Commodities | Apr 30 2013
-Near term it's bearish for base metals
-Aluminium surplus likely for some time
-Copper's increasingly in surplus too
-US dollar rise could cap oil prices
By Eva Brocklehurst
As analysts tumble over each other downgrading commodity price expectations for the near future the light at the end of the tunnel is, longer term, that the current pull-back in mining capex could lift commodities prices in 2016-17. On a twelve-month view, Macquarie analysts flag lead, tin, metallurgical coal and palladium as preferred exposures from a fundamental perspective. Further out, the copper price should appreciate from 2014 onwards and nickel, uranium, metallurgical coal and the platinum group offer the most upside.
In the meantime, Macquarie has lowered copper price forecasts for 2014 to US$6,550 per tonne and for 2015 to US$6,800/t, noting stocks look set to hit a level that will erode the premium over cost support that has been seen in recent years. Zinc prices forecasts have also been reduced, reflecting an accumulating surplus. Zinc is thought to be trading close to production costs for some miners in China. Weakness outside of China has dragged on metallurgical coal and the hard coking coal price forecast is to average US$168/t in 2013 and US$179/t in 2014.
Thermal coal is expected to trade around US$90/t free-on-board Newcastle in 2013 and would need a 100mtpa shift in the supply/demand balance for a significant move in its price range. Macquarie notes core coal buyers remain subdued. Gold and silver price forecasts have been reduced by 8.6% and 7.7% for the second quarter of 2013 but the analysts were already bearish, so only small changes have been made to prices further out. Iron ore prices forecasts are expected to be maintained at an average of US$120/for the second half of 2013.
A recent fall in aluminium prices has made an impact on Chinese smelters. Macquarie notes Guangxi, Henan, Hubei and Shandong provinces are cutting output, reducing capacity by almost 900,000 tonnes per annum. If the price of aluminium continues to remain at RMB14,500/t the analysts expect another 500,000t per annum of smelting capacity to be closed in China in coming months. Adding to the surplus will be supply building up in Xinjiang, Qinghai and Inner Mongolia which benefit from more competitive power and raw material costs. This is highlighted by the following fact that Macquarie cites: Among 281 major aluminium smelters in China, 89 made a loss in 2012. Their losses account for 35.4% of the total loss made by all major non-ferrous metal producers in China.
New capacity being built in the west of the country with captive power stations and cheaper resources may not be started up when completed if the price is still soft. Macquarie suspects they can simply pose a threat to the market as prices improve, although new-built capacity cannot be held back indefinitely given the need to generate cash flow to pay off loans. It seems there's a long road of continued strong growth in aluminium production in China, commencing this year, despite the cutbacks from those older smelters.
Deutsche Bank has taken a look at the fortunes of copper versus aluminium, noting a reduction in the rating of copper. Aluminium is noted for chronic surpluses, but copper supply is on the increase and could blur the divisions on the magnitude of availability. The broker was suspecting some short covering in the base metals complex as Chinese merchants or speculators squared positions heading into May Day break. The analysts also note that funds have exhausted the selling that was being done on the back of disappointing economic growth data. The extent of any buying may depend on how Commodity Trading Accounts respond. Once any short covering is over the analysts expect the market to soften again as the re-stocking by builders for the northern hemisphere summer construction season ends. The analysts suspect copper's price could visit US$6,500/t in the next six months.
Deutsche Bank has also looked at the link between the US dollar and crude oil price. In the 1990s both appreciated because of positive capital flows and terms of trade for the US. From 2001 rising oil prices were met with a weakening US dollar, given the combination of a rising petroleum deficit and falling US interest rates. Ignoring OPEC, the analysts explore a rudimentary model between the currency and crude oil markets and this suggests that, in the event of the US trade weighted index strengthening by around 10% in 2013, Brent crude prices would fall to US$93/ barrel by the end of the year.
The analysts are seeing a case for a rising US dollar capping oil prices, because the appreciation would raise the cost of imported crude for consuming nations, notably Asia. In particular, China's dependence on imported crude has been growing significantly. As the analysts have a bullish US dollar view they have examined what might be on the cards for crude prices. Brent crude is expected to drop by 16% from year-end 2012 prices. In 2014, the bullish US dollar view would imply prices heading to US$85/barrel. Of course, there are other factors. OPEC would likely counter a precipitous drop in prices by curbing supply. A sustained drop below US$100/barrel and Deutsche Bank suspects they'd do just that. The analysts estimate break-even oil prices, on a fiscal basis for key Middle Eastern OPEC members, is around US$80/barrel on a Brent basis. Hence, if the price does as the model suggests, OPEC will spring to action.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
