Material Matters: Gold, Iron Ore, Coal & Gas

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A glance through the latest expert views and predictions about commodities. Gold sector view; bearish call on iron ore; coal prices; Oz gas supply.

-ASX gold sector seen oversold despite safe-haven trade unwinding
-Rising supply overwhelms iron ore prices
-Coal supply stabilising but uncertainty lingers over contract pricing
-Gas supply shortages still possible when demand spikes
 

By Eva Brocklehurst

Gold

Global tensions escalated in early April, underpinning gold, but since then the US dollar gold price has fallen -5%, as the safe-haven trade was unwound amid increasing confidence that US rates were on the rise. Deutsche Bank observes the Australian dollar gold price is also down -2% and yet the ASX gold sector has fallen-16%. Deutsche Bank expects a 25 basis points hike in US official rates in June amid persisting moderate US economic growth.

The broker believes the US dollar gold price has adjusted accordingly but the ASX sector has been oversold. The broker picks Evolution Mining ((EVN)) and St Barbara ((SBM)) as its top Buy stocks, while believing Alacer Gold ((AQG)) and Dacian Gold ((DCN)) present deep value. A Sell rating is retained for Newcrest Mining ((NCM)) and Regis Resources ((RRL)).

Macquarie also notes macro factors are continuing to drive the gold and silver markets. Political risks have eased, which is unhelpful for gold, and the broker agrees a US Fed rate hike coming into view in June and real yields strengthening are the main culprits. Silver has also been affected by a sell-off in bulks and base metals on Chinese concerns.

The broker also retains Evolution Mining as its top pick along with OceanaGold ((OCG)) and junior producer St Barbara, as well as developers/explorers Dacian Gold and Gold Road ((GOR)).

Iron Ore

Macquarie points to good timing when reiterating a correct bearish call for iron ore, having argued that recent strength was merely a seasonal reaction to stronger steel demand. Rising supply has indeed overwhelmed the price, although Chinese port inventories appear to have stabilised. The broker observes high inventory at mills suggests more de-stocking is to follow. The broker adds the observation that the manufacturing recovery is also slowing down and Chinese mills are now becoming increasingly focused on maintaining profitability rather than driving productivity.

The reason why the iron ore price is falling, Shaw and Partners contends, is based on range of factors, including China's purchasing manager indices, Australian exports – a proxy for global supply – freight rates, port stocks and the de-stocking cycle. The broker observes Australia's build up in exports is well correlated to iron ore prices and exports are expected to go higher with Roy Hill included.

The broker expects the mean reversion trade to be completed by the end of the year, although some near-term respite is expected after the recent slump. Shaw and Partners expects a quarterly average price in the US$50/t range by the December quarter.

Coal

Coal supply is recovering and prices are falling, Morgan Stanley observes. Coal supply rates globally are normalising and, as the broker notes, total demand growth across all markets has never been more than just stable or subdued in recent years. Hence, all key product prices are once again under pressure. Thermal coal spot prices are now down -23% for the year to date and metallurgical coal is down -14-18%.

Uncertainty about industry reforms in China this year and the turmoil created by Cyclone Debbie in Queensland have delayed the process of setting thermal coal price contracts. Industry reports suggest some deals are being done in the mid US$80 range for thermal coal but none are benchmark. No reports are surfacing as yet regarding price contracts for metallurgical coal.

Spot prices are the primary guides for negotiations and Morgan Stanley observes these are falling. While miners will push for a quick deal, the broker suspects utilities and mills would rather wait a little longer. The broker sticks with its forecasts, despite the recent supply-side shocks.

June year-end estimates of US$85/t for thermal coal are 12% above spot prices, while for metallurgical coal in the June quarter the broker forecasts a range from hard coking coal at US$180/t to semi-soft coking coal at US$110/t. Morgan Stanley estimates that its spot price forecasts now carry between 10-50% upside risk.

Gas

The Australian government's decision to force exporters to redirect gas to the domestic market at times of need will have a minimal impact, ANZ analysts believe. Under most scenarios, the volumes will be modest and only meet short-term spikes in demand. As well, because of high transport costs, buyers of gas in Victoria and NSW will still be forced to pay around $2/mmbtu more than the LNG net-back price. The analysts believe the only viable option is to encourage new supply into the market, but acknowledge production costs remain high and there are risks involved with the development of some of the reserves.

The domestic market is reliant on some of the highest cost reserves in the country. Therefore, a combination of a tight market and relatively high production costs should mean upward pressure on gas prices on the east coast. Moreover, gas appears the only option to fill the gap in periods of peak electricity demand, as coal-fired power's share of total generation will continue to fall. Moreover, coal-fired power generation is slower to react to spikes in demand than gas power generation.

The analysts observe LNG projects in Queensland could increase production or reduce exports based on various price signals. This would be likely to occur in the Australian winter when Asian demand usually decreases. However, gas shortages are still a distinct possibility when demand spikes.
 

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