Commodities | Mar 22 2012
This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG
– Morgan Stanley updates commodity price forecasts
– Moelis lifts long-term oil price expectation
– Thermal coal prices weaker
– Updates on steel and iron ore
– Palladium may struggle given a lack of real demand
By Chris Shaw
Despite a recent sell-off, Morgan Stanley remains bullish on gold in 2012 given expected aggressive action by the US Federal Reserve, including the likely adoption of QE3 in the first half. Gold prices are expected to rise on a quarterly average basis through the final quarter of next year.
Morgan Stanley sees the gold price as being driven by whether the four pillars of the original bull market – a decline in producer hedging, declining central bank sales, a lack of material new supply and long-term growth in physical investment demand, can persist. Given the expectation these factors will in fact continue, Morgan Stanley is forecasting annual gold prices of US$1,845 per ounce in 2012, US$2,175 per ounce in 2013 and US$1,900 per ounce in 2014.
Silver prices are expected to remain volatile this year, especially given the continuing sovereign debt crisis in Europe. Morgan Stanley expects a lengthy period of negative real interest rates in the US should spur investor demand, even without further QE. A weaker economic outlook should cut fabrication demand, but not enough to take prices back to levels that would deter expected strong mine production growth in Morgan Stanley's view. Price forecasts for silver stand at US$35.48 per ounce this year, US$41.83 per ounce in 2013 and US$36.54 per ounce in 2014.
For aluminium, a large supply overhang and relentless growth in smelter capacity in China in particular has seen Morgan Stanley turn less positive on the metal. This is because production cuts will need be deeper and longer lasting than currently proposed to bring the market into a more balanced position even allowing for what has been solid global demand. Morgan Stanley is forecasting average LME cash prices for aluminium of US$1.02 per pound in 2012, US$1.11 per pound in 2013 and US$1.22 per pound in 2014.
Morgan Stanley's preferred base metal remains copper, as prices are expected to remain well above marginal cost until the global inventory pipeline is re-established. Current supply constraints are not expected to be addressed before 2014. Given this, price forecasts stand at US$3.70 per pound this year, US$4.10 per pound in 2013 and US$3.75 per pound in 2014.
The start-up of four major laterite projects will have a big bearing on the nickel market this year in the view of Morgan Stanley, as this supply could swing the market back into a significant surplus. On the plus side some inventory rebuilding appears necessary, so the broker is forecasting prices of US$9.00 per pound this year, US$9.89 per pound next year and US$10.50 per pound in 2014.
Zinc has the worst fundamentals of the base metals in the view of Morgan Stanley, this reflecting ongoing oversupply. While not as bad, lead has also had an oversupplied market for some time. While Chinese policy change or a reversal in negative European growth could deliver better than expected price performance this year, the broker retains a cautious view.
Price forecasts for zinc stand at US$0.91 per pound in 2012, US$1.00 per pound in 2013 and US$1.10 per pound in 2014, while for lead forecasts are US$1.00 per pound, US$1.06 per pound and US$1.09 per pound respectively.
In oil, Morgan Stanley suggests barring a supply shock, upside to prices from current levels appears limited. If outages can be resolved, strategic reserves are released or geopolitical tensions fade then there is downside risk in the broker's view, especially given demand remains relatively weak.
Moelis has also commented on the oil market, the broker lifting its long-term price forecast to US$100 per barrel from US$85 per barrel previously. The increase is a reflection of firm demand and an increasingly tight supply environment.
Short-term the supply issue reflects geopolitical problems in Iran in particular, while new oil provinces continue to be slow to come on-stream. At the same time, Moelis notes the Middle East now consumes 31% of the oil produced in the region, up from 21% in 2000. This means space capacity in Saudi Arabia is being used up.
Looking ahead, Moelis expects the oil price will remain around US$100 per barrel, as OPEC in particular is comfortable with this price. This is because car developments will deliver savings at the consumer level and higher taxes in Europe in particular are providing governments with the opportunity to make fuel more affordable.
Standard Bank notes Saudi Arabia has stated it will work to bring oil prices back down to fair levels via the use of its spare capacity. If this fails the bank suggests the US would likely attempt to intervene in the market via its strategic oil reserves. This implies increased oil price volatility in the shorter-term.
In terms of investments that deliver value and growth in such an environment, Moelis rates Oil Search ((OSH)) as a Buy as the company should see growth from identified projects where deliverability is established.
Both Woodside ((WPL)) and AGL Energy ((AGK)) are rated as Hold by Moelis, the former because there needs be movement on growth projects before the broker turns more positive. Both Santos ((STO)) and Origin Energy ((ORG)) are rated as Sell by Moelis, the former given deliverability of shale gas remains an issue and the latter given the scope for a drop in spot prices to prompt a re-negotiation of the company's off-take deal with Sinopec.
While the Asian seaborne thermal coal market is usually stable, UBS notes a shock lift in supply has undermined prices in the region. This is likely the result of US and Colombian deliveries being diverted from traditional US and European markets into Asia.
Price weakness has extended to Newcastle coal, where prices for top-grade material have fallen 13% in six weeks. In the view of UBS these trade shifts are likely to last for weeks but are not an indefinite trend. This is because price weakness increases the risk of a contraction in supply as well as encourages greater buying across the Asian region.
UBS is forecasting thermal coal prices of US$125 per tonne for JFY12, while for JFY13 the broker expects and average price of US$110 per tonne. Long-term UBS is forecasting a price of US$90 per tonne.
Still on bulk materials, Citi takes the view steel-making raw materials are capped on the upside for the first half of 2012. While demand is strong in some markets such as the US auto sector, global crude steel production is expected to increase at 3.6% in year-on-year terms for the first half of this year, which is half the rate of 2011.
Citi's expectation is based on the view there will be further normalisation of the Chinese property sector, and a shift in that economy to more consumption-driven growth. Europe is a continuing underperformer and hopes for a recovery now rest on 2013, while solid demand in the US is seeing some re-starting of capacity. Despite this, Citi expects prices in the US should hold around current levels.
In iron ore, BA Merrill Lynch notes the major Australian producers are attending an annual get-together in Western Australia at present. Each of BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Fortescue ((FMG)) had slightly different comments to offer.
For BHP, BA-ML notes a softer outlook with respect to China is seeing some re-evaluation of capex plans, this despite the expectation iron ore prices would not fall below US$120 per tonne. Westpac notes BHP's revised view implies a lower target for Chinese steel production per capita.
The bank suggests this is because China's steel intensity curve has been thrown off by recent stimulus measures pulling forward demand. This means the current cyclical correction should actually bring steel demand back to more fundamentally supported levels, which means slower steel output growth shorter-term but not forever.
Rio Tinto remains confident in the steel demand outlook despite a slowing in Chinese growth, so given significant planned spending to boost production BA-ML notes Rio Tinto clearly also remains confident in the outlook for iron ore demand.
Fortescue's commentary was centred on expansion plans, which BA-ML notes continue to progress as the company targets output of 155 million tonnes yer year by 2014. BA-ML continues to rate both Rio Tinto and Fortescue as Buys, while BHP is rated as Neutral.
Finally on the platinum group metals, Standard Bank suggests speculative positioning at present favours palladium as ETF buying of the metal has continued in recent weeks. While investors are confident, Standard Bank expects the metal will struggle in coming weeks given a lack of real demand.
This makes sustaining prices above US$700 per ounce unlikely in the bank's view, though downside should be limited as US$600 per ounce is regarded as too low given ongoing industry cost pressures.
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