Material Matters: Rhodium, Iron Ore And Thermal Coal

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

-Rhodium stocks critical by 2016
-Iron ore hits seasonal weakness
-But should rebound by Xmas
-Pollutants drive Chinese coal policy
– Which Aust coal miners are affected?

 

By Eva Brocklehurst

Rhodium, a precious metal, has one of the strongest set of fundamentals in Deutsche Bank's analysis. The precious metals complex has diverged considerably over the past 18 months, with gold and silver trading lower and the other metals proving more resilient. Deutsche Bank estimates platinum, palladium and rhodium production in South Africa will be down 29%, 37% and 26% respectively over 2014, reflecting strike action. Moreover, a permanent reduction in South African capacity is considered probable. The analysts do not believe South African production of these three metals will return to prior levels and the deficits that exist in the market will become larger and more durable than previously was the case.

The fundamentals are strongest for palladium, but a more constructive outlook for rhodium is also appearing. China and US dominate palladium demand, for its use in pollution controls in vehicle engines. The combination of low car penetration and increasing emissions standards means China will become the largest single source of increased demand for PGMs – platinum group metals. Rhodium is the most effective of the group for treating nitrous oxide emissions, but is also benefiting from the gains in palladium prices and will increasingly appeal on a price comparison basis. Rhodium inventories are high at present but Deutsche Bank forecasts these to hit critically low levels by 2016. Moreover, the scale of fund holdings relative to market size and above-ground inventories is relatively low compared with the other platinum group metals, and Deutsche Bank envisages more room for inflows into rhodium exchange traded funds.

Where is the iron ore market pricing at present? The eye of the storm, in UBS' view. Iron ore spot prices have declined for most of 2014 and for the next two months the risk remains to the downside. China's crude steel production rates typically decline around 10% in September-November each year, as the summer peak in steel deployment passes. This is the dominant trade signal, and price corrections have usually occurred in this period. After that, ore trade lifts in November-December from restocking activity, driven by a need for ore ahead off the northern winter when bulk movements become difficult. This pushes prices back up by an average of 5% in November and 7% in December.

Hence UBS expects iron ore prices to recover to over US$100/t CFR in the final quarter of 2014. The analysts estimate that around 25% of iron ore supply is breaking even or loss making at US$86/t. Reductions to supply are noted but UBS expects high-cost supply may be slow to withdraw from the market. The broker remains wary of reading too much into a weak spot price at a time when the trade is at its seasonally weakest time.

China may be considering restrictions on thermal coal imports. Morgan Stanley observes there has been considerable discussion regarding proposed policies that could restrict imports of thermal coal. Media reports speculate that the China National Coal Association has sent a proposal to the government requesting that imports of thermal coal with an ash content over 15% and sulphur content over 0.6% be halted. At this stage, Morgan Stanley suspects the most likely policy decision would be an import tariff of some description. Although Australian product is at the top end of calorific value it also tends to be at the higher end for ash and sulphur. Indonesian exports are unlikely to be affected. The broker hastens to state that it is too early to draw conclusions, but does remain cautious regarding the thermal coal price, forecasting an average US$74/t Newcastle FOB for 2015.

Morgan Stanley has identified up to 39% of Australian exports that could be potentially affected by restrictions on thermal coal imports, although only a portion of this 39% actually ends up going to China. Reviewing those Australian miners under coverage which may be affected, Morgan Stanley notes Whitehaven Coal ((WHC)) does not breach ash and sulphur content thresholds that would be used to restrict imports. Also, less than 10% of its volumes are sold to China so the broker does not anticipate any earnings impact.

BHP Billiton's ((BHP)) Mt Arthur mine has sulphur content greater than the 0.6% threshold and some output from the Illawarra and South African assets is over 15% ash. The broker, in trying to determine what portion of the tonnage goes to China, and suspects some volume may be affected but the earnings impact at the group level is likely to be negligible. Rio Tinto's ((RIO)) Bengalla and HVO mines produce thermal coal with over 15% ash content, and the Kestrel mine has over 0.6% sulphur. Collectively, these mines contribute around 3% of earnings but, as is the case with BHP, as only a portion goes to China the impact is likely to be negligible, in Morgan Stanley's view.
 

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