Material Matters: Bulk Trends, Oz Miners, Alumina, Nickel, Zinc And Steel

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-No recovery anticipated for coal
-Too early to go back to miners?
-Disparity in Oz and China alumina
-China’s nickel demand to rise
-Zinc supply to fall sharply
-China’s steel decline continues
 

By Eva Brocklehurst

Bulk Trends

Trends in bulk commodity markets were mixed in May. National Australia Bank analysts note iron ore prices recovered from recent lows, metallurgical coal continued to ease and thermal coal was stable. Chinese domestic production of iron ore appears to be responding to weaker prices and iron ore stocks at the ports appear to be falling, suggesting supply may have slowed more rapidly than demand. Still, China remains the key market for iron ore imports and the analysts notes the rate of growth has slowed considerably.

The analysts note the metallurgical (coking) coal markets are affected by weakness in China’s seaborne demand and do not anticipate a major recovery in imports, reflecting ongoing weakness in the country’s steel sector. Further cuts to metallurgical coal production are likely to be necessary. In terms of thermal coal demand, the analysts expect soft conditions to persist, reflecting the excess capacity for supply.

Oz Miners

Credit Suisse notes four years of mining underperformance in which commodity prices have declined and asks whether it is time to jump back into the market. Australian miners have underperformed the market by 50% over the period and the broker’s commodity index is down 45%. This may feel like the floor but Credit Suisse doubts it. World money supply continues to shrink and the consensus earnings numbers for the large cap stocks still look to be 20% too high to the broker. Credit Suisse wants to witness a turn around in money supply before re-weighting back to the sector in a broad way.

An options-based valuation approach provides support for Rio Tinto ((RIO)), Fortescue Metals ((FMG)), Alumina Ltd ((AWC)), Independence Group ((IGO)) and New Hope Coal ((NHC)) but lower prices for iron ore and alumina temper the broker’s appetite for the first three. Independence Group is diluting valuation support with its proposed merger with Sirius Resources ((SIR)) while the broker puts New Hope Coal at the top of its preferred coal exposures with an upgrade to Outperform from Neutral. This replaces Whitehaven Coal ((WHC)), which the broker downgrades to Neutral from Outperform.

Alumina

The Australian alumina price is unsustainably high relative to the price in China, Credit Suisse observes. The price has been falling in June under pressure from the re-selling of Australian contracted cargoes into the Pacific market. The broker expects alumina will slide further in the next few weeks. The last time China’s ex-works price was US$400/t the Australian price was US$313/t. The broker expects the Australian price to reach that level in the next few weeks from the current US$332/t.

Nickel

Stainless steel production in China is strong and, importantly, the intensity of use of nickel has increased because of an increased share of stainless steel with high nickel content. Credit Suisse estimates virgin nickel demand in the March quarter is around 20,000 tonnes greater than supply so it appears China has been de-stocking. Looking ahead, China will need to import more nickel to meet demand and may increase nickel pig iron production. Nonetheless, higher imports will tighten the global nickel supply. On this basis, amid estimates nickel pig iron needs a nickel price of US$14,000/t to be sustainable, nickel prices are expected to climb.

The NAB analysts believe a depletion of higher quality stocks means an increased reliance by China on lower grade that will soon reach its limits. They also observe stockpiles of nickel ore are already falling at Chinese ports but when this high grade ore will be depleted is uncertain, although the analysts suspect it will be later this year.

Zinc

Zinc has rallied over the past 18 months, with the implications for a market deficit following the closures of the Century and Lisheen mines next quarter. Macquarie considers the closures premature but expects upside for the metal by the end of 2015. Given a serious constraint to upstream zinc output, Macquarie expects the price to rise, forcing more supply into the market and rationalising some of the demand. With this in mind, and noting zinc is a far more fragmented industry than is the case with commodities such as copper or iron ore, the broker takes a peek at the pecking order among zinc miners. The top 10 account for just 37% of global mined zinc output.

Glencore is expected to remain at the top of the heap and hold its place through to the end of the decade with expansion projects in Australia increasing its output. Vedanta is likely to retain its spot as number two even when its Irish Lisheen mine closes. Teck becomes number three, ahead of MMG, in terms of output while MMG will experience a substantial fall in output in 2016 after Century mine closes.

The NAB analysts expect a more balanced zinc market in 2015 but, with the closures and stabilisation of the Chinese downturn, a market deficit is a possibility in the medium term.

Steel

June results from Macquarie’s steel sector survey show a decline in market conditions over the past month. Sentiment is becoming more negative as orders decline and profitability weakens. Infrastructure orders are the only positive, in Macquarie’s observation. Production cuts look increasingly likely. Given iron ore prices have been rising and steel prices falling over the past weeks a decline in mill profitability seems inevitable, unless production cuts can occur fast enough to create tension in the market again.

After production and profitability the third clue to the outlook is inventory. The broker’s survey reveals inventory has stopped declining at the trader level. Should traders start to liquidate stocks on fears of price declines, mills may experience an even sharper decline in orders as the traders satisfy a larger share of demand. In turn this would lead to deeper production cuts. The solution is a recovery in demand, which may take some time. All up, the broker considers this does not augur too well for the raw materials outlook.
 

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