approach to Oil Search. Executive changes were also a surprising theme in the quarter with moves afoot at Santos, Beach Energy ((BPT)), Drillsearch ((DLS)) and AWE ((AWE)).

UBS suspects Drillsearch and Beach Energy could beat estimates if the Bauer field continues to outperform. The broker's key picks in the sector depend on investor risk appetites. UBS envisages most potential upside in Santos among large caps if it can avoid selling assets. Among the smaller caps the broker prefers Drillsearch for its M&A potential and Cooper oil stocks for upside surprise.

Copper

Deutsche Bank is cautious regarding the outlook for copper over the next two years. There is too much mined supply after the expansions over the last 12-18 months. Demand growth is also anticipated to be lower over the next five years as Chinese infrastructure investment slows.

Still, some of the issues which confronted the market recently should dissipate. The broker expects a pause in the rise of the US dollar and a firmer oil price. The Chinese property market is also expected to recover and there should be some extra spending on the grid. Cuts to copper supply driven by price also continue.

Deutsche Bank anticipates a short-term rally, within the context of a bear market, although a hard landing in China remains a key risk. The recovery in industrial production in that country is yet to convince the broker.

Deutsche Bank expects an average price of US$4,650/t in 2016 for copper with a low of US$4,300/t in the fourth quarter of that year. A modest surplus is expected in 2016, but only on the basis of some assumptions. These are the implementation of price related reductions from Glencore, Freeport McMoRan and Grupo Mexico, a bounce in global demand and continued disruptions to production to the extent of 5.3% of the market.

Crude

The most important development in oil markets is that the US oil-directed rig count has reached a new low for the year, Deutsche Bank maintains. This signals that US crude oil production forecasts for 2016 are likely to be on a downward trend in coming months.

Given the slowdown in activity and difficulty of financing investment in fields, as well as the high probability that any rallies in the December quarter are limited, Deutsche Bank suspect there is unlikely to be a substantial rise in US drilling activity any time soon.

When an increase in activity does come, the broker expects it will be gradual, in contrast to the sharp rebound seen back in 2010. The downside for US production volume, in the broker's opinion, is offset by the risk that OPEC fails to accommodate higher Iranian exports mid 2016.

The situation bears watching, in the view of ANZ Bank analysts. US crude oil stocks are expected to fall below 400m barrels by the end of 2016. The analysts upgrade 2016 estimates for West Texas Intermediate by an average of 10% to reflect a quicker run down in inventories.

The level of US inventories is important for the spread between WTI and Brent, which fluctuated in line with the US stock-to-use ratio for a decade before the GFC and supply disruptions pushed Brent into a premium. The analysts suspect US oil prices this time next year could be much higher than they are now and a tighter inventory scenario could mean Brent trades at parity or at a discount to WTI.

One of the reasons to account for the persistent discount in WTI since 2010 is that US crude does not have an open export outlet. The analysts assume there will be no change to the US export regime in the next year. Excess capacity, namely in Saudi Arabia, has allowed OPEC to more than recover the losses from disrupted parties such as Libya and Iraq. The oil cartel's decision not to cut output in 2014 has meant production has risen to a near-record high in recent months, the analysts contend.

Hence, they argue, the next supply shock is likely to be one that increases the global supply of oil rather than reduces it and, if other OPEC countries do not decrease production to accommodate Iran, this will put downward pressure on Brent.
 

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