In Brief: Helium, Rate Cuts, Coal & Retailers

Weekly Reports | May 10 2024

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.