Material Matters: Coal, Alumina And Copper

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A glance through the latest expert views and predictions about commodities. Coking coal; alumina; copper; and Australis Oil and Gas.

-Market increasingly concerned about rapid rise in steel stockpiles
-Protracted outage at Alunorte may keep alumina prices at heightened levels
-Opposing factors weighing on/supporting the copper price
 

By Eva Brocklehurst

Coking Coal

Coking coal prices are falling amid concerns over demand downstream as steel rebar stocks rise to the highest level since 2013. The rise in stockpiles reflects stronger steel production, as China's crude steel output rose by 5.9% in January and February despite restrictions in place on industrial output during the heating season.

This, in turn, is a reflection of just how strong the incentive is for steel mills to boost production, given steel mill margins, Commonwealth Bank analysts suggest. The rapid rise in steel stockpiles has the market worried. Construction accounts for around 50% of China's steel demand.

The analysts envisage premium coking coal prices should gradually trade down to US$170/t by the December quarter and the price is supported at US$160/t. The spot price is high, so Chinese steel mills will look for cheaper domestic coal and this will help support new production.

Local production is already receiving support from policy as China aims to increase coal output by 7.3% this year.

Alumina

The outage at the Alunorte refinery in Brazil appears more protracted than previously thought and UBS suggests the sudden lift in alumina prices likely reflects a market participant unexpectedly short alumina and deciding to cover at a substantially higher price.

Alunorte is the world's largest alumina refinery and produces 6.6 mtpa or 5% of global supply. Heavy rain led to elevated water in the tailings and production was cut by -50%. According to recent news reports, Brazilian authorities have now discovered additional unregulated spills into a local river from the refinery.

Norsk Hydro has also expanded the scope of an independent review into the facility which suggests to UBS the nature of the outage is shifting and may be more prolonged.

A protracted outage would have a sizeable impact on the alumina market and UBS suspects this could mean prices remain above US$400/t for a few months. Those favourably exposed to higher prices from a prolonged outage are Alumina Ltd ((AWC)) and South32 ((S32)).

Copper

UBS believes the copper price is about right. While China's demand appears to be decelerating the rest of the world is more robust. Tender activity remains weak and grid spending for the period period of August 2017 to February 2018 is down -16%. Property sales, while positive, have also been decelerating. Visible inventory is also lifting. UBS suggests, perhaps due to these factors, speculators have been selling copper and this has weighed on prices recently.

The bullish factors to consider are the risks of elevated supply disruptions, as 3mtpa of mines are in employment negotiations in 2018. Scrap supply is also tightening from further importation restrictions imposed by China's policy makers.

UBS suggests this could disrupt around 400,000 tpa of contained metal. Smelters are also seen dropping fees to try and source more concentrate because of either the risk from mine disruption globally or scrap disruption in China.

Macquarie observes, despite the fact that overall demand from end users has not yet picked up post the Chinese New Year, sentiment remains positive. There is some evidence of growth in orders from a few downstream industries.

Fabricators expect higher output rates and sales for the next month while, at the same time, smelters have lifted capacity and expect production to rise in April. The broker has learnt that Chinese smelters expect to undergo less maintenance this year versus last year, and so the utilisation rate should stay high in coming months.

Copper traders also intend to restock copper, which reflects a positive outlook on the market. Macquarie's survey does not yet report tightened liquidity for traders, although this is now regarded as a looming risk to their willingness to buy.

Australis Oil And Gas

Australis Oil and Gas ((ATS)) is undertaking a test production program in the Tuscaloosa marine shale oil play in the US. Acquisition of the Encana assets in 2017 has provided a very dominant position in this area.

Bell Potter notes, supported by stronger oil prices, the company's modest production is now generating useful cash flow that covers overheads. The broker believes the company can generate significantly enhanced returns and showcase a viable oil business in the Tuscaloosa play based on new production.

The company plans an initial phase of 4-10 new wells in the September quarter to test enhanced completion techniques and demonstrate the viability of significantly boosting oil production. Bell Potter has a Buy rating, removing the Speculative qualifier, and a $0.75 target, raised from $0.39.

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