Merchandise | 12:41
A look at the latest opinions and forecasts from experts on commodities: aluminum; base metal miners; large-cap minors; and energy actions
-An increasing risk has appeared for alumina miners
-Macquarie updates forecast for copper miners, more neutral on nickel miners
– Iron miners, large caps, becoming more attractive
-UBS improves outlook for oil, predicts demand for LNG will soon exceed supply
By Eva Brocklehurst
Supply constraints, combined with the demand created by governments that stimulate economies, have stimulated aluminum and alumina prices. These supply constraints are largely due to the fire at the Jamalco refinery and the coup d’Ã©tat in Guinea. Evans & Partners highlights a gap that has emerged between its estimates for aluminum and alumina and spot prices, implying upside risk to earnings and dividend expectations for miners.
Analysts maintain a positive opinion on Alumina Ltd. ((AWC)), being constructive about AWAC’s assets and drawn to management’s commitment to handing money over to shareholders. Unlike their counterparts, AWAC’s assets are well resourced and can support production in the medium to long term. As a result, the expenditure needs are low.
Analysts are also positive on South32 ((S32)) which made progress in its growth options and achieved a solid operational performance. The lack of iron-ore exposure can also make the stock more attractive if this price weakens further.
Base metal miners
Macquarie recently improved its forecast for the copper miners, incorporating modifications to its copper, gold and currency assumptions. On average, earnings estimates increase 10-20% for FY22-23 over all coverage. The broker now forecasts refined supply growth of 3.5 million tonnes of copper by 2025 based on recent approvals of new projects.
A deficit is still expected in 2021 in the order of -259,000 t, which could be reduced to -100,000 t if China sells reserves of around 150,000 t. A balanced market is then expected in 2022 before surpluses arise in 2023 and 2024.
Macquarie maintains a preference for OZ Minerals ((OZL)) because it has several catalysts led by the expansion of Prominent Hill. Sandfire Resources ((SFR)) and 29 Metals ((29M)) are also preferred for the leverage of copper while Chalice mine ((CHN)) is a favorite exploration game.
Meanwhile, the movements of nickel prices that vary from the broker’s forecast present the main risk to estimates and valuation of profits for Nickel mines ((NIC)). The company recently confirmed that Indonesia is considering an export tax on products containing less than 70% nickel.
Macquarie maintains a cautious outlook for nickel miners and reiterates neutral ratings for Nickel Mines, Mincor Resources ((MCR)) and Panoramic resources ((PAN)).
Citi considers Iron mine valuations are now attractive, despite heightened concerns about the Chinese real estate market and the risk to iron ore prices, as monetary conditions point to stabilization. In addition, the easing of closures, reflected by traffic congestion across China, as well as the peak construction season in September, should ensure that demand remains strong.
Despite gloomy data in August, Citi notes that demand for major commodities remains positive while acknowledging steel consumption is underperforming. It is evident that production cuts in China have forced steel consumption to decouple significantly from underlying industrial demand. Consumption fell by -15% in August.
Meanwhile, the gap between sales and property starts in China has widened, suggesting some destocking. Real estate accounts for about a third of the demand for steel in China, and China, in turn, accounts for about half of the world’s steel consumption.
Evans & Partners notes that while the demand shock from China’s reduced steel production has been a significant constraint on iron ore prices, supply is also limited. The June quarter production reports from major producers all showed that short-term supply is constrained.
The coup in Guinea could also delay progress in Simandou, which is expected to be a longer-term source of increased supply. As a result, analysts suspect the risk to iron ore prices, and hence the performance of BHP Group ((BHP)) and Rio tinto ((RIO)), is now more balanced. Stocks appear to offer better value and analysts are updating their recommendations to Positive for the pair.
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