Material Matters: Raw Metal Demand, Steel, Thermal Coal And Fertiliser

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-Nickel re-balancing occurring
-Industrial metals range bound
-Steel outlook improving
-Thermal coal re-stocking
-Fertiliser outlook mixed
 

By Eva Brocklehurst

Global economic growth will be driven next year by the rebound in developed markets. BA-Merrill Lynch believes this is particularly so because economic activity in these regions is less commodity intensive. Raw material demand growth is expected to be below the peak levels seen in the past decade. Those picking stocks will be rewarded where they can make tactical trades around re-stocking cycles, such as in iron ore, or by seeking equities that are leveraged to raw materials with tightening supply, such as nickel.

The broker thinks the iron ore price will remain buoyant in the first quarter of 2014, as China increases re-stocking and steel demand stays strong. New supply will put some pressure on prices in the second half. The broker prefers Fortescue Metals ((FMG)) and Rio Tinto ((RIO)) over BHP Billiton ((BHP)), given their exposure to iron ore but could shift that preference to BHP if iron ore prices fall. In the case of nickel, the fundamentals are pretty poor at present but the analysts believe re-balancing will occur in 2014. Producers are showing some discipline and creating a balanced market in 2014 for the first time four years. The broker acknowledges this is not the consensus view, where a continuation of the surplus is expected. Merrills prefers Western Areas ((WSA)), which is positioned to benefit from stronger nickel prices.

Merrills notes copper is turning out to be the biggest surprise in 2013, as widely anticipated surpluses did not materialise. Rising mine supply may push up refined output but this is not expected to be enough to cause a massive overhang. In this space PanAust ((PNA)) is preferred. In terms of gold, the upside is limited and the analysts see a risk for prices to fall below US$1,100/oz next year. There are some encouraging signs for physical demand in emerging markets which is offsetting the slower investment demand in the western world. Preference? Alacer Gold ((AQG)).

Citi has made some revisions to industrial commodity forecasts for 2014-2017. The broker thinks a trading range is likely for metals and the mining sector for the next 1-2 years. Most commodity markets are in oversupply and with only modest demand growth this will take time to abate. Asset sales could provide upside but the broker notes a disconnect between seller and buyer aspirations. The large diversified stocks have downside support based on the dividend yield while base metals and gold stocks, in the broker's view, have limited downside protection. Demand is expected to be muted for at least another year and seasonal factors are the potential catalysts for prices. Copper and nickel forecasts have been upgraded by 1.5% and 3.8% in 2014 respectively. Silver is Citi's biggest upgrade in the precious metals complex, with upward revisions of 17% and 21% for prices in 2016 and 2017 respectively. Iron ore is the only bulk commodity where the price forecast has been raised, by 4.3% for 2014.

Crude steel output globally was up 6.6% year on year in October. Ex China production was flat on the month. Demand indicators are turning higher and, with inventory in many regions at the lowest level in two years, Macquarie thinks the prospects for global steel are promising as 2014 nears. Most of the strength has been seen in the US, with hot rolled coil prices rising US$110/t since the end of May. European prices have also pick up, although are yet to reach the highs seen at the start of the year.

China has been one of the weakest regions for prices but, as steel output contracted 3.6% in October, some balance should return and underpin prices, in the analysts' view. Macquarie believes a case can be made for the next upward move in global prices being more sustained than in previous cycles. One reason is that demand is showing signs of a more convincing recovery than was seen at any point since 2011. The other aspect is inventory. The associated re-stocking that should come with improving real demand should be strong enough to allow both price rises and increases in utilisation heading into the peak season in the second quarter.

Thermal coal market participants are looking at the potential for power plant re-stocking. Macquarie has noted that China's stocks are at comfortable levels and a further build-up is not seen necessary at this stage. Japan looks set to re-stock on the back of increased dependence on thermal coal power. Inventories are less than one month's worth but Macquarie explains this by the fact that the majority of coal supplied on contract from Australia and there are fewer concerns over availability and pricing. Nevertheless, thermal dependency is looking stronger as there are no operating nuclear reactors on the network and unlikely to be any re-starts until next year at the earliest. Macquarie expects coal capacity utilisation will top 90% in Japan as the northern winter advances.

Elsewhere, Indian stocks are high but the fundamentals are improving. Macquarie finds there's no clear stocking cycle in India. Large spreads between international and domestic prices, weak generator margins and weak growth in domestic production all have a greater effect on inventory than seasonal trends. That said, demand conditions are seen improving as hydro output falls seasonally and the rupee regains some stability. In Europe, Macquarie sees no reason why stocks won't fall going into winter. There's some tightness in the Atlantic basin and thermal coal port stocks are at their lowest level in around two years. Weather could be a key factor to any market strength, as a cold snap in Europe could act to tighten the market.

The outlook for fertilisers is subdued. Investor sentiment for agriculture appears to have waned for the short term, in Citi's view. The recent fertiliser outlook conference revealed lower corn prices after a record US harvest, a price war in potash, which seems to have spilled into phosphates, and lacklustre demand trends in key consuming countries. Citi suspects US acreage under corn will fall next year and higher exports are needed for corn demand to increase as ethanol is no longer seen being a demand driver for corn. Soybean acreage is likely to increase next year but, similar to corn, Chinese demand will drive the planting in both US and Latin America in the longer term.

Phosphate demand is expected to grow modestly next year after significant de-stocking in India but Citi is cautious, given the uncertainty regarding subsidies and a weaker rupee. Clarity is needed on the Chinese export tax policy for 2014 as well. Potash is weak. Citi thinks the market is in for some lower prices n the aftermath of the wrangling in Belarus and Russia over the transactions involving Onexim and Uralkali. Urea markets have been mixed after some strength in the past month which produced a price increase to US$325/mt from US$275/mt in early October. Urea markets remain tight in Asia as stockpiles in China decline. Conditions in the Americas are weak, with soft US seasonal demand and high inventories in Brazil.
 

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