Material Matters: Aluminium, Nickel, Gold, Copper And Iron Ore

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-Aluminium lightens cars
-Nickel stocks shine brightly
-Picking gold dividends
-Copper support despite surplus
-Downside for Chinese construction
 

By Eva Brocklehurst

Using aluminium makes things lighter. This is a plus for car manufacturing as it improves fuel economy. Macquarie thinks the use of aluminium in Ford's F-150 pick-up truck, which makes it 15% lighter, paves the way for aluminium demand from this sector to rise. The impact on aluminium should not be overstated, in the broker's opinion, as the switch from steel is more likely to be seen in the US and Europe. In China, aluminium penetration is still low despite strong growth in vehicle production.

So what are the attractive metrics for the car market? Aluminium components can be 24% lighter than steel and allow fuel consumption to be reduced by two litres per 100 kilometres. Steel's predominance in chassis and body panels is likely to stay, considering its high strength to weight ratio and cost advantages. Aluminium is also more expensive on an in-use basis. The recent development of high strength steels, up to six times stronger than conventional steel, also present a challenge to aluminium gaining more ground in the vehicle sector. Automobile manufactures would have to change long-established mass production methods and face higher re-tooling costs so Macquarie expects the use of aluminium across heavy and luxury passenger vehicles may increase but there will be limited inroads for mass market cars.

Nickel prices are up around 30% this year, mostly because of supply risks associated with Indonesia's ban on exports of low grade nickel laterite ore, and the delays in commissioning large-scale laterite projects. Supply risks should persist in the face of recovery in US and European demand. Bell Potter has upgraded price estimates and assumes nickel prices will average US$9.75/lb in 2015, US$10.00/lb in 2016 and, longer term, US$9.50/lb. To date in 2014, prices have averaged US$7.46/lb. In the light of the robust nickel price the broker retains Western Areas ((WSA)) and Sirius Resources ((SIR)) as its preferred nickel exposures, for their strategic assets and potential to participate in corporate activity.

Western Areas is most leveraged to changes in pricing and Bell Potter has upgraded earnings by 88% for FY15 and 67% for FY16. Sirius has first production modelled for FY17 so there is no impact on near-term earnings. The long-term nickel price upgrade has increased the broker's net present valuation for Sirius by 10%. Earnings forecasts for nickel and gold producer Independence Group ((IGO)) have also been upgraded, by 4% for FY15 and 9% for FY16. Independence is the more diversified of the nickel stocks, with precious metals accounting for around half of future earnings and value.

Bell Potter has upgraded long-term gold price forecasts to US$1,150/oz, from US$1,100/oz, effective from 2018. This scenario favours stocks with relatively long-life assets, or projects currently being developed. Top picks are low-cost producers which have relatively high probability of paying dividends in the next 1-2 years. The top three are Troy Resources ((TRY)), Kingrose Mining ((KRM)) and Doray Minerals ((DRM)). Other gold stocks such as Papillon Resources ((PIR)), Phoenix Gold ((PXG)) and Regis Resources ((RRL)) are viewed as exposed to a high degree of uncertainty, with potential changes in their earnings outlook. Papillon is under a takeover bid from B2Gold, Norton Gold Fields has taken an option on Phoenix Gold's Castle Hill project and Regis Resources has moved up the cost curve because of unresolved grade issues.

ANZ analysts believe copper is oversold. Nevertheless, any rebound is likely to be mild and prices are unlikely to breach US$7,000/tonne before the end of the year. In 2015, prices are expected to reach US$7,500/t. Increasing supply is pushing the market into surplus. World copper concentrate production grew at 7.5% over 2013, the strongest growth rate in nine years. The market should develop a sizeable surplus and treatment and refining charges are expected to be higher over the next two years. China's heavy reliance on copper is expected to keep imports of both concentrate and refined metals relatively high, providing a support to prices.

Commonwealth Bank analysts are downgrading iron ore price forecasts by 10% to US$105/t for 2014 and by 8% to US$100/t in 2015. Prices have been weakened by both seasonal factors and a structural lift in supply. The mild wet season in the Pilbara, which supported supply, and the ramping up of Chinese domestic iron ore supplies after winter, should run their course over the next couple of months. The ebbing of these two stimulants should underpin a recovery in prices, but the structural lift in supply will be harder to mitigate.

The analysts note Fortescue Metals ((FMG)), BHP Billiton ((BHP)) and Rio Tinto ((RIO)) have all lifted run rates in the past three to six months, driving 25% year-on-year growth in iron ore exports out of Port Hedland. Higher run rates are expected to weigh on prices, but the better news is that the analysts do not expect another major jump in Australian export supply until the second half of 2015. Chinese domestic output is expected to shut down if current pricing endures, as at least there quarters of the Chines output is sub-economic.

Moreover, weak construction forward indicators suggest downside for Chinese steel demand from the second half of this year and into 2015, even though non-property steel demand is likely to remain strong. The analysts downgrade 2014 Chinese steel output growth to 2% from 3%. Recent strong supply growth and growing risks to Chinese steel demand imply a faster transition to long-run prices of US$90-100/t, in the CBA analysts' opinion, and the balance of risks remains tilted to the downside.
 

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