Material Matters: Coal, Iron Ore, Alumina And Uranium

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-Short-term support for coal prices
-US$140/t looks like a fair iron ore price to Macquarie
-Chinese alumina demand offset by rising production
-Uranium prices to remain soft

By Andrew Nelson

After a tough year in 2012, analysts at Citi see a much better year for coal and coal stocks ahead, especially if current prices can prevail for a while. Prices aside, the broker sees costs as the real story in 2013, especially with the recent run of extremely wet weather adding to the woes of the persistently high AUD.

But this wet weather comes with a dividend of its own, as the weather disruptions in Australia have actually acted to push coal prices higher. Thermal prices are now hovering in the US$94/t neighbourhood, which is about 20% higher than the October 2012 low, although still down 20% year on year.

The broker also sees more upside from here, noting recent contracts are being set at a 5%-10% premium to prevailing spot prices, which has Citi thinking we’re on our way to US$100/t. Low volume PCI coal have run up to US$148/t, well ahead of Citi’s 2013 forecasts average price of US$139/t. Low volume coking coal has rallied up to US$173/t, with Japan’s tilt at economic resurgence also a possible catalysts for coal prices.

Another boost for thermal coal could also arrive from Columbia some time soon. Analysts from Deutsche Bank note a combination of events in Colombia has now made the supply shortages in Australia look like small change. And there hasn’t been much of a market reaction, yet.

First, there’s a strike at Cerrejon mine, then there’s a suspension of the Drummond coal-loading license, plus a halt at La Francia. Together, these issues have reduced Colombian exports by 157,000 tonnes per day, with a cumulative volume of 1.4mt displaced by mid month. A night time rail suspension adds an extra outage of 26kt/ more tonnes per day and brings the total volume displaced to 1.6mt.

Deutsche notes that as long as these interruptions continue, currently strong European demand in the face of high gas prices should provide plenty of support for higher thermal coal prices, thus a bullish skew for Atlantic Basin pricing remains solidly in place.

The iron ore market is also experiencing interesting times, with record export volumes from both Brazil and Australia in Q412 materialising at a time when prices were pushing steadily higher. Australian exports have in fact doubled from the end of 2008 and given iron ore supply continues to struggle, the broker sees massive scope for outperformance.

Analysts at Macquarie note Australian iron ore producers are adding capacity furiously. BHP Billiton ((BHP)) has lifted output by 65mtpa, Fortescue ((FMG)) has more than doubled shipments, while smaller domestic exporters have more than tripled their activity. Rio Tinto ((RIO)) is also significantly lifting output, just not as much as peers, making the planned expansion in 2013 crucial, especially as it is the biggest supply addition to come to market in the year.

Brazil, on the other hand, has a fairly flat growth profile, with Australia taking more and more of global share. In fact, the broker only estimates Brazil will add 5mt of export volume.

Yet while Australia inarguably owns the supply side of the picture, China drives the demand side. The broker notes the proof is in the second half of last year when the Chinese stocking cycle pretty much drove the price higher despite increasing supply. The problem is; the broker predicts Chinese ore demand will be flat into Q2 before falling into Q3 and Q4 as steel output drops and Australian supply builds Thus while the iron ore price may hold at US$155/t or even above over the next couple of weeks, US$140/t looks like a fairer price for iron ore through H1, says Macquarie.

Deutsche also sees some important developments brewing in the world of alumina. The broker notes prices have started to recover over the past few weeks, with the market starting to price in higher demand, especially from China. The problem is: the market was also pricing in lower supply and while Chinese demand is expected to remain firm, supply weakness is now much less likely.

The broker notes Rio Tinto is no longer considering shutting down its underperforming Gove alumina refinery after commitments from government for energy assistance. The broker thinks this will certainly put a cap on any near term price renaissance. On the other hand, the broker also sees further price support in the form of weak Indonesian exports of bauxite post the export ban. Meanwhile, Middle Eastern smelter production growth continues to move along quite quickly, while Chinese smelter expansions are also progressing.

Lastly, commodities analysts at Commonwealth Bank ((CBA)) think there is still too much supply in the uranium market. The bank has moved to lower its uranium price forecast by 9% in FY13, by 12% in FY14 and by 2% for FY15. The banks new prices are US$45/lb, US$54/lb and US$72/lb respectively.
 

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