Commodities | Mar 28 2013
-Iron ore bears may be overdoing it
-Future looks bearish for thermal coal
-Gold may hit US$2000/oz next year
-Gold finds are diminishing
By Eva Brocklehurst
ANZ Bank analysts believe some of the more bearish calls on iron ore are overdone. Having looked at the numbers they believe prices could rebound US$5-10 per tonne in the short term as the seasonal construction program in China begins. The bearishness appears to be coming from the plans to curb property inflation in China and expectations of rising iron ore supply in the face of lower demand. Okay, iron ore is the most leveraged of the seaborne commodities to Chinese growth so the ANZ analysts have trimmed forecasts for the second half of the year by 6.5%, to average US$132/tonne compared with US$141/tonne.
Nevertheless, they don't buy a slump in Chinese property demand. In fact, they see the latest 20% tax on capital gains from the sale of a second property as forcing down sales of such investments and crimping the housing stock. What they see unfolding to address rising housing prices is increased supply in areas of strongest demand. The analysts expect this will boost raw material demand and keep iron ore prices from arriving at the most bearish scenarios.
In terms of the increased supply dynamic, this has been on the cards for some time with ongoing expansion of capacity among the major miners in Australia. Two factors are paramount, in the ANZ analysts' view. Fortescue's ((FMG)) jump in 2013 capacity looks big but is merely a return to the status quo, after the King's project was halted last year and re-started three months later. The other is that the slide below the US$100/tonne price of iron ore last year could be a one-off, characterised by sustained high production of steel in China amidst uncertainty over the political changes that were about to occur. The analysts also maintain the view that over 50% of China's 1.5 billion tonnes of annual iron ore output is loss making under US$110-120/tonne.
BA-Merrill Lynch expects the iron ore price to trade around US$120/tonne on average for the year, split as US$130/tonne for the first half and US$110/tonne in the second. The lower price in the second half is predicated on expectations of increasing supply, particularly from Australia. BA-Merrill Lynch agrees that this new supply is well flagged. Longer term, the broker expect the price to be around US$97/tonne in 2019 money (around US$84/tonne in current money terms).
Deutsche Bank also believes the iron ore price will move modestly higher over the next few weeks, supported by opportunistic buying from Chinese mills and short covering. The analysts view the pricing in the fourth quarter last year as close to fair value, around US$120/tonne. They note that little physical material is being transacted on the spot market at the moment, exacerbated by high steel stocks and low iron ore inventories at ports. Longer-term, these analysts are also bearish on the price and expect iron ore to gravitate towards US$110/tonne over the next several years, as a function of decelerating steel demand in China. Longer term they too envisage a price around US$80/tonne.
Thermal coal prices are under pressure. According to Deutsche Bank, the evidence shows producer hedging at higher forward prices, cost reductions through efficiencies, burden for Australian producers from fixed infrastructure expenses and distressed sales of Appalachian coal through eastern and southern US ports. Global growth is improving and the analysts expect the price of thermal coal will pick up near term. The analysts forecast the price at around US$100-105/tonne by the end of the year. A key statistic here is that 95% of thermal coal demand in the US and 87% in China is for power generation. Over the next two years the growth story augurs well for thermal coal. Beyond that, the analysts are concerned that coal-fired generation is falling out of favour in several centres of demand including the US, Europe and China for environmental reasons. The price outlook is therefore bearish in the longer term.
BA-Merrill Lynch analysts believe the worst is not yet over for thermal coal. Colombian exports are recovering and increasing and low-cost producer Indonesia is increasing product and exports. Even in Australia production continues to ramp up. The only country that has cut thermal coal exports is the United States. The analysts don't expect the recent recovery in China's thermal coal imports to absorb all of the oversupply this year. They have lowered price expectations to US$92/tonne for 2013 and US$88/tonne in the second quarter.
BA-Merrill Lynch has marked down gold price expectations for 2013 to a more modest US$1670 per ounce. The analysts remain positive on the gold outlook but do not believe gold will reach the US$2,000/oz price target until 2014. Meanwhile, IntierraRMG has produced a report on gold discoveries and found a 45% decline in new discoveries. Not unexpected? The rate of decline has accelerated over the past four years. That's the chief finding.
The year 2003 to 2004 was the best in the study range, with over 400 million ounces of new gold discovered. This includes inferred, indicated and measured ounces with an average grade of 1.65 grams per tonne. In comparison, 2005 to 2006 had the lowest number of discoveries, with just over 150m new gold ozs at a similar grade. Then, discoveries increased significantly during 2007 to 2008 with more than 390m ozs and the average grade was up to 2.65g/t, the highest in the 10-year period under view. After that, the next two years produced just over 250m in new gold ounces with a declining grade of 1.25g/t. This deterioration has continued to the present. The amount discovered in 2011 to 2012 dipped below 225m ozs with a reduced grade of 1.17g/t.
Where was the gold found? Primarily, in Africa. Africa led the way with new discoveries of 479m ozs of gold with an average grade of 2.8g/t. Next was North America at 290m ozs, and with a much lower grade of 1.3g/t. Europe was third in new discoveries with 240m ozs at 2.0g/t. Australasia recorded 74m ozs of new discoveries with an average grade of 1.4g/t. Global drilling activity is waning and IntierraRMG expects that the next few years will continue the trend of fewer new gold discoveries.
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