Material Matters: Oil, Base Metals & Bulks

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A glance through the latest expert views and predictions about commodities

-Lift in oil prices unlikely to be the start of a super cycle
-Energy transition, batteries underpin outlook for copper, nickel
-China's steel production cuts may pressure iron ore
 

By Eva Brocklehurst

Oil

For 2021 Citi upgrades its oil forecasts, envisaging Brent at US$69/bbl on average, noting it is cruising close to the US$70/bbl mark and could hit US$75/bbl or even US$80/bbl at certain times over the next few months.

The broker expects US$59/bbl for 2022 and assesses aggressive action by OPEC et al to keep more oil off the market for longer means inventory is being drawn down more rapidly than previously anticipated.

Nevertheless, while Saudi Arabia is reasserting its traditional role as a swing producer the broker suspects its stance could backfire and stimulate a stronger supply response down the line from shale and other producers.

Saudi Arabia's insistence on surprise tactics is particularly important at this point in time as prices have responded and facilitated the ability of many producers to meet their break-even price levels and increase hard currency earnings.

That said, the broker also points out this is not the beginning of a new super cycle for oil, and from 2023 onwards prices should return to the low US$50/bbl range. UBS also does not subscribe to the super cycle view, believing demand growth in 2021 and 2022 is above trend only because of the collapse in demand in 2020.

Yet, over the longer term the broker maintains a US$70/bbl forecasts for Brent, which is the level where supply should have enough incentive to meet the growth in demand and natural field decline.

UBS raises its Brent forecasts for 2021 to US$65.50/bbl and 2022 to US$62/bbl to reflect the market's desire to price in a faster recovery in demand and because of producers agreeing to defer increases to production.

The broker lifts expectations for oil stocks, upgrading Woodside Petroleum ((WPL)) to Buy as risk/reward is now more appealing, increasing earnings estimates by 8-51% for Oil Search ((OSH)) and Santos ((STO)) as well.

Citi, too, raises earnings estimates for Oil Search by 23%, the most leveraged producer in its coverage of oil. With a target of $5.27 the stock is the broker's top pick for those seeking upside exposure to oil. Under a longer-term base case at US$55/bbl Santos is Citi's top pick amongst the large cap stocks because of its higher-returning growth projects.

Base Metals

Macquarie has upgraded its outlook for copper based on the outlook for electricity and energy transition, which in turn transforms the earnings outlook for OZ Minerals ((OZL)) and Sandfire Resources ((SFR)). The broker retains a preference for OZ Minerals as it has several organic catalysts led by the Prominent Hill expansion.

The broker assesses earnings upside for OZ Minerals, boosted by gold exposure, is 40-75% over the next four years. Sandfire Resources also has upside of 50-130% over the same period, although the broker acknowledges its forecasts are coming off a low base.

Meanwhile, growth in nickel use in batteries is the main positive on that front, with a major impact from the middle of the decade onwards, and there are doubts about whether there will be enough available. Western Areas ((WSA)), over FY21, offers the greatest leverage to nickel, in the broker's view.

The company's recent capital raising should enable it to comfortably fund the Cosmos development and maintain strong exploration expenditure.

Mincor Resources ((MCR)) provides significant leverage to nickel as it resumes mining. IGO Ltd ((IGO)) has a positive trajectory driven by the re-basing of nickel forecasts and its gold exposure from Tropicana, with Macquarie calculating 20% upside for FY22-23.

Bulks

Morgan Stanley anticipates significant risk to demand for iron ore given China's largest steel city Tangshan's intention to cut steel production emissions has potential to return the market to surplus. Taking into account China's scrap share of steel at 20%, the broker calculates China's iron ore consumption could be -34-61mt lower than the 1.43bnt anticipated.

Such a decline could turn a projected seaborne market deficit in 2021 into a balanced or even oversupplied market.

If sufficient scrap is available in China, Morgan Stanley notes more steel could be produced through the electric arc furnace route, further impacting demand for iron ore. This would put significant pressure on the 62% benchmark price. Nevertheless, product premiums for pellets, lump and high-grade should remain elevated.

Macquarie disagrees, assessing the market will remain in deficit, or at the very least tight. Despite the policy risk the broker expects China's crude steel production will reach 1.09bnt this year.

The broker also suggests a decline in China's net steel exports could mean other producers in Asia increase output and thus, to some extent, iron ore consumption. Japan, South Korea and India can replace some of the Chinese steel in Asia.

Yet Morgan Stanley does not believe China's steel cuts will simply play out as a relocation of iron ore demand. Higher scrap use outside of China will have a negative effect too. The broker estimates US and European steel scrap share at 65% and 50%, respectively. If 40mt of China's crude steel production were to relocate to Europe and the US this would be a loss of some -50mt of China's iron ore demand.

Moreover, the broker believes the iron ore price will eventually be driven by its own supply/demand fundamentals. Goldman Sachs agrees a recovery in Brazilian exports along with the slowdown in steel production in China will narrow the deficit for iron ore in 2021 and now forecasts a "clear surplus" in 2022. A more sizeable surplus of around 49mt is anticipated in 2023.

The broker raises iron ore price estimates for 2021 to US$135/t but maintains 2022 forecasts at US$95/t. Although calling for a -US$50/t drop in iron ore by the end of the year, Goldman Sachs believes the ongoing recovery in global steel demand signals it is too early to become bearish on the sector.

The drop in iron ore prices is already assessed as factored into BHP Group ((BHP)) and Rio Tinto ((RIO)). The broker retains a Buy rating on the former because of strong cash flow and exposure to bullish views on metallurgical coal, copper and oil.

Otherwise, Goldman Sachs has Neutral ratings on Rio Tinto ((RIO)), Mineral Resources ((MIN)) and pure iron ore stocks Fortescue Metals ((FMG)) & Champion Iron ((CIA)). Deterra Royalties ((DRR)) is upgraded to Neutral from Sell on valuation.

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