RERUN: Material Matters: LNG, Ferrochrome, Iron Ore, Steel, Tin, Nickel And Cobalt

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

– Official reponse from Roy Hill
– Ill-timed expiries for LNG
-Ferrochrome needs constraints
-Supply-side cuts help iron ore 
-Steel slump blamed on sentiment
-Minor tin deficit anticipated
-Stockpiles building in nickel
-Strong upside to cobalt likely

[Note from the editor: the story below was originally published on 17th May 2016. We are republishing the story unchanged to include an official response received from Roy Hill after its original publication. The response from Hoy Hill reads: "We can confirm that Roy Hill is ramping up production as planned and is expected to achieve a full capacity run rate equivalent to 55 Mtpa by the end of 2016 as previously communicated to the market." This statement was made in response to UBS's assertion that production at Roy Hill is not ramping up fast as expected, see further inside the story below.]

By Eva Brocklehurst

LNG

With substantial volumes of LNG offtake in the Pacific Basin set to expire by 2020, Deutsche Bank expects LNG producers will attempt to roll forward expiring volumes into new deals. Still, this is ill-timed, in the broker's view, as the LNG markets in the Pacific Basin are over-supplied for the rest of the decade and excess LNG is heading to Europe.

From the broker's analysis of LNG contracting profiles for key LNG buyers with offtake expiries out to 2020, the conclusion is that the buyers will have little appetite to roll forward expiring volumes in the absence of a positive demand shock.

Deutsche Bank expects LNG projects with expiring offtake to 2020 will probably need to either sell uncontracted volumes into spot LNG markets, or alternatively, offer short-term offtake to Asian buyers at spot pricing.

In the broker's coverage, Woodside Petroleum ((WPL)) has the most exposure to LNG volumes, with a spot LNG price of US$6/mmbtu to 2020 every US$1/mmbtu move in the spot price is calculated to impact 2020 earnings by 5.0%.

Ferrochrome

The global market in ferrochrome has picked up recently and Macquarie observes that while a recovery in the South African rand has played a part, this also suggests stainless steel production is recovering faster than expected.

Taking a longer view, the broker observes ferrochrome is lacking in raw material constraints. Ore stocks are set to remain at comfortable levels over the next five years. To change this status, Macquarie suspects a 12-week inventory is needed as a minimum.

By 2020, the broker forecasts 3.1% compound growth in stainless steel output. To reach a 12-week inventory 3.7% growth is required, while any growth above 4.0% is expected to rapidly accelerate constraints on the market.

Iron Ore

Improving fundamentals, rather than speculation, have been real driver behind rising iron ore prices, in the opinion of analysts at ANZ. Despite rising speculation in Chinese futures contracts they do not expect prices to push back below US$50/t on a sustainable basis.

Outside of some volatility in futures markets, demand for physical cargoes has been consistently strong and this is backed by the data, the analysts observe, as steel production has increased while construction activity in China has picked up.

Supply side issues have also helped. The analysts observe Roy Hill is not ramping up as fast as expected and there has been a decrease in both BHP Billiton's ((BHP)) and Rio Tinto's ((RIO)) production guidance over the next 18 months.

Low prices have also affected Chinese domestic production. The analysts note run-of-mine output is down around 10% for the first three months of the year. Moreover, because of falling grades, they calculate the iron units produced in China over the same period are down over 20%. If this is maintained the market should return to balance by 2018, the analysts suggest.

Steel

The physical steel market in China has frozen, Credit Suisse observes. The broker was expecting prices to ease back, but not slump. The rapid change in just a week is reflecting sentiment, not fundamentals, the broker maintains.

Construction continues and infrastructure projects in China are still starting up, while inventories of steel traders at at historical lows. The broker doubts April steel production overwhelmed demand but suspects the rapid fall was a buyers strike as sentiment turned sour. Re-stocking should follow and prices lift again, although maybe not as high as previously.

Credit Suisse doubts futures trading curbs were a reason for the halt in the steel trade but suspects it follows weak trade data in China and a suggestion that the country's economic growth is L-shaped.

Tin

The London Metal Exchange tin price has performed better than Macquarie expected, up 19% from its low. At this level – US$16,600-17,000/t – all global production is considered to be cash positive.

The reasons for the rise, the broker maintains, is low export volumes from Indonesia, as that country clamps down on illegal mining, and reductions in output from China, which accounts for 80% of domestic refined tin output and 40% of the world's production.

Meanwhile, Macquarie observes, demand has been better than expected as stronger data is reported in electronics markets, and tinplate production is boosted by the broader rally in Chinese steel production. The broker anticipates a minor deficit running in 2016.

Nickel

As positions on the LME turn more positive, Deutsche Bank notes nickel has avoided the speculative flurry that has driven iron ore and steel. Currently spot prices for the metal mean that close to 60% of the industry is loss making, the broker calculates.

To counter the impact of the closure of Queensland Nickel, the government in New Caledonia has permitted two more companies to export nickel ore to China. Deutsche Bank also observes a number of miners continue to build stockpiles of either low-mid grade saprolite or, in one case at least, high grade saprolite, with the aim of selling at higher prices.

Positive signs exist but the broker believes these should be met with caution. LME inventories have been falling and channel checks suggest some metal is being moved back into off-exchange stocks in China. Also Chinese stainless steel prices have started to recover from early lows. The broker forecasts a deficit in 2016 but this is contingent on further price-related supply cuts.

Cobalt

Macquarie notes interest in the cobalt market has picked up again in the past couple of weeks with the announcement of the China Molybdenum offer for a stake in the Tenke Fungurume operation in the Democratic Republic of Congo (DRC).

The main revenue stream is copper but the asset represents a much bigger share of the global cobalt supply at 17% of mined output, on the broker's estimates.

This cobalt is important to China, as 93% of units sold there originate in the DRC, and this is the highest proportion of a commodity supply from a single country that Macquarie can find. This is also a commodity where China has very little resources.

Nevertheless, the cobalt market has disappointed the broker over the past few months as, unlike its rechargeable battery counterpart, lithium, cobalt prices have fallen and stabilised at their lows. The challenge is, as Macquarie envisages, an overhang in supply after a surge in exports to China last year.

The broker believes the demand growth profile remains one of the best among industrial metals and an ever-growing refined market deficit to materialise over coming years. A 40% upside in the cobalt price to US$15/lb is expected by 2020.
 

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