Commodities | May 22 2017
A glance through the latest expert views and predictions about commodities. Coal; high-grade iron ore & steel; platinum & palladium; alumina & aluminium.
-Thermal coal prices to fall as Chinese net imports continue to ease
-Near-term macro factors turning positive for high-grade iron ore
-Platinum and palladium prices converging
-Has the alumina price found a floor?
By Eva Brocklehurst
Coal
Deutsche Bank envisages slowing demand for thermal coal amid increasing supply, after consultation with industry participants in China. This will likely lead to thermal coal prices falling to the lower end of the Chinese government's targeted price band of RMB530-570/t. The broker observes coal stocks already appear to be pricing in the fall in the price.
Coal is forecast to fall to 55% of China's total energy mix by 2020, from 60% currently. That said, new mines are still required over the medium term to meet demand and most production targets are unchanged, Deutsche Bank observes, because of under investment.
The government is closing less efficient mines. The “no new mine for three years policy” in China was relaxed late in 2016 but the government is still encouraging a “new for old policy”. Chinese coal companies expect industry production growth of 2% over the next five years, while Deutsche Bank expects Chinese net thermal coal imports to continue to ease.
Credit Suisse expects settlement for Japan's coking (metalurgical) coal contracts above US$200/t rather than the current spot indicators that have drifted to US$160/t. Following the outage from Cyclone Debbie there has been no liquidity in the market, as producers were intent on filling contracts and had no volumes available for spot sales.
Iron Ore/Steel
Deutsche Bank expects supply-side reform should continue to benefit high-grade iron ore, with a further 50mt of blast furnace and 100mt of induction furnace capacity closures underway in China this year.
The remaining blast furnaces are using higher grade 62% iron and more scrap to meet demand. Iron ore supply appears to be exceeding underlying demand for the near term, amid increasing seaborne supply and high port inventories.
High coking coal and steel prices, and furnace closures, all point positively for high-grade iron ore and the broker observes the preference is leading to steeper discounts for 58% material, particularly with the rise in low-grade Indian supply.
Market participants have observed the discounts offered by some of the low-grade iron ore producers have widened to 30-35% relative to higher grades. Port stocks are also at record levels, with a significant proportion estimated to be low-grade material.
Deutsche Bank expects the 62% iron ore prices to decline to US$50/t by the December quarter and average US$54/t in 2018.
Credit Suisse also believes the macro factors are turning positive for iron ore and retains a forecast for US$70/t for the September quarter. The broker expects de-stocking in the December quarter will soften the seaborne iron ore prices to US$55/t.
The broker observes the Chinese government has now reversed course, having tightened the credit arrangements last month for off balance-sheet structures used to fund infrastructure. This undermined confidence in demand and prices slumped.
The broker now expects the government will seek a strong and stable economy ahead of the party's congress later in the year. Upward risk to steel and iron ore are envisaged, although weak cash margins for steel producers may restrain upward momentum. Credit Suisse acknowledges little visibility on 2018.
After the party congress the government may cease stimulus of infrastructure and resume attempts to reform the economy. The broker takes a view that the infrastructure projects started in late 2016 and 2017 will still be under way and retains a buoyant outlook for iron ore prices, which will gradually roll back through the year.
Platinum
A gathering of the platinum industry in London took place amid a backdrop of a strong palladium price and weak platinum price, which Macquarie observes marks the smallest difference between the two since 2002.
Whether palladium could overtake platinum for the first time since 2001 was a major topic of discussion, although the common view is that the two are now so close that speculative flows and not fundamentals will decide.
Longer term, the broker expects that platinum will continue to be more highly valued, not the least because it has a sizeable jewellery trade, although this is currently not so buoyant. The 2016 slump in platinum jewellery demand is widely attributed to falling sales in China, exacerbated by changes in fashion which reduced interest in jewellery and produced a preference for lightweight pieces.
Engine technology remains the most important determinant of both platinum and palladium. A large problem, Macquarie observes, is the threat to diesel vehicles in Europe, both in terms of how quickly market share declines and how large a share of platinum demand is entailed.
Whether catalytic manufacturers start to move back towards platinum in gasoline cars is open to debate, Macquarie believes. The broker also notes the industry underestimated supply in 2016, expecting mine output to fall more than did. For 2017 the market is expected to become less tight, although participants at the conference disagreed on the extent.
Supply is expected to be lower, with a lack of investment in the South African sector increasingly taking a toll. As there is uncertainty about many of the elements in the platinum outlook, Macquarie suggests investors focus on high-frequency data such as monthly mining output, car sales, foreign exchange rates and gold as indicators.
Alumina/Aluminium
Credit Suisse observes the alumina price appears set for a recovery, having begun to climb back from RMB2230/t earlier this month. The Chinese price has now reached parity with the Australian price and alumina has now become more attractive to Chinese traders, the broker observes.
Credit Suisse doubts the price will rebound straight away and this may be just a relief rally from an oversupplied situation. For the price to strengthen considerably the broker believes re-stocking impetus will be needed. This is expected to occur as the Chinese winter approaches.
Deutsche Bank suggests alumina prices may fall further before recovering by the end of the year. The outlook in China for alumina is less optimistic than for aluminium because of re-starts and additional supply. Still, the price is expected to recover to RMB2800/t by the end of the year.
Meanwhile, industry particpant Chalco is very optimistic about the aluminium price because of the expected closure of non-compliant smelters and environmental crackdowns. Deutsche Bank notes China's installed aluminium capacity is around 43.8mt but only 37.8mt is operating.
Industry participants believe non-compliant capacity will need to gradually shut down and envisage deficits growing into 2019. Hence, optimism about the aluminium price, which Chalco believes will average RMB15,000/t in 2018 and 2019.
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