Material Matters: Copper & Iron Ore

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While the long-term outlook for copper is unchanged, there is potential for near-term downside, while brokers believe long-term fundamentals for iron ore are largely unchanged.

-Longview Economics forecasts near-term copper price downside
-Long-term bullish outlook for copper intact
-Analysts unconcerned by iron ore's recent price fall
 

By Mark Woodruff 

Near-term downside for the copper price

Longview Economics mounts a strong case for selling copper at current prices, on a six-to-nine months view, while maintaining the long-term bullish outlook for copper prices remains intact. The latter view is supported by significant forecast growth for electric vehicles, renewables capacity and power grid transmission.

Over at UBS, it’s felt the copper price is nearing a turning point, but the question of when to buy is left unanswered.

This broker lists several bull points for copper including low visible inventories and a lack of tier 1 exploration success, while new projects are generally in higher-risk jurisdictions where political uncertainties may ultimately weigh.

Longview’s financial model currently signals the copper price is elevated relative to barometers of Chinese activity (i.e. currency, interest rates and equities), while a forecast rally in the US dollar over the coming weeks/months should exert further downward pressure on the red metal.

Additionally, power sector investment growth in China is turning lower, the country’s property sector continues to deflate, and Longview expects global copper supply growth should rebound this year.

China’s credit impulse, which calculates the annual change in new credit (public and private) as a percentage of gross domestic product, serves as a leading indicator for the country’s economic activity.

Unfortunately, various leading indicators point to a weak/falling credit impulse this year, notes Longview, yet Chinese officials remain reticent to reflate the property bubble and are avoiding “flood-like” stimulus.

This weaker credit impulse helps underpin two negative factors for copper: a likely deceleration in Chinese power grid investment growth, and ongoing deflation of the property sector, explains Longview.

Slowing grid investment growth will have multiple knock-on effects for copper demand. By way of example, Longview notes several Chinese new energy executives recently complained about the lack of ultra-high voltage cables causing delays for renewables construction.

The overhang in China’s property sector remains substantial, according to Longview, and will place ongoing downward pressure on copper demand over coming years. A return to typical levels for global copper supply growth is a further nail in the coffin for copper’s price prospects in 2024. 

There was lower-than-usual supply growth in 2023, explains Longview Economics, due to rising costs, strikes and ongoing supply issues across major producers.

Steady as she goes for iron ore pricing

Despite a recent dip in the iron ore price to around US$129/t from circa US$140/t at the close of 2023, neither Morgan Stanley nor UBS believe there has been any meaningful change in the outlook for pricing.

While estimated hot rolled coil (HRC) steel margins in China are at their lowest point since 2015, Morgan Stanley cautions against making lower iron ore forecasts on this basis alone.

The historical relationship between HRC steel margins and subsequent iron ore price moves is labeled "unconvincing". When these margins are negative, the iron ore price three months out is lower less than 50% of the time, observe the analysts.

According to this broker, iron ore fundamentals will provide price support in the US$135-140/t range over the first half of 2024, and the balance of risk to current pricing is, if anything, slightly tilted to the upside.

Iron ore inventories should remain low through 2024, notes UBS, which anticipates seaborne iron ore demand and supply will both lift by around 20mt this year. As a result, a stable year-on-year iron ore price of around US$120t is forecast.

On the supply side, price support over the first half should arise from seasonally lower shipments from Australia and Brazil, suggests Morgan Stanley, 

Regarding demand, the broker points out the falling number of new housing starts in China is increasingly less of a driver for overall steel demand, while urban village renovation may actually result in an incremental improvement for iron ore demand.

China’s fiscal policy in 2024 will be more proactive, believes Morgan Stanley, with the Chinese Ministry of Finance directing more investment towards to these renovation projects.

Also, demand conditions appear to be improving in Europe, with additional steel price hikes and 18m-tonnes worth of blast furnace capacity restart decisions announced since November, notes the broker.

During 2023, iron ore demand positively surprised the analysts at UBS and kept the market tight. While demand is the key risk to the 2024 UBS iron ore price forecast, the compounding impact of infrastructure and property stimulus measures in China, with exports to remain high, is expected to result in flat overall demand.

In the near-term, UBS prefers Rio Tinto ((RIO)) over BHP Group ((BHP)) on valuation and operational performance. Both companies are rated Neutral, with 12-month target prices of $130 and $48, respectively.

Morgan Stanley also prefers Overweight-rated Rio Tinto (target $145) to BHP Group which is assigned an Equal-weight recommendation and a $44.50 target. 

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