Material Matters: Oz Energy Stocks, Oz Steel Data, And Forecast Changes

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– Macquarie the latest to adjust commodity forecasts
– Oz steel data for April mixed
– Goldman Sachs adjusts preferences in energy sector

By Chris Shaw

Macquarie has not changed its directional view on commodity prices but specific forecasts have been adjusted. Bullish changes have been made to iron ore and copper numbers, while estimates for uranium have been lowered.

The changes reflect Macquarie's view Chinese economic activity levels continued to grow strongly over the first four months of 2011. Commodity end use demand has also been healthy. Ex-China, world PMIs (Purchasing Managers' Indices) have moderated slightly but continue to point to solid growth according to Macquarie.

Near-term, Macquarie sees something of a cyclical slowdown within what remains a positive longer-term trend. Economic growth has been geared towards Asia and there is nothing at present to cause any change to the view this trend will continue.

In general Macquarie expects steepening cost curves will mean prices stay higher for longer, so risks in relation to price forecasts remain to the upside. Major beneficiaries will be the low cost miners, so Macquarie sees scope for an increase in capital returns to shareholders, increased M&A activity in the sector, a push towards sustaining capital spending and renewed focus on organic growth.

Specifically, Macquarie suggests signs are the copper market is tightening up, with the market expected to be in deficit by as much as 500,000 tonnes in 2011 and by 200,000 tonnes in 2012. Thanks to higher than expected stock build over the past six months, higher price forecasts have been pushed out slightly. Macquarie is forecasting copper prices of US$10,304/t this year, rising to US$11,581/t in 2012. These forecasts are down 6.5% and up 5.0% respectively from earlier projections.

Aluminium price forecasts are largely unchanged, Macquarie suggesting post a rally since last October there is now limited upside from current levels. Forecasts stand at US$2,603/t for 2011 and US$2,316/t in 2012.

Zinc prices have fallen to levels Macquarie views as a strong buying opportunity, as downside appears limited thanks to pricing currently digging into the 90-95th percentile of the cost curve. Forecasts reflect this, Macquarie expecting zinc prices of US$2,316/t this year and US$2,449/t in 2012.

Nickel appears headed for a market surplus in the second half of 2011, a trend expected to cause an easing in prices. On a 12-month view Macquarie sees prices falling by 10-15%, forecasts standing at US$24,509/t this year and US$20,957/t next year.

In the bulks, Macquarie argues a supply shortfall will necessitate a large re-rating for iron ore prices, while met coal price forecasts have also been increased. The adjustments are significant, Macquarie lifting forecasts for long-run prices by 12.7% and 7.4% respectively.

Shorter-term prices should also gain, Macquarie expecting a re-acceleration in iron ore prices from the third quarter of this year. For the full year the broker is forecasting a price of US$178/t CFR China, which would be another record.

For hard coking coal Macquarie's forecasts have increased by 15% this year and by 19% in 2012 to US$303/t FOB Australia and US$264/t FOB Australia, with prices expected to stay firm until stock levels are replenished from current critical levels.

Macquarie has not significantly adjusted precious metal price forecasts, with average prices for gold expected to be US$1,490/oz this year and US$1,350/oz in 2012. Macquarie continues to prefer platinum group metals in the sector, particularly as silver appears vulnerable to more downside risk.

In uranium, Macquarie suggests the market is unlikely to move into a deficit situation prior to 2014. This implies price weakness until that time, Macquarie's forecasts now standing at US$60/lb this year, US$56/lb in 2012 and US$45/lb in 2013.

The Australian Bureau of Statistics has released steel import data for April, UBS viewing the data as mixed. Long product imports rose 33.1% compared to March, pipe and tube products rose 31.2% and flat products were broadly in-line.

In UBS's view, the combination of recent gains in the Australian dollar and falling regional steel prices suggests increased imports in the near-term. This risk has increased given global steel production rose in March in year-on-year terms.

With domestic demand still around 15% below the levels enjoyed prior to the Global Financial Crisis, UBS expects the market will see an increase in deferrals by domestic customers anticipating lower steel prices.

JP Morgan suggests the typical two to three month lag between orders of imported steel and those products actually arriving in Australia means the impact of the most recent increase in the Aussie dollar is unlikely to be seen until June and July import data.

But as with UBS, the potential for lower import prices in coming months has JP Morgan expecting domestic customers will increasingly defer orders. While import volumes rose in April, JP Morgan doesn't equate this to lower market share for OneSteel ((OST)). This is based on the view buyers are running down inventories while assessing competing price offers.

JP Morgan retains the view OneSteel's iron ore operations will allow the share price to perform better over the next six to 12 months than BlueScope Steel's ((BSL)). UBS agrees, though it rates both companies as Hold compared to JP Morgan's Overweight on OneSteel and Neutral rating on BlueScope.

Over in the energy sector, Goldman Sachs has adjusted its views on market leaders Woodside ((WPL)) and Santos ((STO)). Woodside has been upgraded to Buy and Santos downgraded to Hold, reflecting the potential for positive share price catalysts for the former and the absence of such catalysts for the latter.

According to Goldman Sachs, if Woodside's new CEO, Peter Coleman, can deliver progress on major growth options such as Browse, Sunrise and the Pluto expansion there is potential for material share price upside.

In contrast, Santos is in a risky execution phase at its Gladstone LNG project, while lacking any similar positive catalysts shorter-term. Comparing the changes of Goldman Sachs, the FNArena database shows Woodside scores three Buys, four Holds and one Sell and Santos is rated as Buy four times, Hold three times and Sell once.

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