Mixed outlook for base metals; upside in gold expected; positive uranium fundamentals; quarterly production previews; coal settlements.<\/p>\n
-Copper supply surging but growth expected to slow \nBy Eva Brocklehurst<\/p>\n Base Metals<\/u><\/p>\n Zinc<\/strong><\/u> support was in evidence from additional infrastructure spending as Goldman Sachs conducted a field trip to China. This infrastructure spending has a solid historical relationship with galvanised steel output and tends to lead it by 2-3 months. Goldman highlights the uncertainty on the supply side and believes zinc will continue to outperform in the second half of 2016 and in early 2017.<\/p>\n Copper<\/strong><\/u> is entering a supply storm, Goldman believes, and this should translate into higher copper smelter and refinery charges and ultimately higher refined copper production. This drives the broker's forecasts for copper prices at US$4,083\/t and US$4,000\/t for 2017 and 2018 respectively. UBS has been negative for a long time on copper but is starting to change its view.<\/p>\n The demand side is considered to be strong, while supply-side growth is expected to slow. In copper stocks, despite upgrading OZ Minerals<\/strong><\/u> ((OZL)) to Neutral the broker still prefers Sandfire Resources<\/strong><\/u> ((SFR)), given its simpler organic growth opportunities, although suspects mine life is an issue that may keep some investors away.<\/p>\n Nickel<\/strong><\/u> demand is lifting and around 10% of supply is set to leave the trade, UBS notes. Inventory levels will provide a buffer in the short term but by early 2017 the broker suspects this will be reduced. At spot prices of around US$4.55\/lb the broker observes the industry is not on a sustainable footing and many producers are still losing cash. Prices are expected to lift to US$5.50\/lb in 2017.<\/p>\n The broker prefers Independence Group<\/strong><\/u> ((IGO)) over Western Areas<\/strong><\/u> ((WSA)) as the Nova mine offers lower break-even prices. The broker concedes Western Areas' pure nickel exposure makes it a key name and it is likely to trade at a premium while price upside risk is present.<\/p>\n Aluminium<\/strong><\/u> smelting is being targeted by the Chinese government for supply-side reform, leading to a number of capacity reductions throughout the country. Goldman Sachs observes the current oversupply of power throughout China still makes smelting aluminium an attractive industry, especially as the country is a significant importer of bauxite. Aluminium prices are expected to decline in the second half and in 2017.<\/p>\n Gold<\/u><\/p>\n UBS continues to expect upside in gold<\/strong><\/u>. Low inflation should keep yields down and the US Federal Reserve's policy setting loose. The broker expects gold prices to edge towards an average of US$1,400\/oz over 2017. UBS prefers Evolution Mining<\/strong><\/u> ((EVN)) and Alacer Gold<\/strong><\/u> ((AQG)) in the sector.<\/p>\n Uranium<\/u><\/p>\n On a 5-year view UBS considers the uranium<\/strong><\/u> industry fundamentals very positive but estimates Energy Resources of Australia's<\/strong><\/u> ((ERA)) stockpiles will be exhausted by 2020 and its mining licence will conclude in 2021. Catalysts are lacking in the near term which means prices are likely to languish in the low US$30\/lb region for 2016-17, around marginal cost in the broker's view. Looking ahead the broker expects a similar premium will be maintained by ERA, with an average price of US$44.80\/lb versus average spot at US$30.10\/lb being realised over the September quarter.<\/p>\n Production Previews<\/u><\/p>\n UBS expects the September quarter will have been strong for bulk<\/strong><\/u> commodities in Australia but, following above-average rainfall, production and sales have risks to the downside. Offsetting this will be a lift in the Platts 62% iron ore<\/strong><\/u> price over the quarter. The broker expects a weak set of numbers from Newcrest Mining<\/strong><\/u> ((NCM)), OceanaGold<\/strong><\/u> ((OGC)) and Sandfire Resources. Beadell Resources<\/strong><\/u> ((BDR)) is expected to report a significant lift in production, with a near doubling of head grade.<\/p>\n OZ Minerals is expected to lift production over the quarter while Evolution Mining is expected to report lower costs as the June quarter was adversely affected by one-off items. Iron ore shipments are likely to be weaker, with UBS observing volumes in the vessel movements off the coast of Western Australia were below expectations.<\/p>\n The broker lowers its ratings for BHP Billiton<\/strong><\/u> ((BHP)) and South32<\/strong><\/u> ((S32)) to Neutral from Buy and Whitehaven Coal<\/strong><\/u> ((WHC)) to Sell from Neutral. The broker believes all three are quality companies but envisage risks as manganese<\/strong><\/u> and coal<\/strong><\/u> prices are at unsustainable levels, with the factors that drove prices higher being reversed. UBS switches its diversified preference to Rio Tinto<\/strong><\/u> ((RIO)) with a view that a sustained iron ore price through to year end could mean additional returns in 2017.<\/p>\n Coal<\/u><\/p>\n Peabody and Nippon Steel have reportedly settled the benchmark hard coking (metallurgical) coal<\/strong><\/u> price at US$200\/t for North Goonyella product. This is much higher than Macquarie was expecting and the highest quarterly contract price since the September quarter of 2012. Peabody settled PCI coal prices at US$133\/t recently. The broker envisages a boost to free cash flow for BHP Billiton while South32 cash flow could double at spot prices. Whitehaven Coal would be debt free in a year's time using spot prices.<\/p>\n Goldman Sachs suspects the coking coal market may remain relatively tight as a direct result of the 276 working day rule imposed by China in May. There is also a commonly held belief that authorities are less inclined to relax restrictions on coking coal producers versus thermal coal<\/strong><\/u>, because steel<\/strong><\/u> making is targeted for supply-side reform.<\/p>\n The adoption of a more flexible production regime in China and re-start of supply ex China should mean the global market returns to more normal levels in 2017, in Goldman's view. Spot premium hard coking coal prices are expected to be US$180\/t in the December quarter and US$135\/t and $125\/t for 2017 and 2018 respectively.<\/p>\n Thermal coal, while not experiencing the price response on the level of coking coal, is also affected by the working day rules although regulators have slightly relaxed the production cap. Goldman Sachs expects lower demand from buyers of semi soft coking coal and greater competition with LNG<\/strong><\/u> in the power sector should all contributed to a balanced market net year for thermal coal. Price estimates are US$65\/t for the December quarter and US$61 and US$60\/t for 2017 and 2018 respectively.
\n-Nickel demand lifting and supply moving out
\n-Absence of catalysts in the near term for uranium
\n-Strong September quarter for bulk commodities
\n-Coking coal market expected to remain tight<\/strong><\/p>\n
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