Commodities | Apr 08 2015
-Near term downside risk to iron ore still
-Glencore’s coal output to fall in 2015
-Chile to remain top copper producer
-Non OECD pick up in oil demand
-Platinum at discount to gold
-Palladium at attractive buy point
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By Eva Brocklehurst
Iron Ore
A surge in cheap iron ore has changed industry fundamentals, in the view of analysts at Westpac. The market’s attention has quickly moved to costs, as the industry matures from an investment-based focus. The supply glut that has emerged is largely stemming from huge capacity expansion in Australia, but is also aggravated by lower-than-expected steel demand. The seasonal rise in iron ore inventories has been modest, the analysts observe, which signals some supply response to the glut. Chinese ore prices are also more robust and stable, suggesting supply may be more constrained.
Nevertheless, spot iron ore prices are less than US$50/t and the forward prices are now below US$50/t. So, the analysts estimate that while the outlook for 2016 may be more constructive, the evidence is not sufficient to alleviate the near-term downside risks. Westpac analysts have lowered 2015 average forecasts to US$55/t, with a spot low of US$47/t, before a recovery to US$60/t in 2016 is expected (in year average terms).
HSBC notes the Australian government continues to slash its iron ore price forecasts, now at US$60/t over 2015, citing rising supply and lower demand growth from China. As evidence of how quickly the scenario is changing the analysts observe that just three months ago, the government reduced its forecast to US$63/t from US$94/t. The government has also increased its 2015 export volume forecast to 763mt from 747mt and expects this will rise to 822mt in 2016.
Coal
HSBC analysts note that China plans to reduce coal production on the basis of its environmental protection initiatives and reduce coal consumption by 160mt in the next two years. Shanxi, the country’s biggest coal producing province, has unveiled a 5-year strategic plan, placing a ceiling of 18mt production by 2020, with around 600mt marked for export. Major producer Shenhua has set a goal to cut coal production by 10.8% in 2015, with China Coal and Datong Coal expected to announce their plans shortly. The analysts note global coal producer Glencore expects its 2015 output to fall by around 6.0%, after cuts in Australia and South Africa, although capacity could be quickly brought back if prices improve.
Copper
HSBC analysts notes China’s copper demand in 2015 is likely to increase by 4.2% and the market estimates a global copper surplus of 480,000t this year. Chile will still be the top global producer over the years to 2023, as 29 of the 115 projects planned to come on line between 2014 and 2023 will be developed in Chile. Chile will then represent 31% of global copper production.
Oil
As the conflict in Yemen escalates investors are becoming concerned about oil supply disruptions but the threat remains remote at this stage, in the view of National Australia Bank analysts. OPEC is expecting a strong pick up in global oil demand this year, largely accounted for by non-OECD countries such as China and India. The analysts note most OECD countries, with the exception of the US, are expected to show declines in demand.
NAB analysts have retained oil price forecasts for 2015 and 2016 and expect oil prices to fluctuate around current levels for the coming two quarters before recovering towards the end of the year. NAB forecasts are centred at US$49/bbl for West Texas Intermediate in the June quarter and US$54/bbl for Brent with US$60/bbl and US$63/bbl respectively for the December quarter.
Platinum Group
Deutsche Bank expects the platinum market to remain well supplied despite strong demand. The recovery in South African production, post the strike, means the market is now looking more balanced. The broker had hoped the strike would provide producers with the opportunity to rationalise high-cost, high-capex production but several realities suggest this opportunity was missed. Now, the South African supply base is expected to decay over time, either from capital starvation or by consolidation and subsequent rationalisation. Deutsche Bank has cut price forecasts for platinum by 12-13% over the next three years and expects, with strong production from South African producers and continued rand weakness, platinum will trade at a discount to gold for the remainder of the year.
In the case of palladium, the broker believes the recent pull back presents an attractive entry point for the metal. Weakness, explained by weak producer and consumer currencies and the weather effect on vehicle demand in the US, is not considered likely to continue over the medium term. Deutsche Bank does not believe currency weakness is really justified as a factor in palladium prices, given production levels for a byproduct (of platinum or nickel) are relatively insensitive to producer currency weakness. Europe is not a major demand region and the weakness in the euro affects platinum more so than palladium.
The US is the largest consumer of palladium, accounting for 25% of global demand. Recent vehicle sales have been seasonally weak because of extreme weather but Deutsche Bank points out that sales levels are still up 6.0% year on year. A recovery is expected in March with improvement over the course of the year. The broker expects, given better fundamentals, that palladium will continue to re-rate versus platinum over the medium term. That said, only modest improvements in demand are expected, with future growth in the US expected to come from a change in sales mix, given the fall in fuel prices and tightening legislation.
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