In Brief: Helium, Rate Cuts, Coal & Retailers

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Weekly Broker Wrap: surging helium prices; the global interest rate outlook; met coal prices; green shoots for retailers & will an airplane shortage benefit Qantas?

-Surging helium prices spur heightened exploration activity
-Interest rate cuts by the ECB, then the Federal Reserve in 2024
-Upside potential for metallurgical coal prices
-Green shoots for retailers
-Qantas to benefit from an airoplane shortage

By Mark Woodruff

Surging helium prices spur heightened exploration activity

Demand for use in magnetic resonance imaging (MRI) and semi-conductors has resulted in unprecedented price increases for helium over the last few years, prompting Wilsons to provide an overview of upstream ASX-listed exposures.

It is early days for the relatively small US$1.5bn helium market, and the broker anticipates significant ongoing price swings as major new projects in Russia and Qatar come online over the years ahead.

Qatar and the US currently account for 86% of global helium production, note the analysts, in a market that consumes around 6 billion cubic feet (BCF) per annum.

Pricing is opaque, explains Wilsons, and can vary across locations and markets, as it is subject to local dynamics with private contracts typically structured on a fixed price basis plus an escalation factor.

Current record prices range from US$200 to over US$500 per thousand square cubic feet, which is 35 times and 175 times, respectively, more expensive than Japan/Korea Marker (JKM) LNG and Henry Hub natural gas prices.

A rare commodity, not often found on its own, helium is usually affiliated with hydrocarbons and typically produced as a “by-product” alongside hydrocarbons. It has few substitutes in select applications, explains Wilsons, due to unique molecular properties such as a very low boiling point, and is often used for cooling.

By way of example, helium is employed in healthcare to cool the highly conductive magnets in MRI machines. For semiconductors and electronics, helium is used in cooling the glass in LCD panels and in hard disk drives.

The helium price surge over the last three years has spurred increased activity in Australia by explorers and producers, and $197.1m has been raised by way of IPO proceeds, along with institutional and private capital placements, among nine small helium-focused companies, highlights the broker.

Without providing investment recommendations, Wilsons lists Santos ((STO)), Renergen ((RTO)) Blue Star Helium ((BNL)) and Central Petroleum ((CTP)) as examples of helium producers and developers on the ASX. Investors can also gain exposure to resource appraisal and exploration projects such as Noble Helium ((NHE)), Grand Gulf Energy ((GGE)), Gold Hydrogen ((GHY)) and Buru Energy ((BRU)).

Interest rate cuts by the ECB, then the Federal Reserve in 2024

Inflation developments across advanced economies over the past year have been positive, and the high starting point for inflation is more likely to constrain the speed of interest rate cuts rather than eliminating the need for policy loosening, suggests Oxford Economics. It’s felt the present economic backdrop is closer to conditions on the eve of past cutting cycles than the market currently perceives.

In 2024, the US Federal Reserve and the European Central Bank (ECB) will cut by -50bps and -100bps, respectively, forecasts Oxford. By the third quarter, US core personal consumption expenditure (PCE) and eurozone core inflation are expected to be 2.7% and 2.1%, respectively, and declining. If these two measures are not falling, the bar to policy rate cuts is expected to remain high.

Of the two central banks, the ECB currently has a tighter policy stance and can be more confident than the Federal Reserve core pressures will continue to ease, suggests Oxford.  On this basis, the ECB can pivot to rate cuts more boldly and earlier than the Fed.

Historically, central banks typically do not begin cutting or tightening cycles at the same time, notes Oxford, and they rarely wait for recessions or labour market downturns before reducing rates. It’s believed data have been soft enough for some time now.

Recent market hopes for as many as six rate cuts of -25bps apiece by the Fed in 2024 were far too optimistic, points out Oxford, and now talk of a rate hike are wide of the mark, a view supported by recent Fed commentary. 

In the absence of a big game-changing shock, the most compelling near-term catalyst for central banks to ease, according to Oxford, could be concern about overly restrictive policy rates.

Another budget overshoot this year is possible in the US during the build-up to the presidential election, which Oxford Economics feels may result in caution over policy loosening. Uncertainty over the election winner also makes it difficult to predict any policy stance in 2025 and beyond.  

Upside potential for metallurgical coal prices

Morgan Stanley is forecasting around 20% price upside for metallurgical coal in the expectation strong fundamentals will reassert themselves as India's steel boom draws in more imports, feeding a steel industry that is now growing at 10% per year. It’s also noted China’s import dependency is on the rise.

Australia is far more critical to the global met coal market compared to thermal, highlights the broker, as it is the dominant global exporter with 43% share compared to 18%.

Prices for met coal reached record highs in 2022 after China's ban on Australia coal led to big shifts in met coal trade flows as volumes were rerouted to India and South Korea. However, Australia’s trade to China has barely recovered, even after the ban was lifted due to a dwindling production base, which is still running -18% lower than peak 2019 levels.

Exports have been in decline for four consecutive years as investment has been deterred by hikes in Queensland's coal royalties and higher emissions costs, explains Morgan Stanley, while adverse weather has also affected shipments.

Now, China’s import dependency is rising (14% in 2023 versus an average of 8% in the previous five years), as a continued focus on safety affects the domestic industry, and coal output from the largest producing province, Shanxi, is expected to fall by -5.3% year-on-year in 2024.

Last week, the price of Australia hard coking coal fell to US$240/t, and Morgan Stanley forecasts a level of US$290/t for the fourth quarter of 2024.

The Newcastle thermal coal price rebounded to US$148/t last week and the broker expects US$120/t in the second half of 2024, noting that price lacks near-term catalysts.

Green shoots for retailers

Just prior to yesterday’s harsh share market treatment dealt out to most stocks in the Australian Retail sector following trading updates by Baby Bunting ((BBN)), Temple & Webster ((TPW)) and JB Hi-Fi ((JBH)), Bell Potter envisaged a brighter outlook for the sector from June onwards.

The broker’s view was supported by more favourable comparatives for companies with exposure to Australian non-food retail sales, along with upcoming Stage 3 income tax cuts, which are expected to incrementally boost disposable incomes across a broad group of low-to-middle income households.

Any potential benefit is most applicable to Gen X & Y consumers who make up around 65% of retail spend, noted the analysts.

Within these income demographics, top spending categories which may be supported are essentials such as food and beverages, as well as discretionary categories like recreation and other retail, explained the broker.

Bell Potter highlighted the return of promotional activity by retailers back to pre-covid levels from the end of December last year, and noted some recovering signs emerging in categories such as Consumer Electronics, as technology-led spend continues to take a larger share of the consumer wallet.

From among the broker's coverage, key picks are two global roll-out names, Lovisa Holdings ((LOV)) and Premier Investments ((PMV)). Accent Group ((AX1)) and Universal Store ((UNI)) are also favoured for exposure to the younger consumer demographic, a likely beneficiary of the tax cuts.

For Accent Group, Bell Potter noted improving comparisons will arise towards the end of the second half of 2024, and positive commentary from global footwear brands such as Skechers & Deckers (Hoka). It’s also thought Universal will benefit from fast-approaching supportive comparatives.

The broker raised its 12-month target prices for Lovisa Holdings, Temple & Webster, Universal Store and Propel Funeral Partners ((PFP)).

For more details, please refer to The Broker Call Report and/or Stock Analysis on the FNArena website.

A shortage of airplanes is positive for Qantas, according to Brandywine Global

Valuations across the airlines sector globally are attractive, according to Brandywine Global, and the current imbalance between constrained supply and rebounding demand offers several possibilities for investors.

The investment manager, part of US-based Franklin Templeton, has taken positions in several airline stocks around the world, including Qantas Airways ((QAN)).

In good news for aircraft lessors and premier airline franchises, according to Brandywine, a shortage of commercial aircraft may impact travellers’ wallets in the coming years due to manufacturing issues at Boeing, including the grounding of the 737 Max and production slowdowns arising during the pandemic.

“This supply crunch is happening at the same time demand for flights has largely recovered to pre-pandemic levels in most markets outside of China”, highlights Portfolio Manager Sorin Roibu.

Unless Boeing and Airbus can ramp-up production to meet the growing demand for air travel, prices are likely to rise across the aviation ecosystem, forecasts Brandywine, which is not expecting Boeing to return to 2018 production levels anytime soon.

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