Material Matters: Oil, Alumina & Gold Miners

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A glance through the latest expert views and predictions about commodities. Oil; aluminium; alumina; and Australian gold miners.

-Developments in Iran, Venezuela underpin outlook for higher oil prices
-Even assuming no loss of Russian output, aluminium market likely to be in deficit
-Chinese alumina exports alleviate concerns about tightness
-Technology at the forefront of gold mining investment
 

By Eva Brocklehurst

Oil

Oil prices rose to multi-year highs recently as supply worries were heightened after the US prohibited the purchase of debt owed to the Venezuelan government, following the re-election of President Madura.

Venezuelan production of oil has already collapsed in the face of an economic crisis but, with US penalties, Commonwealth Bank analysts suggest supply is likely to head even lower. Meanwhile, the International Energy Agency believes major oil producers are willing to address any shortages which arise from falling output in Iran or Venezuela.

As the WTI oil price lifts above US$70/bbl, all shale producers are becoming profitable. This development signals to the analysts that the Permian Basin no longer needs to be the focus of drilling activity and that region's limited pipeline capacity is now less of a constraint on overall US production growth.

US oil production outside of the Permian Basin is now a tangible downside risk to oil prices at current levels, the analysts suggest.

Over compliance with production reductions at OPEC is now envisaged the most tangible driver of current higher oil prices. The global surplus in oil markets has dwindled and the analysts are sceptical of Saudi Arabia's motives to further address oversupply and shortage risks.

There is speculation that Saudi Arabia is targeting an oil price of US$80/bbl to bolster valuations for its IPO of Aramco and the CBA analysts believe the regime would be content with prolonged shortages until the IPO of Aramco is complete.

The prospect of renewed US sanctions against Iran also threatens to sideline oil production. The sanctions were imposed in 2012 with support from France, Germany, UK, Russia and China and later lifted after Iran agreed to terms.

Renewed US sanctions are expected to have a smaller impact, as China and India are most likely to continue buying Iranian oil. China and India account for just over half of Iran's oil exports. All up, the CBA analysts expect global oil exports would lose -0.5-1% of global supply under US sanctions.

Citi agrees the fundamental arguments regarding lower OPEC capacity as a result of recent developments in Iran and Latin America hold more weight in terms of higher oil prices than views regarding an investment shortfall and potential supply gaps.

Nevertheless, recent changes in market positioning suggest the rally in deferred crude prices has more to do with flows. Whatever the fundamental arguments, the broker suspects flow dynamics affected recent moves in the back end of the curve.

Steeper backwardation, all else being equal, makes it more attractive for consumers to hedge and less so for producers and this has occurred recently. However, a reduction in investor long positions appears at odds with the increasingly bullish outlook.

Equity markets are also not indicating a material change in long-term oil views. Equities and sub- indices, Citi observes, have caught up with the rally in oil prices but feedback signals managers are still a long way from being overweight in energy. The broker also points out the Brent futures curve is a "terrible" predictor of where oil prices actually end up.

Aluminium

Pending US sanctions on the Russian giant Rusal continue to hang over the aluminium market. ANZ analysts do not expect aluminium prices to fall back to earlier levels, despite the US Treasury easing requirements around potential sanctions. Rather, the fundamental backdrop indicates the risks for prices are on the upside.

But heat has has been taken out of the market, as Oleg Deripaska is being provided more time to relinquish control of UC Rusal and for third parties to wind down existing contracts.

Risks to supply remain high as the process of vetting any new owner could extend into next year and create an uncertain period, hindering trade. Even assuming no loss of Russian output, the market is likely to be in deficit this year. The analysts expect ongoing efforts by Chinese authorities to reduce overcapacity will be successful.

Alumina

A resolution to the US sanctions proposed against Russian-owned alumina supply is likely, in Credit Suisse's view, while Chinese alumina exports have also helped alleviate concerns about tightness.

Credit Suisse notes additional alumina is still needed to fill the 3mtpa supply gap caused by the curtailment at major producer Alunorte, and there has been no word on progress at the refinery so hopes are fading fast for a lifting of the 50% curtailment.

China is an obvious source of additional supply and has begun to export alumina, allowing the price to soften. Nevertheless, Chinese alumina prices are easing, now back to RMB2950/t, with still no tightness apparent in the Chinese market.

Credit Suisse calculates the alumina price may be able to fall as low as US$420/t and still keep the alumina market balanced.

Gold

Macquarie is watching out for data on Chinese gold imports and economic surveys while expecting the main driver for gold prices forthwith will be the US dollar. The US currency is enjoying the benefits of a widening gap in yields between the US and other major economies, which was enough to push gold below US$1300/oz last week.

The broker assesses three Australian underground gold miners that are keen to be at the forefront of technology. A recent Canadian conference on "All Electric Mine" innovation has highlighted the implementation of electric-powered underground equipment.

The broker flags Northern Star Resources ((NST)), which has trialled an underground 4G network at Kalgoorlie with the aim of utilising autonomous technologies in the future. The company plans to turn its operations there into a centre of excellence via investment of $50m over 10 years.

Resolute Mining ((RSG)) intends to lower Syama's operating costs by adopting various mining technologies which involve automation and electric machines.

St Barbara ((SBM)) is also undertaking a study to assess a mass extraction project at Gwalia. This will employer slurry hoisting system to lift ore from more than 1.5km below the surface and extend mine life.

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