Material Matters: Chinese Data, Iron Ore, Oil, Coking Coal And Nickel

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-Questions over Chinese domestic demand
-Additional iron ore supply expected
-Selling on the horizon in oil?
-Did coking coal simply lag iron ore?
-Drop in nickel output expected
 

By Eva Brocklehurst

Chinese Data

Deutsche Bank observes some large numbers in the latest Chinese trade data. Metallurgical (coking) coal imports rebounded over 70% and refined nickel over 600%, year on year. Aluminium and steel exports were up 20% and 30% respectively.

The broker observes improving industrial activity in China but expects the market to remain sceptical on the extent at which domestic demand is recovering in the absence of production data.

Aluminium semis exports have rebounded on increased domestic output with re-starts of idled capacity as a result of a rally in domestic aluminium prices.

Refined copper imports are at an all time high. Investors may be sceptical that copper is simply a case of re-stocking without underlying demand but Deutsche Bank suspects copper demand is simply lagging that of steel.

Deutsche Bank also suspects that liquidity-driven speculation has fueled prices well beyond fair value, particularly in iron ore.

Iron Ore

Further cost reductions have been achieved in the March quarter by iron ore producers as oil prices were, on average, lower. UBS observes, in some instances, producers have also decided to shut high-cost mines.

With the iron ore price rising back above US$70/dmt CFR from re-stocking, reduced supply and improved steel spreads, UBS expects additional supply will come on line as major producers ramp up to capacity.

The broker calculates that the break-even price at which a company would need to re-evaluate operations is now US$27-63/t CFR across the iron ore producers. BHP Billiton ((BHP)) and Rio Tinto ((RIO)) have been beneficiaries of lower operating and freight costs and higher lump premium, offset by the strength in the AUD. Fortescue Metals ((FMG)) has dropped its break even US$8/t to US$30/dmt.

The latest speculative spike in iron ore in China has stunned markets, Morgan Stanley observes, driving iron ore to a year-to-date peak of US$70.50/t. The broker observes a credit surge in China with new loans running at twice the 5-year monthly average.

Authorities at the Chinese exchanges have moved quickly to impose trade controls and this move to cap the trade suggests the enhanced credit liquidity may soon be curtailed. Morgan Stanley expects a short-term pull back in activity and commodity prices as a result.

Oil

While the rally may persist the risks to oil are growing, Morgan Stanley contends. The price has risen on the back of macro funds, index/ETF flows and investors fearful of missing out, but the broker notes the Middle East is bearish.

While non-fundamental rallies can last for several months, and there are few near-term catalysts, the broker believes a macro unwinding of positions could cause severe selling, given the nature of the players in this rally.

The broker finds, similar to 2015, few investors are considering the potential supply risk from OPEC. As a base case Morgan Stanley envisages OPEC production rising nearly 1mmb/d by June, with much of the gain being a seasonal ramp-up from Saudi Arabia and continuation of Iran's ramp-up as well as a resolution of outages.

Supply could rise, with a little more effort, and offset global crude demand expectations and US declines in 2016. The broker is concerned around emerging market demand and GDP given the commodity price outlook. Moreover, US supply might respond if oil moves higher too quickly.

Metallurgical Coal

The coking coal price has rallied around 20% over the past few weeks and Macquarie observes Chinese sentiment is currently bullish. Steel margins are positive and mills are wanting to re-stock raw material and increase output.

Coking coal had lagged iron ore and manganese in terms of the steel-inspired rally which Macquarie put down to fewer large-scale supply withdrawals. The market has also received a boost from lower output in Shanxi province and the Chapter 11 bankruptcy filing by Peabody, which has increased supply concerns for Asian buyers.

Macquarie expects the price of coking coal will be supported in the near term but fall back in the second half, given the broker's more conservative structural view on China.

Nickel

Supply reductions are finally beginning to have an effect on nickel, Macquarie observes. The pressure on this commodity is great, with an estimated 60-70% of mines losing money. The broker notes single asset miners were particularly defiant in the face of the falling price.

This year there has been a series of closures as hope is slowly been abandoned, Macquarie notes, and now prices have bounced, albeit along a low level at around $8,500/t.

While determining production cuts in nickel is difficult because of different ore types and a number of intermediate production stages, Macquarie estimates that cuts and losses in planned output for 2016 total around 129,000 tonnes. Based on 2015 production this represents a drop in output of around 3.2%. Macquarie estimates global production will fall by 3.8% this year.
 

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