Material Matters: Uranium, Tin, Steel, Alumina And Resource Risks

This story features BLUESCOPE STEEL LIMITED, and other companies. For more info SHARE ANALYSIS: BSL

-Uranium surplus until 2015?
-Tin outperforms on LME
-Chinese steel exports surge
-Chinese alumina imports low
-Common risk themes dog resource stocks
 

By Eva Brocklehurst

Uranium miner Cameco has announced a year-long delay in commissioning what will eventually become one of the largest uranium mines, Cigar Lake, Canada. As the global market is in oversupply because of Japan's decision to close nearly all nuclear reactors, Morgan Stanley does not think this latest setback at Cigar Lake will have a near-term effect on prices. The broker recalls the initial delay at Cigar Lake was a catalyst for the uranium price bull run in 2006-07. The project was meant to start operating in 2008 but has sustained several setbacks, mostly due to flooding. The latest event serves as a timely reminder in Morgan Stanley's view – as prices drift to 7-year lows – that bringing new uranium supply to market to fill the impending gap remains a significant challenge.

The shutdown of nuclear capacity in Japan which, ahead of the Fukushima meltdown, commanded 12% of global share, postponed the supply gap that was forming. Morgan Stanley expects the market balance will remain in surplus until 2015. With prices below incentive levels, the analysts expect further news about delayed operations could be the only means to higher prices. Cameco does not expect production at Cigar Lake before the end of the second quarter in 2014.

The tin price has outperformed other LME traded metals over recent weeks and spreads have tightened. Macquarie observes the apparent trigger for the latest price action was reports of disruptions to shipments from Indonesia, as a result of a change in local market regulations. Indonesia is the second largest tin producer and the leading supplier to the international market. The global tin market was already heading for a small deficit this year and so the short-term outlook is positive for prices. Macquarie notes this outlook comes with risk on the Indonesian policy front and, outside of the LME, there appears to be a reasonable level of inventory. Despite this, a new risk on the supply side, along with signs of an upturn in demand, could mean the deficit in the tin market may be deeper.

Chinese customs agencies have released preliminary trade data for August. While copper and iron ore imports came in much as expected, the more interesting story in Macquarie's view is about steel and alumina. Aided by higher Asian market prices, net steel exports hit levels not seen since June 2010. Steel production has been strong but the rise in net exports suggests to the analysts that, even with robust real estate demand, more material is finding its way into the export market. Moreover, this has been helped by a firming in Asian market prices during July and August. The analysts note sequential Chinese apparent steel demand appears to be flat to falling.

Meanwhile, alumina imports remain at very low levels, falling 39% month-on-month and 56% year-on-year. Macquarie observes this marks the second-lowest month since 2011 and continues the downward trend seen through the course of this year. Given the spot price is now hovering at the year's lows, and Macquarie expects the LME aluminium price to face headwinds from market re-balancing, Chinese alumina import volumes may increase slightly. That said, there remains more than enough capacity in global markets to keep the spot price at current levels for a some time.

On the steel stocks front, Credit Suisse has reviewed BlueScope ((BSL)), Arrium ((ARI)) and Sims Metal Management ((SGM)). Arrium and BlueScope showed some strength in their respective FY13 results and near-term outlook. The currency was less punitive to BlueScope while Arrium received more earnings from mining than what was expected. Balance sheet pressure may have subsided somewhat but the domestic steel business continues to face strong headwinds from the currency, compressed spreads and soft domestic demand. The broker thinks the first half of FY14 will be a continuation of this theme. On the other hand, Sims outright disappointed the broker. Structural market challenge are still overshadowing operations and earnings. The company's balance sheet is not the concern, it's the near-term scrap markets, which are seen as under pressure.

Goldman Sachs has updated resource equity models to account for actual commodity and currency prices in August. The broker's earnings and valuation metrics have not changed but the update does highlight the common risk themes of price, volume and cost of production. The broker has a Buy rating on BHP Billiton ((BHP)) and Neutral rating on Rio Tinto ((RIO)). Goldman sees upside risks for Atlas Iron ((AGO)) and Mount Gibson ((MGX)) on a better-than-forecast iron ore price and for Alumina ((AWC)) on better aluminium pricing. Gold miners Regis Resources ((RRL)), Newcrest Mining ((NCM)), Kingsgate Consolidated ((KCN)), St Barbara ((SBM)) and Perseus Mining ((PRU)) also have upside risks with a better-than-forecast gold price. Downside risks largely centre on hiccups in operations or not meeting production forecasts. In this case the spotlight is on Lynas ((LYC)), PanAust ((PNA)), OceanaGold ((OCG)), Perseus Mining, St Barbara, Yancoal ((YAL)) and Medusa Mining ((MML)).

In the week to September 10, both Orica ((ORI)) and Nufarm ((NUF)) appreciated strongly and substantially outperformed the market. Incitec Pivot ((IPL)) was largely flat. There was limited domestic chemicals news on which to base this outperformance, in Goldman's view. Commodity pricing was soft and continued lower in the the week to September 10. Wheat prices were down 1.3%, whilst corn fell 0.7%. Diammonium phosphate (DAP) prices moderated, with DAP Tampa down US$7/t to US$413/t. Similarly, urea prices continued to soften, with Prilled Urea (Baltic Sea) down US$9mt to US$281/mt FOB. Goldman estimates ammonium nitrate import parity has fallen to $649.0/t from $669.8/t, largely a result of the appreciation of the Australian dollar against the US dollar.
 

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.

Click to view our Glossary of Financial Terms