Metal Matters: Diversified Miners, Copper, Iron Ore, Gold And Silver

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This story features RIO TINTO LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

-Diversified miners constrained
-Copper prices cannot hold up
-Iron ore should be underpinned
-Gold trending down
-Silver rallies to be sold
 

By Eva Brocklehurst

Commodity prices drive mining earnings, ultimately. UBS notes that a widely subdued outlook for commodity prices deters investors. Other factors rate, such as operational expenditures, but are secondary in that they may not manifest until the next reporting season. So, where is the upside in terms of commodity prices at the moment? The analysts cite uranium, platinum group metals, nickel, aluminium, mineral sands and coal as offering prospects. All these are up from the lows in price of 2012.

So, maybe it's time to count the impact of commodity prices so far this year on diversified miners. Credit Suisse has asked whether the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) will be constrained by tepid demand and increasing supply of several commodities. The analysts have reduced forecasts for 2013 by 7-9% for gold, thermal coal, copper and nickel prices and for 2014 by 11-14% for gold, thermal coal, copper and alumina. As a result of lower price expectations on the aforementioned commodities the broker has downgraded FY14 earnings estimates for BHP and Rio by 11% and 5% respectively. The broker notes gearing levels for both giants remain elevated through the forecast period and should act to constrain potential capital management if the commodity price forecasts hold.

In terms of copper, Credit Suisse expects a peaking in the price in the second quarter at around current levels and slippage to occur in the second half as a surplus builds. Here, the downward pressure is likely to be milder than in the case of iron ore, as marginal copper supply remains more difficult to get to market. Copper has shifted from a deficit to a surplus market this year and Credit Suisse is forecasting a moderate surplus over 2013 and a larger one in 2014. So, copper prices are viewed falling to US$7,000/tonne by the end of the year and US$6,400/t by the end of 2014. The analysts concede their view is more pessimistic than the rest of the market but believe others will follow in the same direction, because prices cannot hold up at a premium to marginal costs of production when supply is more than meeting demand.

For CIMB iron ore prices should stay supported. Underpinning iron ore is strong cost support levels and supply outages, or disruptions, outside of Australia. What downward pressure there is will come from weak Chinese steel production and higher Australian exports. In the second half of the year the analysts believe prices will hover in the range of US$110-130/t. In the case of iron ore supplies outside of Australia, CIMB views a large proportion of India's iron ore production as uneconomic, or constrained by increasingly stringent environmental and regulatory issues. As well, there has been a significant increase in cash costs there from export duties and haulage rates. CIMB sees Australia's BHP, Rio Tinto and Fortescue ((FMG)) providing the bulk of the iron ore supply increase in the next 18 months.

Chinese steel production indicators are not all that bad, according to CIMB. Fixed asset investment and other indicators signal growth momentum is occurring and any stalling is likely to be short term. The analysts believe strength and maturity of the Chinese steel industry means that China will remain reliant on sourcing iron units from overseas. They note the imported iron ore share of total consumption has been increasing steadily over the past five years. As the market has moved back to a more balanced position, CIMB sees the use of imported ore on the rise. This is because not only are lower prices pushing out the marginal Chinese producer but Chinese steel mills are looking to higher grade iron ore to maximise efficiency. Even in a market that is likely to move into surplus over coming months the demand for imported ore should remain high, if not move higher, thus supporting benchmark prices.

Credit Suisse expects the price of gold to keep trending lower as the risk to the financial system from Italy and Cypress is reduced. The analysts have cut forecasts for both gold and silver prices significantly. Quarterly gold price forecasts for the remainder of the year have been reduced by 13% to 18% as the reasons to be bullish have disappeared, or had minimal short-term impact. The analysts expect gold will average US$1580/ounce over this year and US$1500/oz in 2014. Silver, although having a larger industrial component, is likely to be weighed down by gold. Silver price forecasts have been reduced accordingly and the analysts now expect the metal to average US$28.50/oz in 2013 and US$27.20/oz in 2014.

Standard Bank notes silver prices have fallen and could be subject to a further sell down to test US$26.16/oz. This expectation is based on weak underlying supply/demand dynamics and growing inventories. Rallies should provoke selling in the foreseeable future. Standard Bank notes the rise in open interest on COMEX was particularly strong in the July contract as the price fell. There is still the risk of short covering pushing the price back to US$29/oz. Here lies the selling opportunity. The rise since the beginning of the year in ETF (exchange traded fund) holdings in silver is in contrast to the liquidation of gold. The lack of silver liquidation, silver ETF holdings are up 4% and gold ETF holding down 7%, underscores the analysts concern for the silver outlook.
 

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