Commodities | Jul 12 2024
A glance through the latest expert views and predictions about commodities: potential impact on iron ore from trade tensions; gold sector stock preferences & the outlook for a range of commodities.
-The impact of trade tensions on the iron ore market
-Updates on iron ore price forecasts
-Goldman Sachs' preferences in the gold sector
-The outlook for coal and other commodities
By Mark Woodruff
Iron ore: the impact of trade tensions and price forecasts
While tariff hikes by the US in 2018 had modest and temporary effects on the US steel balance, Morgan Stanley points out iron ore demand continued to expand globally, driven by Emerging Market growth, mainly centred on China.
Net imports of steel in manufactured goods continued their rising trend, reflecting the limited impact of tariffs on steel-containing goods, highlights the broker.
In the event of a Trump win in the upcoming US Presidential General Election, the analysts note potential for 10% tariffs on all imported goods and 50% on Chinese goods.
This time around, Morgan Stanley feels the impact of these actions by the US could be more than offset by emerging market steel growth which is shifting to India, Southeast Asia, Africa and the Middle East, as Chinese demand plateaus at a high level.
China is a relatively small steel supplier to the US, representing just 2% of direct imports, and less than 20% of indirect imports, explains the broker.
Partly due to re-routing, the analysts explain China has grown its direct and indirect steel exports, despite tariffs, as it stays competitive on costs and meets rising Emerging Market growth.
Greater impacts could be felt should there be actions from a wider group of countries or barriers focused on indirect exports, cautions the broker.
Morgan Stanley highlights the risk to overall economic output posed by any worsening in trade tensions.
Iron ore price forecasts
Citi's latest bi-monthly update on the iron ore market shows the broker's FY24 forecast price has been trimmed by -4% to US$110/t.
The analysts expect the price to drift lower during the next three months over concerns relating to steel demand amidst lower steel output targets and ample port inventories.
The broker also points to a seasonal slowdown in the third quarter when prices may dive below US$100/t.
Citi sees scope for the price of 58% ore to move up against the benchmark price. Currently, benchmark (62%) ore is more expensive by around US$14.00/t for China's blast furnace operators, while 65% ore is cheaper than the benchmark price by circa -US$3.00/t.
Goldman Sachs forecasts the benchmark iron ore price will average between US$100-105/t over the remainder of the year, while UBS sees limited downside with cost support between US$90-100/t.
UBS is not anticipating a material price bounce either, with iron ore inventories now above normal, and supply stronger-than-expected in the first half of 2024.
This broker is cautious on the medium-term price outlook as supply lifts in Australia and Brazil from next year, and in Guinea (West Africa) from 2026/27 on the ramp-up of the Simandou project. Steel scrap is also expected to displace some iron ore demand.
Costs and incentive prices remain high and support a US$85/t long-term real price, according to the analysts.
In the iron ore space, the broker's 12-month target price for Fortescue ((FMG)) falls by -15% to $18.70 on lower forecast price realisation.
Also, UBS has upgraded its rating for Deterra Royalties ((DRR)) to Buy from Neutral as the announced acquisition of UK-listed Trident Royalties, and the subsequent negative impact on available dividends for shareholders, is seen as distracting investor attention from underlying asset quality.
Goldman Sachs' preferences in the gold sector
When it comes to investing in the Australian Gold sector, Goldman Sachs prefers near-term margins/returns over long-term ounces. Assets with less execution risk and those best positioned to capture increases in gold pricing are also favoured.
While the gold price has continued its run through the second quarter of 2024, rising by around 5% quarter-on quarter and by 15% year-to-date, gold equities have in recent times broadly underperformed the Australian dollar gold price, partly due to escalating costs.
Over the past five years, margin expansion has been crimped as costs (AISC) have worsened by circa -40% on average, explains Goldman Sachs, during a period when the Australian dollar gold price has risen by around 70%.
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