\n\tBy Chris Shaw<\/p>\n
\n\tFor some time the JP Morgan view on industrial metals has been broadly neutral. While demand from China has stayed strong and there remain supply side constraints in a number of metals, there have also been offsets from the West's weaker manufacturing cycle and policy tightening in China that has put growth expectations under some pressure.<\/p>\n
\n\tThe end result is LME metals stocks have remained relatively tightly held across the sector. With seasonal demand improving and underlying demand still solid, JP Morgan now sees a situation where any easing in investor risk aversion could mean a quick and possibly sustained move higher in prices.<\/p>\n
\n\tWhile there needs to be some positive data to support any move higher, JP Morgan notes at present technical momentum is currently very strong, so driving positive price action.<\/p>\n
\n\tThere are two possible outcomes for the rest of the year in JP Morgan's view, the first being a continued slowing in metal demand as implied by current PMI surveys. The other is the potential for further stimulus measures to fight off deflationary concerns in the global economy, with likely moves including delays to rate hikes and additional quantitative easing measures.<\/p>\n
\n\tIn the view of JP Morgan, the latter has the potential to see risk aversion quickly turn in favour of stronger demand for risky assets, as additional liquidity would drive hard asset values higher. The next few days are likely to prove important in answering whether the rally in metals prices overnight proves sustainable in the broker's view.<\/p>\n
\n\tLooking at zinc specifically in the base metals sector, Macquarie notes at first glance the market's fundamentals imply a poor outlook for prices as stocks are close to multi-year highs and more metal is believed to be being held in unreported inventories.<\/p>\n
\n\tAs a reflection of these weak market fundamentals, the zinc price has underperformed its base metal peers since the start of the year, though as Macquarie notes prices have remained above the industry's marginal cost of production in recent months.<\/p>\n
\n\tLooking more closely at the zinc market, Macquarie suggests there is evidence to point to something of a different picture. Its analysis shows the market for zinc concentrates remains in deficit, which is translating into sharply falling treatment charges.<\/p>\n
\n\tGiven the market for concentrates is in deficit, this implies a limit to how much more metal can be produced, while Macquarie also suggests there are limits to any further reductions in stock levels of zinc concentrates in China. These reductions have been apparent in recent months.<\/p>\n
\n\tAs well, Macquarie notes when volumes of reported zinc stocks are measured as a ratio to world zinc consumption, inventory levels have actually started to fall in recent months. The declines have yet to show up by substantial amounts.<\/p>\n
\n\tMacquarie suggests it should also be noted some of the zinc held in stock is simply in the wrong place, meaning it is not always readily available to the market. As an example, Maquarie notes LME zinc stocks in New Orleans in the US are quite high, but this facility is some distance from major zinc customers. This means these customers could be left waiting weeks for delivery of warrants cancelled today.<\/p>\n
\n\tThis is a possible reason behind the recent sharp rises in zinc premiums in Macquarie's view, as the overall picture is one of physical markets tighter than a simple model of global supply and demand balances would suggest. Given this, Macquarie advises caution in adopting any position on the short side of the zinc market at present.<\/p>\n
\n\tMore comments have come from analysts with respect to fourth quarter coal contract prices, Citi analysts taking the view while the settlements were a little below their expectations the outcome could have been worse.<\/p>\n
\n\tCiti had been forecasting hard coking coal contract prices of US$250 per tonne and Macquarie US$215 per tonne. Prices were settled at US$209 per tonne, but as Citi notes this was better than the US$190 per tonne Japanese steel mills were requesting.<\/p>\n
\n\tFor PCI coal the settlement price of US$147 per tonne was lower than Citi's US$200 per tonne forecast, but again there is a positive in that it is a price above recent transactions of Russian coal.<\/p>\n
\n\tCiti analysts note spot prices appear to be turning higher, as after bottoming at US$179 per tonne in August they have since rallied to US$187 per tonne in Australia. Chinese prices also appear to be moving higher.<\/p>\n
\n\tCiti's overall view is while the coal price settlements cast something of a shadow over its own forecasts for coal prices in the first half of 2011 of US$250 per tonne for hard coking coal and US$200 per tonne for PCI, there is no reason to change its strongly bullish metallurgical coal outlook.<\/p>\n
\n\tDeutsche Bank has wrapped up its view on the Australian steel sector post the recent profit results of BlueScope ((BSL)), OneSteel ((OST)) and Sims Group ((SGM)), taking the view while results broadly met expectations, outlook comments were generally downbeat.<\/p>\n
\n\tOne key positive remains relatively optimistic expectations for Australian engineering construction projects, as Deutsche sees this as potentially boosting volumes in the second half of the 2011 financial year.<\/p>\n
\n\tLooking at the companies in more detail, Deutsche's view is while iron ore earnings for OneSteel were robust, iron ore prices are likely to trend lower in coming quarters. Given iron ore accounts for around 70% of group earnings at present this is expected to have a negative impact on the share price.<\/p>\n
\n\tTo reflect this, Deutsche bank downgraded OneSteel to a Hold rating post its profit result.<\/p>\n
\n\tBlueScope remains a Buy even though manufacturing profitability is likely to come under pressure in the first quarter of the 2011 financial year, as Deutsche sees potential for earnings to recover as steel prices improve and as iron ore prices come down.<\/p>\n
\n\tDeutsche Bank also rates Sims Group as a Hold, which reflects the uncertain outlook in the group's markets given the potential for lower iron ore prices to put pressure on scrap metal prices and group margins in coming months.<\/p>\n
\n\tAs well, Deutsche notes around 30% of group earnings in the second half of the 2010 financial year related to trading profits, which can be viewed as lower quality earnings that cannot necessarily be sustained in coming periods.<\/p>\n
\n\tThe FNArena database shows most of the market agrees with the ratings of Deutsche Bank for the three companies, as both OneSteel and Sims Group have Sentiment Indicator ratings of 0.3, while BlueScope has a more positive rating of 0.8.<\/p>\n","protected":false},"excerpt":{"rendered":"
A glance through the latest expert views and predictions about commodities with JP Morgan on base metal prices, Macquarie on zinc and Deutsche offering its Oz steel preferences.<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[23,89,88],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57142"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=57142"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57142\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=57142"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=57142"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=57142"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}