Tag Archives: Base Metals and Minerals

article 3 months old

Material Matters: Iron Ore, Oil, Gold, Potash And Nickel

-China's steel market consolidating
-More deficits needed for rally in oil
-Buy gold equities on pullback - RBC
-Pressure building on potash price
-Philippines unlikely a strong catalyst
 

By Eva Brocklehurst

Iron Ore

Rising steel prices in China have dragged up the price of iron ore, with ANZ Bank analysts suggesting the news regarding a possible restructure of the Chinese steel industry is behind the firmer prices. Baosteel and Wuhan Iron & Steel have announced a joint strategic restructuring, resurrecting the hope over-capacity in the industry could be addressed.

The analysts cannot envisage iron ore prices staying at current levels for too long and consolidation in the steel market is expected to be, ultimately, bearish for iron ore demand. Supply growth in iron ore remains relatively high as well. The analysts recommend producers use the current rally to forward-sell some production.

Oil

Sentiment in the oil market has turned bearish on the back of rising rig activity in the US amid signs of weak demand. This is in contrast to what the ANZ analysts consider is a constructive fundamental backdrop.

The analysts expect the tightening in the oil market to continue, but the extent of the current increase in activity is also considered unlikely to be sustained at current prices. The analysts do not expect US output to stabilise until the December quarter, even assuming prices over US$50/bbl.

A high level of inventories remains a concern and will likely require a market deficit over a period to fall back to a more sustainable level. The analysts suspect any further declines in price will accelerate supply closures and set the stage for an even stronger recovery in 2017.

Gold

RBC Capital Markets expects gold prices to strengthen from the current US$1,340/oz, as investors choose gold as a safe haven investment. This comes amidst elevated levels of geopolitical uncertainty, and higher systemic risk associated with declining real rates and increasing amounts of sovereign debt offering negative returns.

The analysts increase gold price assumptions to US$1,500/oz in 2017 and 2018, 12% above the current spot price, before forecasting a decline to US$1,300/oz in 2020. Investment demand for gold has outshone the decline in jewellery demand, the analysts note, and this situation is expected to continue with investors buying on any pullback in the price.

The analysts recommend investors take advantage of any pullback to buy gold equities, with a focus on operating companies that have attractive margins, solid balance sheets and organic growth opportunities. Preferred Australian stocks include Silver Lake Resources ((SLR)) and Saracen Minerals ((SAR)).

Potash

Contracts have finally been settled for potash shipments to China. At US$219/t CFR Macquarie notes the agreement set by Belarus is more than 30% below the price in 2015. This suggests a commodity space fast turning into a battle for market share while the discipline of the old producer cartel has been broken. Further capacity is being added so the pressure on prices is building.

Potash has recently been the only commodity trading out of its cost curve but now Macquarie observes market economics have taken hold. One area of hope for the market in 2017 is the recent recovery in agricultural prices, which points to better future demand. Chinese imports are now also expected normalise after a weak period.

Still, the broker does not expect spot prices to recover to levels seen at the start of 2016 in the foreseeable future. Macquarie acknowledges it has long been a bear on potash, but the latest contract settlement was even lower than it expected.

The broker also reiterates a view that the contract system is starting to break down and heavy discounts to this benchmark could well be done. Such a process would be a further de-rating event for producers.

Nickel

Deutsche Bank observes the new administration in the Philippines could mean, if a large enough swathe of the country's nickel ore mines are closed because of environmental infringements, there will be a second supply shock to the market in as many years.

The Philippines accounted for just over 20% of the mined nickel units in 2015. Still, the broker does not believe the drawdown of inventories will reach critical levels. The lesson from the last shock, when Indonesia applied a nickel ore export ban, is that support for the metal is only temporary, given the abundant supply of laterite ore.

Indonesia is coming back into the market as its smelting capacity ramps up while New Caledonia could potentially allow more ore exports. Deutsche Bank concludes that the Philippines will not be a catalyst for a complete re-basing of the nickel price overnight but could help along the way to a more sustainable price range.

See also, Nickel Price Hike Likely on July 18 2016.

Syrah Resources

Syrah Resources ((SYR)) has secured its funding for Balama after recently raising $194m in a placement. With the funds secured the company has earmarked up to US$45m to progress the company's spherical graphite project in the US.

It now appears likely the company will assess the viability of an enlarged plant compared with its prior consideration of a 25,000 tpa plant, given offtake agreements with Morgan Hairong and Marubeni now point towards demand being stronger than anticipated.

Canaccord Genuity updates its model to account for the equity raising and the timetable for construction at Balama. The broker looks to updates on construction as it progresses at Balama and considers further marketing and offtake arrangements are the next de-risking catalysts. Canaccord Genuity retains a Buy rating and raises the target to $7.00 from $6.15.
 

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article 3 months old

The Overnight Report: Slow And Steady

By Greg Peel

The Dow closed up 16 points or 0.1% while the S&P gained 0.2% to 2166 and the Nasdaq rose 0.5%.

Grafting

The ASX200 posted its eighth consecutive up-day yesterday in rising 28 points. I haven’t seen any referrals to history, but I assume it’s been a while since we’ve seen such a run. The eight days have taken us from a Brexit low of 5197 to yesterday’s close of 5458 – a gain of 5%.

That’s a lot in a week but if we take out the hundred point gain of Monday last week we’re otherwise looking at a steady graft. That Monday was the day the world decided Brexit was no big deal but otherwise, our market, Wall Street and other markets clearly have a feel of “Where else could I put my money?”

Materials slipped a little yesterday to be the only losing sector while gains were mostly even across all other sectors with the exception of energy, up 1.2% as Oil Search ((OSH)) abandoned its bid for InterOil, and consumer discretionary, which gained 1.4%. JB Hi-Fi ((JBH)) was the mover in a sector that has been a little left behind in the rally so far, being one of the most cyclical.

Which brings us back to the question of just how long a rally based on defensives can last. The bounce in commodity prices helped the index back over 5000 pre-Brexit vote and while issues of capital and low interest rates still trouble banks, their yields cannot be ignored. Otherwise, utilities and telcos have been drivers, consumer staples has defied the supermarket wars, although we must remember there are other stocks in that sector, and healthcare has wobbled its way back after various regulatory and Brexit (currency) scares.

To seriously push to new highs – and here we remember that while Wall Street long ago surpassed its pre-GFC high, the equivalent ASX200 high is still 25% away – we will need growth stocks to take the baton. Yield compression in the banks, REITs and infra funds can only last so long before bond proxies become way too expensive.

Bring on the result season.

Grafting

It occurred to me this morning that the original FNArena Overnight Report was only ever written on days in which the Dow moved 50 points or more. That was ten years ago. The reason being that under 50 points there wasn’t really much to talk about – over 50 points obviously something had happened. Nowadays 50 points is a slow day.

The point is that with the odd exception of 1987, the tech wreck wreck and other spurts of volatility, grafting is what stock markets typically did up until the GFC. The financial world was a steadier, safer place. But for the fact there may not be a lot to talk about in an Overnight Report, it would be nice to return to that world.

Wall Street grafted higher again last night without any great conviction. Each move up in both the Dow and S&P is currently a new all-time high. The Nasdaq is back over 5000 and at new highs for 2016 but still below its 2015 high.

The Nasdaq was in the frame last night, outperforming with a 0.5% gain thanks to Japan’s Softbank making a takeover bid for US-listed but UK-based ARM Holdings, makers of technology for Apple and others. Jaws dropped at the 43% premium offered by Softbank, the CEO of which explained his eagerness as a longer term investment in the Internet of Things.

Call that “new tech”. New tech was otherwise dealt a blow after the bell this morning when Netflix posted a shocker that sees its shares down 14% as I write. Old tech, in the form of IBM (Dow) and Yahoo, posted reasonable results which have them both up slightly.

Bank of America joined its peers in posting a beat during the session, which sent BofA shares up 3%. But to put that into context, BofA’s “beat” was still on a 19% drop in June quarter earnings year on year, blamed on low interest rates.

Wall Street continues to worry over the TINA rally and the high multiples being paid for defensive yield, as is the case here. As the US result season rolls on, a clearer picture will emerge, particularly from forward guidance rather than just last quarter’s earnings numbers.

Commodities

Iron ore tumbled back last night, falling US$1.60 to US$56.20/t.

A mixed session on the LME saw nickel starring with a 2.7% gain (See Nickel Price Hike Likely).

West Texas crude fell back US$1.03 to US$45.20/bbl as it became clear the Turkish government is back in control. WTI is bouncing around a lot, and so too local energy stocks, but for the moment it’s firmly wedged into a 45-50 range.

Gold is down US$8.60 to US$1328.60/oz despite the US dollar index being down 0.1% at 96.56.

The Aussie is steady at US$0.7580.

Today

Anyone want to back nine days? The SPI Overnight closed up one point.

We’ll see the minutes of the July RBA meeting today. Economist consensus is still baking a rate cut next month.

The first post-Brexit ZEW survey of eurozone investor sentiment is out tonight.

On the local stock front, Oil Search and Rio Tinto ((RIO)) will post June quarter production reports.
 

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article 3 months old

Nickel Price Hike Likely

-Chinese are diversifying sources
-Using nickel metal in pig iron
-And stainless steel production rises
 

By Eva Brocklehurst

Nickel has a new geography to occupy brokers. The Philippines. The new government is enacting a nationwide audit of mining areas for compliance with international standards, and the scrutiny may constrain or reduce the nickel ore export trade. With Indonesian exports of nickel ore being out for the count, this added supply risk from the Philippines has potential to procure a long-awaited lift nickel prices, brokers observe.

The Philippines nickel ore trade is around 20% of global mined supply and most is exported to China as low-grade laterite ore for feed into nickel pig iron production. The issue here appears to be environmental protection, rather than, as was the case in Indonesia, a strategic goal to create downstream processing inside the country.

Nickel spot pricing has lifted by around 10% to US$4.46/lb, partly attributable to the emerging supply risk but, UBS asserts, is not yet at a level which would place the industry back on a sustainable footing, although the situation in the Philippines deserves to be closely monitored. Cash losses are still accruing for many producers and spot pricing remains below the marginal cost of production.

UBS calculates this to be around US$4.50-5.50/lb based on high pressure acid leach producers. The broker believes around a third of nickel mines globally are loss-making, yet the industry has been slow to idle capacity.

Nevertheless, the case for upside is not just about supply. Demand is also recovering as stainless steel consumption in China lifted 5.7% in the year to May, with a mix-shift to nickel-bearing product. The broker suspects restocking in stainless steel is also a source of potential upside.

Hence, the best placed equities are those which have positive cash flow at the current depressed prices. UBS believes Norilsk is well positioned as the lowest cost global producer but Independence Group ((IGO)) is also favoured for its Nova project, which has break-even costs of US$2/lb when fully ramped up. Production begins at the end of this year.

Morgan Stanley estimates nickel markets could become bullish on the back of the Philippines developments, contending that, despite 30% of supply being loss-making and the market over-supplied, production was pared back just 5%. Why? Most of the nickel mines are large assets, such as Murrin Murrin and Ravensthorpe, which are owned by global corporations, well able to ride out the price weakness. Now this waiting game may actually deliver.

Meanwhile, established Philippines miners such as Coral Bay Nickel and Taganito Mining are expected to meet government-imposed industry standards, while around another 300,000 tonnes per annum is exposed to cuts which is estimated to be 15% of global supply. As a result, Morgan Stanley lifts its forecast deficit and expects upside risk to the price outlook.

Philippines nickel exports were already down more than 30% in the first half of the year, Macquarie notes, mainly from weather-related disruptions. Still, these political developments may matter for nickel.

Around 400,000 tonnes of nickel ore were exported from the Philippines last year to finished nickel producers in Australia (QNI, closed in 2016), Japan (three ferronickel producers) and China (nickel pig iron producers). In addition, 51,700t of nickel in nickel/cobalt sulphides were produced at two plants in the country for export to Japan for processing into nickel metal.

The main issue for the buyers of nickel ore from the Philippines is the seasonality of supplies, because of the rainy season which runs from October to March when exports fall sharply because of the difficulty in sustaining operations in heavy rain. Ore buyers traditionally need to build up large stockpiles ahead of this period but Macquarie wonders whether this will be possible in the coming year.

The main challenge for the Chinese pig iron producers is that up to 2014, they only relied on Philippines ore for low grades. Most of the feed for electric furnace production came from Indonesian high-grade ore. Now this material has dried up. Stocks of nickel ore in China are now considered too low to sustain production at recent rate and producers have started to diversify feed sources.

Macquarie suspects the nickel pig iron industry could obtain greater proportions of its feed from nickel metal. This may explain why Chinese imports of nickel metal have risen this year. Regardless, the broker does not expect any significant improvement in Chinese nickel pig iron production from a projected level of 354,000 tonnes this year.

Nevertheless, the broker agrees the surge in stainless steel production has supported China's primary nickel consumption and expects total stainless steel production will grow 3.9% in 2016. Macquarie does not believe further major closures in nickel capacity are likely and, bringing together supply/demand estimates, a deficit of 110,000 tonnes is expected this year and 71,000 tonnes next year. This should support higher prices than in the recent past.
 

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article 3 months old

The Monday Report

By Greg Peel

Scripted

I suggested on Friday morning the local market would likely open to the upside on overnight strength before fading in the afternoon as traders took profits following a week-long rally, unless Beijing had something to say about it. Well Beijing did have something to say about it, but the market still played to script.

China posted GDP growth of 6.7% in the June quarter, in line with the March quarter result and beating expectations of 6.6%. Industrial production grew 6.2% year on year in the month of June, up from 6.0% in May and beating expectations of 5.9%. Retail sales rose 10.6%, up from 10.0% and beating 9.9%. Fixed asset investment grew 9.0% year to date, down from the 9.6% pace in May and below 9.4% expectations.

On face value, these appear to be a pretty encouraging set of numbers with the exception of fixed asset investment. To the ASX200, they were worth 20 points at midday, taking the index from up 20 points, and ready to fade, to up 40 points. But then the sellers arrived on cue.

Economists do not, however, suggest these were numbers out of China that offer relief. Within the GDP result, growth in private investment, representing 60% of all investment, fell to a record low for the quarter. This leaves the government to carry the can. On that note, the 9.0% growth rate in fixed asset investment to June is the lowest since 2000, suggesting the government is easing off on the infrastructure stimulus.

The June retail sales number was indeed encouraging, but in a way China’s economy is a bit like Australia’s in that it is trying to transition away from a previous model. Can the growth of China’s consumer economy offset the slowdown in the export-driven sectors? Not if private investors are not on board. Beijing can beef up the stimulus again, as everyone expects it will, but just how many airports and railway lines can you build for the sake of it?

Local traders may have had a closer look at the Chinese data, after the computers had had first shot, and decided they were not so hot after all. The index faded all afternoon.

But importantly, the index has clearly breached the 5400 resistance level, meaning that will now become support. Wall Street took a breather on Friday night and the local futures finished down 11 points on Saturday morning, so 5400 will now be the pivot level for the decision as to whether we have reason to push higher.

That will likely come down to the US earnings season now underway and the local earnings season due to start next month.

Almost

Had the S&P500 closed even a tenth of a point higher on Friday night, it would have been the first Monday to Friday run of all-time highs for the index since 1998. But alas, the S&P closed down two points at 2161. The Dow closed up 10 points but that only marked four days of rally. The Nasdaq lost 0.1%.

The fact the 1998 record was not achieved underscores the reality that markets do not usually go up five days in a row. Wall Street was all set for a similar session of Friday profit-taking after a very strong week, but instead hung in there. It is a positive sign.

Traders have also pointed to other positive signs in the Russell small cap index catching up to its large cap counterparts post Brexit and indeed outperforming on the upside. This suggests the rally has breadth. And a further six basis point gain for the US ten-year bond yield to 1.59% equates to over 20bps from the Brexit low and an indication the safe haven money is coming back out again.

The ongoing element traders have been pointing to for several post-GFC years is the level of cash still on the sidelines. If investors decide they have no choice but to deploy that cash in a low interest rate world, stock market upside could be substantial.

The US CPI rose 0.2% in June, in line with expectation. The increase was largely due to the oil price which many believe should ease off after the summer driving season. Annual inflation is only 1.0%, reflecting the initial big drop in oil prices. Core inflation, without oil, is 2.3%. This should be enough to prompt the Fed into hiking but for three reasons.

Firstly, the Fed prefers the PCE measure of inflation, and that is still running under 2%. Secondly, the Fed did not hike in June because of Brexit risk, and despite the rebound in markets a rate hike is not expected at the July meeting either, on a “too soon” basis. Thirdly, wages fell 0.2% in June. Lack of wage growth suggests a subdued inflation outlook.

But US retail sales jumped 0.6% in June when 0.1% was expected. It’s the third consecutive solid gain.

The big earnings result on Friday night came from the banks. Citigroup posted a beat and Wells Fargo posted in line. The shares of both closed down on the day, but this was more a case of a Friday after a week-long rally and the fact JP Morgan’s solid result on Thursday night had traders amped up for strong beats on Friday night.

As of this week, the earnings reports will come thick and fast, with a lot of Dow names in the frame. If Wall Street is to hang on to or exceed new all-time highs, it will need the run of results to be as positive as the early numbers have suggested.

Commodities

Since we’re focusing on records today, we can also note the 0.6% jump in the US dollar index to 96.69 on Saturday morning ended the strongest week for the dollar against the yen since 1999. The yen has been plunging basically since “Helicopter” Ben Bernanke met with officials in Tokyo early in the week, sparking speculation the BoJ may be prepared to use “helicopter money” as a last ditch effort to soften the yen and boost the Japanese economy.

Helicopter money directly refers to hand-outs of printed money to the populace as a form of stimulus, analogously dropped from helicopters. In the GFC, the famed “Pennies from Kevin” is a local example. But it can also mean other drastic stimulus measures, such as the BoJ buying government bonds and then forgiving the debt. Whatever the case the policy is highly inflationary, but given a low inflation world and over two decades of deflation in Japan, hyperinflation is not considered a risk.

The jump in the greenback on Friday night helped aluminium, copper and nickel down around 0.5% on the LME and lead down 1.5%, with zinc rising 0.5%.

Iron ore fell US20c to US$57.80/t.

Oil traders cited the better than expected China GDP and US retail sales in sending West Texas crude up US73c to US$46.23/bbl, despite the US rig count marking its sixth week of gains in seven.

Gold held its ground against the strong greenback in rising US$2.50 to US$1337.10/oz.

The Aussie is down 0.7% on the strong greenback at US$0.7580.

The SPI Overnight closed down 11 points or 0.2% on Saturday morning.

The Week Ahead

All eyes will be on the ECB on Thursday night when it holds a scheduled policy meeting. But given the wold has quickly recovered from Brexit fears, and the Bank of England elected not to react, it is likely Draghi will keep his powder dry.

The US will see housing sentiment tonight, housing starts on Tuesday and existing home sales, the Chicago Fed national activity index, the Philadelphia Fed activity index, FHFA house prices and leading economic indicators on Thursday. Friday sees a flash estimate of July manufacturing PMI, and Japan and the eurozone will offer the same.

Japan is closed today.

The minutes of the July RBA meeting are due tomorrow and otherwise, NAB’s June quarter business confidence summary on Thursday provides the local data of note this week.

It will be a bit different on the local stock front however, as the quarterly reporting season ramps up.

Western Areas ((WSA)) will report quarterly production today, Rio Tinto ((RIO)) and Oil Search ((OSH)) tomorrow, BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)) on Wednesday, South32 ((S32)) on Thursday and Santos ((STO)) and OZ Minerals ((OZL)) on Friday, among others during the week.

Rudi has returned from two weeks of touring Victoria and Queensland. He will appear on Sky Business via Skype-link on Tuesday, 11.15am, to discuss broker calls. On Thursday he'll return to the studio at Macquarie Park, 12.30-2.30pm and on Friday he'll do the Skype-link again around 11.05am.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Risk Back On

By Greg Peel

The Dow closed up 134 point or 0.7% while the S&P rose 0.5% to 2163 and the Nasdaq gained 0.6%.

Hit for Six

I suggested in yesterday’s report that it may not be the day in which the ASX200 manages to breach the brick wall of resistance at 5400. Ultimately I was proven wrong, but it was no simple feat. On my count, the index rose above that level before pulling back to or below that level six times in choppy trading yesterday before the final assault.

At 2pm, just when it looked like the sellers may just win on the day, we turned and rallied to a close of 5411. With Wall Street up again last night, we may cement that breach today, although it’s interesting to note the S&P500 closed up half a percent in the US but the futures are only suggesting 0.1% for the local index today.

Bridge Street has seen its sixth consecutive up-day. But aside from Monday’s big surge, it’s been a grafting, somewhat cautious climb. On the other side of 5400, there’s a bit of a “Now what?” feel.

We actually saw a positive jobs number yesterday. On face value the net 7,900 jobs added fell short of 10,000 expectations but the big surprise was the mix – 38,400 full-time jobs were added and 30,600 part-time jobs were lost. For the past several months, apparently strong employment results have been misleading, given growth has been almost entirely led by the addition of part-time jobs. A job is a job on the ABS count, be it full or part-time. But part-time jobs mean fewer hours worked, thus lower net wages, thus limited positive economic impact.

So to see this sudden and sharp turnaround is heartening. We also saw the unemployment rate tick up to 5.8% because of increased participation – more people trying to find work – which again is an encouraging sign.

It’s not yet enough to suggest inflation is about to pick up again, so there is no reason yesterday’s jobs numbers would prevent the RBA from cutting in August once the June quarter CPI result is known.

After a very strong run this week, the resources sectors finally saw some profit-taking yesterday. Materials fell 1.3% and energy 0.6% to be the only sectors to finish in the red. The banks have also been a significant driver of the rally to 5400, but they had another positive session yesterday with a 0.8% gain. Elsewhere, gains were roughly even, but the defensive sectors continue to remain just as popular, indeed if not more popular, than cyclicals overall.

The new buzz word on acronym-obsessed Wall Street is STUB – staples, telcos, utilities and bonds. With Wall Street at new all-time highs, the outperformers in 2016 to date have been the people who make toothpaste, the people to whom one pays one’s phone, electricity and gas bills each month, and government-issued fixed interest. Investments that quietly yield while carrying limited risk.

In Australia, the picture is not dissimilar, if we substitute the likes of a pizza chain in for staples and toll roads for utilities, for example. The question is: how high can we continue to go on defensives? To get cyclicals up and running again – meaningfully -- we need some central bank stimulus.

Some days are Dimon’s

The Bank of England did not cut its cash rate last night, defying an 80% chance priced into the futures market. While this sounds like a trigger for major volatility, it wasn’t.

It wasn’t, because between the time BoE guvna Mark Carney suggested he would likely cut the cash rate and now markets have moved from Brexit panic to Brexit complacency, and from a collapse in the pound to…well…a still-collapsed pound. In other words, the BoE does not need to cut the cash rate to stop a market crash, nor to try to force currency devaluation. Markets have recovered and the pound has re-based, which alone should provide the additional economic stimulus the UK needs through this ongoing period of uncertainty.

The response on the UK stock market was a 0.2% fall. The response on Wall Street was…hey did you see JP Morgan’s result!

Right up to the last minute, analysts were marking down their forecasts for JP Morgan’s (Dow) June quarter earnings. We could thus say it was always going to be easier to post a “beat”, but as it was the bank’s result was very impressive not just in its EPS, but in the breakdown of where it made money and where it didn’t lose it. Most notable was a solid performance in consumer-related banking, and most comforting was no attempt to use Brexit as any sort of excuse.

The US banks have been enjoying a rally back from initial Brexit lows, just as Australian banks have been doing, and as such have been leaders in the push to new all-time highs. The banks themselves are nevertheless a very long way from all-time highs. JPM’s result helped float all US banks last night and thus lead this latest move into blue sky. Tonight sees results from Wells Fargo and Citigroup.

The other talking point on Wall Street last night was the June producer price index release. It posted the biggest jump in more than a year in rising 0.5% on the headline against 0.3% expectation. It was all about the oil price rebound nonetheless, and the core PPI remains in the doldrums.

Wednesday night on Wall Street saw a bit of a pause, as stock indices steadied and a bit of money flowed back into bonds and gold. It was as if Chris Froome had come off his bike and had to jog for a bit. Last night saw the stock rally kick back in, gold fall back again and the US ten-year yield rise 6 basis points to 1.53%, as Froome got back on a bike.

Commodities

The US dollar index is down 0.3% at 96.09 following a mild bounce in the pound on no rate cut. But gold is down US$7.70 at US$1334.60/oz.

Copper took a breather last night in a session which saw all other base metals mildly higher.

Iron ore fell US70c to US$58.00/t.

West Texas crude rose US39c to US$45.50/bbl.

The Aussie is 0.4% higher at US$0.7633.

Today

The SPI Overnight closed up 6 points. It’s a Friday, we’ve had six up-days in a row and we’re sitting just above what was major resistance. A bit of profit-taking today?

Beijing may have something to say about that. China’s June quarter GDP result is out today, alongside June industrial production, retail sales and fixed asset investment numbers.

Retail sales will also be in focus in the US tonight, amidst the big earnings reports.

On the local stock front, Whitehaven Coal ((WHC)) and Mt Gibson Iron ((MGX)) post quarterly production reports today.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

Material Matters: Iron Ore, Energy, Base Metals And Gold

-Iron ore production growth uncertain
-OSH, STO hard hit by soft LNG prices
-Losses still accruing for nickel producers
-NAB analysts: gold to resume downtrend 
 

By Eva Brocklehurst

Outlook

Heightened financial market volatility is dominating most commodity markets yet National Australia Bank analysts contend it is the fragile balance of supply/demand factors which is most material to the outlook.

The NAB US dollar denominated non-rural commodity price index is expected to fall by around 13% in 2016 and a further 8% in 2017, led by iron ore prices. US dollar appreciation is expected to partly offset the decline in Australian dollar terms. Overall, the analysts suggest Australia's terms of trade will continue its gradual descent.

Iron Ore

The analysts note iron ore and metallurgical coal prices have risen considerably in recent months as a credit-fueled rebound in Chinese construction activity underpins steel production. They argue that this is not sustainable, given excess property supply in many locations. Prices are expected fall on weaker demand, but the duration of the current uptrend is unclear. The analysts expect iron ore prices to average US$42.50/t in the second half of 2016 and US$40/t in 2017.

Port Hedland export data for June shows iron ore exports totalled 41.8mt, a record month both in terms of tonnage shipped and daily run rate. This should not be a surprise, UBS maintains, as Roy Hill is now contributing to exports along with the other big three.

The broker estimates BHP Billiton's ((BHP)) share for the month is 56.0%, up 9% sequentially. Fortescue Metals ((FMG)) share is 35%, up 6% sequentially. Roy Hill shipped around 2.0mt in the month of June, as it ramps up towards nameplate of 55mtpa.

Macquarie suggests BHP will miss its FY16 iron ore shipment target, with a 255mt result considered likely against a target of 260mt, while Fortescue could deliver a slight beat to guidance. The ramp-up at Roy Hill, which has gathered pace, represents some upside risk to iron ore supply estimates in the second half, the broker acknowledges.

Growth beyond 2016 is uncertain, Macquarie contends, with recent commentary, particularly from Rio Tinto ((RIO)), suggesting the commitment to its 350mtpa target could start to diminish.

Energy

Oil markets suggest significant upside risks exist to global supply in the short term, despite falling US production. Therefore, the NAB analysts maintain up-moves in prices will be relatively constrained in the near term and prices will fluctuate between US$45 and US$50 a barrel in the September quarter. LNG prices are also expected to be subdued unless there is a substantial jump in the price of oil.

UBS observes, with LNG prices lagging oil by around three months, these should bottom in the June quarter. Stocks such as Oil Search ((OSH)) and Santos ((STO)) are expected to be hardest hit, with the forecast LNG price to be 20-23% below the first quarter. The downside protection in Woodside Petrolem's ((WPL)) LNG contracts is expected to limit revenue declines to 3%.

Coal

NAB analysts expect hard coking (metallurgical) coal contract prices to average US$89/t in the second half and US$84/t in 2017. Thermal coal prices are expected to decline in the next Japanese fiscal year to US$58/t.

Citi upgrades its thermal coal price forecasts for 2016-19 by 12-37% and coking coal forecasts by 2-19% for 2016-18. The broker expects a recovery in coal, as well as in oil and copper prices, will drive BHP Billiton's earnings higher in FY17, partly offset by the bearish outlook for iron ore prices. For Rio Tinto, the broker suspects the upgraded coal prices will be largely offset by higher Australian dollar forecasts.

Base Metals

For base metals, the NAB analysts note demand from China has supported copper recently while aluminium faces favourable long-term demand from car making and power generation. Weak prices for nickel have delayed rather than cancelled new supply, they observe. Meanwhile, zinc deficits are expected in 2016 and 2017 and lead remains well supplied.

UBS observes the new government in the Philippines is placing its mining industry under greater scrutiny. This has potential to constrain or reduce the nickel ore export trade over time. At stake is around 400,000tpa of contained nickel supply which is mostly exported to China. This trade accounts for around 20% of global mined supply and almost all of China's nickel pig iron feed.

The nickel spot price has lifted around 10% to US$4.46/lb which is attributed, in part, to the supply risk emerging from the Philippines. UBS maintains spot prices have not reached levels which would put the industry back on a sustainable footing and cash losses are still accruing for many producers.

Nevertheless, there are some positives emerging on the demand side as China's stainless steel consumption has lifted 5.7% in the year to date, with the mix shifting to nickel-bearing stainless. UBS also suspects re-stocking in stainless could be a source of potential upside.

Gold

The NAB analysts suspect the US will take a more cautious approach to monetary tightening post the Brexit vote and this signals further upside potential for gold in the near term. They nonetheless expect gold prices will resume a modest downward trend in the December quarter. Gold is expected to trade above US$1300/oz for the remainder of the September quarter, ending 2016 at US$1280/oz before moderating to US$1100/oz by end 2017.

Citi upgrades its gold price forecasts by 4% for 2017 and 2% for 2018, but ascertains the impact is largely offset by higher forecasts for the Australian dollar.
 

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article 3 months old

The Overnight Report: Caution At The Top

By Greg Peel

The Dow closed up 25 points or 0.1% while the S&P was flat at 2152 and the Nasdaq fell 0.3%.

Struggling

On a technical basis, the ASX200 trading at over 5300 since Monday suggests further upside towards 5800 is on the cards. The index still has to get through brick wall resistance at 5400, and thereafter there has to be a fundamental reason to support further gains.

With the world now settling down again following immediate Brexit fears, albeit still wary of further possible bouts of volatility, the local market may need to wait until the reporting season next month to find a new driver. Meanwhile, yesterday’s session may have been positive but there remained an air of caution.

The big movers yesterday were the resource sectors, thanks to big commodity price jumps. Materials was up 2.0% and energy 1.5%. But only three other sectors finished in the green yesterday – the banks, telcos and utilities. All offer yield as their primary attraction, not cyclical growth.

It was not a straight line rally yesterday either. After a spurt up on the opening rotation, interest faded. Late buying then righted the ship. There were also the Chinese trade numbers for June to consider.

Exports fell a slightly worse than expected 4.8% year on year following May’s 4.1% drop. Imports fell 8.4% compared to 0.4% in May, when a 5.0% fall was expected. While the numbers are not very positive there is no great panic, given Beijing is expected to rev up the stimulus any moment now beyond renminbi devaluations.

The index closed yesterday at 5388. Following a flat session on Wall Street and the futures up only 8 points this morning, today is unlikely to be a day to retest 5400. We also had oil falling back last night.

The local June jobs numbers are out today but nothing particularly market-moving is anticipated. There will likely be some caution in the market today ahead of tonight’s Bank of England policy meeting.

For so long, we’ve not been particularly interested in BoE meetings. The UK’s economic surge following the London Olympics brought expectations of a likely rate hike from a post-GFC 0.5%, but that surge soon faded and for the past few years the UK has simply bungled along, stuck on the same cash rate.

Tonight is expected to see a rate cut. BoE guvna Mark Carney has already hinted at one and the local market is pricing in an 80% chance. The risk to global markets, both to the downside and upside, is either no cut or a full 50 basis points to zero. A 25bps cut will no doubt be a non-result.

Let’s see some results

If Australia now needs to wait for results season, the same is true on Wall Street where quarterly results are now trickling through. So far we’ve seen earnings beats from Alcoa and rail company CSX, while fast food conglomerate Yum Brands is up around 5% in the aftermarket as we speak, having reported after the bell.

It’s early days, and as late as last night analysts were still downgrading their expectations for JP Morgan’s result, due tonight. JPM will be the first of the big banks and first Dow stock to report.

Having hit new highs in the S&P and Dow, Wall Street stalled last night. In Tuesday night’s session we saw a rush out of the safe havens of gold and Treasuries but last night gold clawed back ten dollars and the ten-year yield fall back 4 basis points to 1.47%.

This week’s US Treasury auctions of three-years and ten-years struggled to find any buyers. Last night’s thirty-year auction was a different story. Buying interest was the strongest it has been since September last year for a yield of 2.17%. That’s not a lot more than the current inflation rate but if we bear in mind last night Germany issued its first ever ten-year bund with a negative coupon, and that Swiss fifty-year bonds are currently trading negative, a 2% thirty year backed by the US economy looks like manna for pension fund managers at this time.

But that 2.17% settlement rate is still the lowest on record. Welcome to the new normal.

The latest Fed Beige Book was released last night. This anecdotal assessment has had US economic growth fluctuating between “modest” and “moderate” for so long now traders have stopped taking any interest. Never has a publication been so aptly named.

Commodities

It was that time of the week last night when the US weekly oil inventory numbers are released, and as usual they surprised. The drawdown on crude was not as big as expected and persistently high levels of gasoline stocks in the middle of summer have the market concerned.

Having jumped 6% on Tuesday night, West Texas crude is currently down US$1.51 or 3.2% at US$45.11/bbl. Having tried and failed at 50, it looks like 45 will be the pivot level for WTI for the time being.

Copper kicked on with a further 1% gain last night on the LME but nickel and zinc fell back 1%.

Iron ore fell US10c to US$58.70/t.

Gold is up US$9.60 at US$1342.30/oz with the US dollar index down 0.2% at 96.35.

The Aussie is off 0.2% at US$0.7606.

Today

The SPI Overnight closed up 8 points.

As noted, the local jobs numbers are out today but the big drawcard is the BoE meeting tonight.

Iluka Resources ((ILU)) and Transurban ((TCL)) will post quarterly reports today.
 

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article 3 months old

Alumina Ltd Basks In Higher Margins

-Bauxite proportion accelerating
-Low debt balance sheet
-Potential AWAC cash distribution?
 

By Eva Brocklehurst

Alumina Ltd ((AWC)) has enjoyed a recovery in margins in the June quarter, with the benefit of higher spot pricing and tight cost control. Alcoa, the company's 60% partner in the AWAC joint venture, reported alumina segment earnings rose to US$109m, also benefitting from a slightly higher bauxite contribution.

The increase in the alumina price was augmented by productivity savings and Alcoa has indicated it is on track in the broader upstream business to reach US$550m in savings in 2016, having delivered US$379m in the year to date.

Ord Minnett estimates the alumina price achieved was US$250/t, with cash costs around US$195/t. Looking ahead, the broker expects costs to be lower again following the closure of Pt Comfort, along with increased bauxite sales but also sightly lower prices for alumina.

The bauxite segment is expected to grow as a proportion of earnings. Alcoa has secured another third party contract of US$60m over two years bringing the total to US$410m. 2016 bauxite sales are set to be three times the 2015 volume as the JV pushes further upstream to meet market demand. For the second half Ord Minnett forecasts AWAC earnings per tonne of US$59/t, inclusive of bauxite at US$11/t.

The majority of bauxite sales are coming from the Guinea and Brazil assets but, with the first trial bauxite shipment from Western Australia occurring in June, Ord Minnett believes there is upside potential for more third party sales going forward. Moreover, the broker maintains the market will begin to attribute more value to the mining segment within the AWAC joint venture as bauxite sales grow.

Ords retains an Accumulate rating on AWC because of the valuation support and dividend yield, as well as the strong balance sheet. Although Citi forecasts a recovery in alumina spot prices to US$260/t in 2017 and US$270/t in 2018, this is considered already priced into AWC stock. Hence, this broker maintains a Neutral rating.

The production report delivered the margin recovery Morgan Stanley was looking for after a low point was reached in the prior quarter. The broker has a positive view on the stock based on further margin gains, a balance sheet that is almost debt free, and the potential yield.

Annualising the Alcoa cash flow statement and converting at spot prices suggests 5% pay-out capacity but the broker's base case is higher than this, as it also captures the benefit of the AWAC sale of its 20% stake in the Dampier gas pipeline, from which AWC garners a 40% share of around US$58m. This should come through in the second half and support the broker's forecast dividend.

Morgan Stanley expects cost improvements will also come as Ma'aden production replaces the high-cost Pt Comfort tonnage. Cost performance, price realisation and bauxite contributions were all ahead of UBS estimates. At spot pricing the broker envisages the earnings per tonne margin is running at around US$57/t.

AWC's 40% share of the second quarter distribution is calculated at US$14m. Once AWC reports the receipt of distributions this should provide greater clarity on the dividend potential in the first half, UBS maintains, as AWC has indicated it intends to maintain net debt levels and pass all available free cash flow to shareholders.

Macquarie maintains the operating results were widely anticipated, given the improvement in spot alumina prices in the quarter. Yet the result was below forecasts and the broker reduces earnings estimates, amid increases to cost assumptions.

Macquarie reduces its first half AWC dividend forecast to US18c from US45c. The broker's previous assumption was based around Alcoa distributing cash from AWAC to increase its cash balance and reduce net gearing prior to separation, but now Macquarie expects Alcoa will achieve this via its second half US$400m asset sale.

Macquarie also expects normalising freight rates will be a headwind to AWAC's expected margins from bauxite and alumina. The broker remains bearish on alumina, expecting prices will fall 6% in the September quarter to average US$225/t and retains an Underperform rating.

Deutsche Bank maintains it is possible AWAC will distribute additional cash and a high proportion of its US$550m cash balance back to JV partners in the second half ahead of the Alcoa de-merger, in order to strengthen the downstream balance sheet.

The broker increases 2016 and 2017 earnings estimates on lower refining costs but remains cautious about the outlook for seaborne alumina in the second half because of refinery re-starts in China and new low-cost supply emerging. The broker cites Alcoa's assessment that around 40% of curtailed Chinese refineries have re-started production.

What of the risks in the planned Alcoa de-merger? Macquarie expects the de-merger will be a negative catalyst for AWC. while even the looming court case over the AWAC JV terms and rights does not alter Morgan Stanley's fundamental view. Yet, the potential for a debt-carrying new JV partner to trade in lower multiples and be translated back to market views on AWC is a concern, the broker acknowledges.

AWC believes it has rights over the various AWAC assets and has made several claims in its filing against Alcoa. Credit Suisse suspects AWC is not seeking to expand its ownership of these assets but wants to confirm its legal rights and for Alcoa to negotiate an amendment to the JV agreement to strengthen the rights. The trial is scheduled for September 20 2016.

FNArena's database has two Buy ratings, three Hold and two Sell for AWC. The consensus target is $1.36, signalling 3.7% in downside to the last share price. Targets range from $1.00 (Macquarie) to $1.60 (Ord Minnett, Morgan Stanley). The dividend yield on FY16 and FY17 forecasts is 6.0% and 4.7% respectively.
 

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article 3 months old

The Overnight Report: Now The Dow

By Greg Peel

The Dow closed up 120 points or 0.7% while the S&P gained 0.7% to 2052 and the Nasdaq rose 0.7%.

Resistance

Two weeks ago we were worried about the ASX200 falling through 5100. Yesterday the index had a good look at 5400. And to a great extent it’s all about politics.

Eight years ago Barrack Obama said “Yes we can”. On Monday night the Tories said “Theresa May”. At the height of Brexit concerns, and the depth of global markets, the transition from David Cameron to new UK prime minster was expected to take three months. But Cameron is currently wrapping the glassware and souveniring ash trays as we speak.

May may have been anti-Brexit, and bears a scary resemblance to a certain predecessor, but her rapid ascent to PM has ended at least one period of Brexit-related uncertainty. Presumably the Brexit button will now be pushed, but markets have come to acknowledge that the process of exit is actually going to take time, and that time has the capacity to smooth the transition.

On the weekend the Abe government won a landslide victory in the Japanese upper house. On Monday Malcolm Turnbull achieved a majority. That’s actually yet to be confirmed, but who would argue with Anthony Green?

Political uncertainty has thus been dampened. Political certainty means fiscal mandate. Fiscal policies, backed by central bank monetary support, are shortly expected to be underpinning the economies of Japan, China and perhaps even Australia. The bottom line is there’s no reason not to buy stocks.

The ASX200 scored a ton on Monday, and yesterday waved its bat at 50 points up before the air became a bit rarefied. The 5400 level has been brick-wall resistance these past few months. At 5391, the profit-takers moved in. And fair enough – there were plenty of profits to be had.

As the index fell back to close up only 16 points, profits were taken on the cyclicals that have led this recent surge. But defensives continue to be sold, underscoring the “risk on” nature of this rally as opposed to the yield-driven rallies of the previous months. Banks, as I noted yesterday, sit somewhere in between, and closed higher again yesterday. Materials won the day with another 0.9% jump.

Materials is set for another good session today, assuming the stock market hasn’t already jumped the gun. Global stimulus is a boon for commodities prices. Base metal, iron ore and oil prices all surged overnight. The offset is gold – which is not a commodity but a currency – which has fallen overnight in “risk on” fashion.

NAB released its June business confidence survey yesterday, which was conducted post-Brexit but pre-election. Despite the volatility Brexit unleashed, the confidence index (looking ahead) rose to 6.1 from 3.0 in May and the conditions index (right now) rose to 12.0 from 9.7. Stock markets like business confidence. The RBA also pays attention as well.

Sky’s the Limit

Last night the Dow closed at 18,347, above the previous all-time closing high of 18,312 set in May last year. The Dow briefly traded above the all-time intraday high of 18,351 before slipping back a tad. At 2152, the S&P500 has breached 2150 resistance and is now trading in blue sky. The S&P mid-cap and S&P small cap indices also traded up to all-time highs last night, suggesting the rally has breadth.

Supporting the breadth were relatively solid volumes on Wall Street last night. Rising volumes at new highs have chartists all excited. The Nasdaq is still short but is back over 5000 and as of last night, back in positive territory for the year. Still lagging is the Russell small cap, which contains a lot more smaller caps than the S&P small cap, and the Dow Transports.

Proponents of Dow Theory would suggest the rally in the Dow Industrials cannot be sustained unless the Dow Transports is leading the way. Proponents of Dow Theory wear boaters and striped jackets and dance the Charleston.

Confirming the swing to “risk on” in the US were last night’s twenty dollar fall in gold and a further 8 basis point jump to 1.51% in the US ten-year yield. The US Treasury has been holding bond auctions this week and suddenly the buyers have disappeared.

Wall Street’s rally of the past two sessions has come without any economic data releases of note and just the one earnings report from a major cap company. Alcoa posted a beat. JP Morgan will report on Thursday night.

What will derail the rally? Well, that’s the scary part. It’s being driven by central bank smoke and mirrors. To justify the surge in global PEs we’ll need to see supportive, hard fundamental evidence. This particular US earnings season will be an important one.

Commodities

West Texas crude is up US$1.87 or 4% at US$46.62.

Aluminium closed up 1.5% on the LME, copper, lead and zinc 2.5% and nickel 4%.

Iron ore closed up US$3.40 or 6% at US$58.80/t.

Gold is down US$21.60 at US$1332.70/oz.

All commodity price movements occurred on a flat US dollar index, unmoved at 96.52.

Far from unmoved is the Aussie, which is up another 1.2% at US$0.7623. Over to you Glenn.

Today

The SPI Overnight closed up 30 points or 0.6%. 5400 is 57 points away.

China’s trade numbers for June are out today.

Westpac will release its June consumer confidence survey result.

The Fed will publish its Beige Book tonight.
 

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article 3 months old

The Overnight Report: Getting High

 

By Greg Peel

The Dow closed up 80 points or 0.4% while the S&P gained 0.3% to 2137 and the Nasdaq rose 0.6%.

Surge

Well it’s amazing what one good US jobs report can do. A reconfirmation of a US economy still growing, a big jump on Wall Street, and Australian banks rise 2.5%. The iron ore price was unchanged, gold little changed, and the materials sector rises 2.9%. But was it about US jobs?

It is likely the rebound in US employment, putting to bed any fears over the May anomaly, was a contributing factor. But for further incentive we can look to a 4% jump in the Japanese stock market on the day.

Many have called Abenomics a failed experiment and with good reason. Everything the government and Bank of Japan has thrown at the Japanese economy has amounted to little to date, and the yen remains stubbornly high. Not that it’s all Japan’s fault, as the country continues to lose out in the global race to the bottom.

Over the weekend Shinzo Abe’s coalition won a landslide victory in the upper house election – something a certain Mr Turnbull would give his right arm for (his right arm, of course, being Tony Abbott). The implication is that Abe has been granted an even more definitive mandate to keep doing what he’s doing. It is now expected the government, fiscally, and the BoJ, monetarily, may be preparing for some shock and awe, after a couple of years of pure frustration.

So tick the box on further Japanese stimulus. China is expected to ramp up its stimulus measures any time soon. The Bank of England is expected to cut its cash rate and/or reignite QE on Thursday night. The ECB is no doubt readying itself for more of “whatever it takes” post Brexit. And despite the strong US jobs number, the Fed is not expected to raise its cash rate due to global uncertainty.

Here come the helicopters. What does one do with all that free cash? Invest in the only market offering a positive return.

There was clearly an element of “risk on” in yesterday’s local rally as well as a search for yield. Cyclical sectors performed well. Defensives were slightly more muted. The banks lie somewhere in between. For all the angst surrounding that sector, it’s impossible to overlook the yields on offer.

And while we tend to obsess over China, it must be remembered Japan is also a major importer of Australian resources.

Back to the future

It was May last year when the S&P500 closed at 2130, which for all that time has been the all-time high. Last night the S&P closed at 2137. It was not a volatile session – the US indices opened higher from the bell and despite a bit of a fade in the afternoon, basically held their ground.

Why did Wall Street rally? See all of the above.

The US rally was also more notably “risk on”, with defensive sectors rising but underperforming, having outperformed for a couple of years now. It was also notable to see the US ten-year bond yield spike up 7 basis points to 1.43% despite the promise of more central bank stimulus around the globe. It would appear some investors elected to remove money from that crowded trade to put into stocks.

Similarly, gold fell back US$11.

So, here we are, back at the high. Now attention will turn to the US earnings season. It will begin to kick into gear later this week.

Commodities

Stock markets may have been surging across the globe last night but it was more of a mixed bag for commodities. The US dollar index rose 0.3% to 96.53 which may explain the US$11.10 fall in gold to US$1354.30/oz but this is most likely due to some unwinding of the safe haven trade.

Copper rose 1% on the LME and nickel 1.5%, but the other base metals barely moved the dial.

Iron ore rose US20c to US$55.40/t.

West Texas crude fell US41c to US$44.75/bbl.

Today

The SPI Overnight closed up 26 points or 0.5%

Locally we’ll see the NAB business confidence survey for June today which I believe would have been conducted prior to the election.

Alumina ((AWC)) will provide a quarterly production report.


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(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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