Material Matters: Iron Ore, Critical Minerals, Copper, Gold & Silver

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A glance through the latest expert views and predictions about commodities: iron ore price forecast, junior critical minerals companies, slowing economies impacting copper & forecast for gold and silver.

-Morgans lifts short-term iron ore price forecasts 
-Preferred junior ASX exposures for critical minerals
-Slowing economies to weigh on copper demand?
-ANZ Bank’s forecasts for gold and silver

By Mark Woodruff

Morgans lifts short-term iron ore price forecasts 

Morgans suggests pessimistic sentiment around China growth has outweighed the effect of any actual pullback in the country’s steel production.

The market has been overly negative in focusing on Chinese government commentary around 2023 steel curbs to support emissions reduction, in the broker’s opinion.

Demand will remain broadly stable while forecast supply may be at risk, according to Morgans. If this view of industry fundamentals proves to be correct, market sentiment is expected to reverse.

There are already promising indications, with port stockpiles in China remaining at healthy levels, which suggests to the analysts increased iron ore imports are being consumed.

Moreover, there’s now evidence of early green shoots for the Chinese property market, after iron ore has proved more resilient than the broker expected during the worst of the property slump.

As a result of these views and indicators, Morgans meaningfully upgrades its short-term price forecasts for iron ore. When demand signals turn positive, the iron ore price is expected to firm given the apparent supply tightness already in the seaborne market.

A partial offset to these forecast price upgrades is provided by the broker’s higher opex assumptions across iron ore miners, due to higher short-and medium-term inflation assumptions.

By contrast, other brokerage houses are forecasting opex declines in the June half, which the analysts consider an unlikely outcome given both the ongoing inflationary backdrop and a recovery in royalty expenses on rising iron ore prices.

Following these forecast changes, Morgans increases its 12-month target prices for BHP Group ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)), Mineral Resources ((MIN)) and Genmin ((GEN)). [Please refer to the Broker Call Report (or Stock Analysis) on the FNArena website for target price changes].

The broker also upgrades its rating for BHP Group to Add from Hold, as the new target of $51.10, up from $46.70, significantly trails the last closing price of $47.27.

Preferred junior ASX exposures for critical minerals

Despite a soft start to 2023 for junior mining equities on the ASX, Morgans remains optimistic about a stronger second half on a pick-up in M&A activity and a recovery in sentiment.

Since mid-2020 in Australia, the broker observes an increasing suite of critical minerals has captured a significant portion of exploration budgets, and spending has increased on projects involving nickel, lithium, rare earths and copper.

Morgans expects this trend to continue.

While the decarbonisation focus of the US Inflation Reduction Act (IRA) is on strategic minerals, with immature and opaque markets, the broker expects copper will also benefit from increased electrification.

Along with increased projected demand, LME stockpiles of copper have declined, which suggests to Morgans copper prices will remain at attractive levels.

Outside of the major resource companies and producers in Australia, the analysts identify developers with substantial copper or copper-cobalt deposits including Rex Minerals ((RXM)) and KGL ((KGL)).

The broker also notes New World Resources ((NWC)) and KGL have high-grade copper projects, which are attractive for underground mining, and both have the added benefit of resource upside.

Turning to tungsten, Morgans has an Add rating for EQ Resources ((EQR)), which wholly-owns the Mt Carbine tungsten mine in Far North Queensland.

Boosting this rare metal’s credentials, the United States Geological Survey (USGS) suggests tungsten is a strategic mineral that is “essential to the economic and national security of the United States”.

Morgans also has Add recommendations for Panoramic Resources ((PAN)) and Poseiden Nickel ((POS)), in a time when the LME stockpile level for nickel is at a 14-year low.

Slowing economies to weigh on copper demand?

Despite positive structural trends for copper including ongoing investment in renewables, Macquarie sees cyclical challenges ahead for copper demand.

Bullish economic scenarios priced in to markets in early January are looking less likely to materialise, according to the broker, due to a challenging outlook in the US and emerging signs of the lagging impact of monetary policy in Europe.

In addition, indicators are pointing toward a stalling in the China recovery, with the level of construction activity remaining weak, though Macquarie notes there are some positive signs with completions picking up.

While overall construction activity appears to have reached a nadir, most recent data show the pace of recovery was easing in late-March and early-April for property sales and apparent demand, observes the analyst.

Weakness in private residential construction is already pronounced in the US, yet Macquarie points out private non-residential construction has so far provided an offset.

Meanwhile in Europe, increased funding costs for banks suggests to the broker an increased likelihood for a contraction in residential property investment as rates move higher.

A rise in financing costs is also making purchases of new machinery more expensive, and declining business orders over recent months in Europe has resulted in a significant scaling back of business capex plans, according to Macquarie.

These higher financing costs and inflation (which is reducing real wage growth), along with over-consumption during covid, are feeding through to soft new orders for consumer goods in both the US and Europe.

More positively for copper, the trend of rising electric vehicle market penetration continued in March, observes the broker, while broader trends and forecasts show Europe experienced the fastest growth in solar photovoltaic (PV) capacity in 2022, and the US will add around 34GW of solar capacity in 2023.

ANZ Bank’s forecast for gold and silver

While gold prices have retreated towards the US$2,000 level from the high of US$2,075/oz last week, ANZ Bank ((ANZ)) expects similar levels will be revisited in the next 12 months.

Recent bank failures in the US and Switzerland have supported safe haven demand for gold, and more strategic investment may occur due to an increasing risk of a US recession, equity market volatility and simmering geopolitical tensions, explains the bank.

A catalyst for a gold price rise may occur, suggests ANZ, if the US Federal Reserve pauses interest rate hikes earlier than expected and begins to ease, potentially as early as the second half of this year.

The Fed’s hiking trajectory has been guided by US CPI inflation and labour data, which are showing signs of easing.

However, Fed officials remain divided on the timing of the pause and the market is currently pricing a 25bps hike at the next FOMC meeting in May and ANZ forecasts another 25bps rise in June.

In a scenario that usually augers well for gold prices, the bank highlights rising US recession expectations, as partly indicated by a steepening US yield curve, which generally is followed by interest rate cuts with a three-to-six-month lag.

ANZ’s bearish view on the US dollar also contributes to a higher gold price expectation (US$2,080/oz in 12 months), and any weakness in physical demand caused by higher prices may be offset by further buying, given low investor holdings.

Recent banking-sector fears and resultant equity market volatility have turned ETF flows positive, observes ANZ, while speculative positions in gold have increased and central bank gold buying around the globe is continuing amid elevated geopolitical risks.

The “inexpensive alternative” silver may prosper from increased demand for gold, says ANZ, which forecasts an average silver price of US$24/oz for 2023.

However, while silver fundamentals are supportive, the bank cautions a downturn in economic growth could weigh on industrial demand. 

A negative scenario may potentially play out for the gold price, cautions ANZ Bank, should inflation come down to the target level of 2% in the US without materially weighing on the American economy.

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