\n\tBy Chris Shaw<\/p>\n
\n\tLast week was LME Metals Week and the discussions brought up some interesting points according to Goldman Sachs. In general terms, the broker notes miners generally are happy with current prices and most producers have a positive outlook for 2011.<\/p>\n
\n\tAccording to Goldman Sachs, this reflects the generally comfortable view of producers with respect to China continuing to be the main driver of base metal demand growth. The copper story looks the brightest according to the broker, while there is a consensus opinion aluminium will remain over-supplied in the medium-term. Market opinions on nickel and zinc are mixed at present.<\/p>\n
\n\tStandard Bank also notes LME Week participants are bullish on copper, even with prices currently above the US$8000 per tonne level. While the bank agrees on the positive outlook for the metal it sees scope for significant price volatility in coming weeks ahead of the next Fed meeting in the US in early November.<\/p>\n
\n\tIn Standard Bank's view copper prices have run out of steam somewhat following the strong gains recorded in September and early October. As well, the bank notes a recent moderating in open interest levels suggests some market participants have decided to take some profits.<\/p>\n
\n\tDriving copper prices in the bank's view has been the value of the US dollar, so with further quantitative easing measures expected there is scope for anticipated Chinese re-stocking of the metal to be delayed if the greenback falls further.<\/p>\n
\n\tThis is likely to create some additional volatility in copper markets, especially as Standard Bank also sees scope for power curbs in China continuing to impact on smelters and fabricators and so short-term demand for the metal.<\/p>\n
\n\tAnother major talking point during LME week according to Goldman Sachs was the rumoured introduction of physically-backed exchange traded funds (ETFs) for copper, aluminium and possibly other base metals.<\/p>\n
\n\tGoldman Sachs notes consumers and producers generally are uncomfortable with the concept, especially given the impact such products could have on prices, premiums and market fundamentals. This is partly because higher prices stemming from increased physical demand could result in increased substitution between metals.<\/p>\n
\n\tThere were also questions as to the economics of such ETFs. Goldman Sachs notes industry consultants Brook Hunt calculates given the cost of storage, investors in an aluminium ETF would need around 15% price upside to break even while those in copper ETFs would require 5-8% price increases. To date, the timing of the release of any base metal ETFs remains unknown.<\/p>\n
\n\tDeutsche Bank is somewhat more positive on the potential impact of base metal ETFs, taking the view the launch of such products could herald new investment demand for this part of the commodity complex.<\/p>\n
\n\tHaving said that, Deutsche cautions the potential launch of such ETFs, along with support stemming from the potential for further quantitative easing measures and US dollar weakness, is largely priced into base metal markets at current levels. This implies a short-term correction is possible, likely coming before the end of the year in the broker's view.<\/p>\n
\n\tElsewhere in commodities, Goldman Sachs recently met with the management of minerals sands play TZ Minerals International and learned the current market for high grade titanium feedstocks and zircon is presently very tight. This trend is likely to continue, TZ Minerals expecting increasing deficits in these markets beyond 2014 even allowing for known new projects.<\/p>\n
\n\tThe other point made by TZ Minerals is that historically most titanium feedstock producers have had “cap and collar” pricing mechanisms but a number of these contracts are ending either this year or in the next couple of years.<\/p>\n
\n\tThis is likely to see a shift to shorter contract durations, with pricing possibly moving from annual to a minimum of semi-annual contracts. Quarterly contracts are also possible. Recent price increases have been accepted by customers given a lack of choice according to TZ Minerals, the company seeing scope for further price increases from 2012-2015.<\/p>\n
\n\tFollowing the meeting with TZ Minerals, Goldman Sachs continues to rate both Iluka ((ILU)) and Mineral Deposits ((MDL)) as Buys with respective price targets of $9.00 and $1.35. The FNArena database shows Sentiment Indicator readings of 0.4 for Iluka and 1.0 for Mineral Deposits. Consensus price targets according to the database stand at $6.03 for Iluka and $1.22 for Mineral Deposits.<\/p>\n
\n\tIn the energy sector UBS has revised its foreign exchange estimates to reflect the fact the Australian dollar has been far stronger against the US dollar than the broker had expected. At the end of the September quarter the AUD\/USD rate was $0.97 and UBS has now applied this rate to its forecasts through to the end of the third quarter of 2013. Previously its model had factored in an exchange rate of $0.8410 against the US dollar.<\/p>\n
\n\tApplying this new currency forecast and marking-to-market for the actual quarter-end oil price sees UBS adjust earnings estimates through the sector, with most of its estimates falling up to 10% this year and around 20% in 2011. Some moves have been larger or smaller but these have come from companies with a relatively low earnings base.<\/p>\n
\n\tAt the larger capitalisation end of the sector there is no change to UBS's preference for Woodside ((WPL)) and Oil Search ((OSH)). Both companies are rated as Buys, while price targets have changed modestly to $55.14 for Woodside and to $8.55 for Oil Search.<\/p>\n
\n\tElsewhere in the sector UBS continues to rate Santos ((STO)), Karoon Gas ((KAR)), Australian Worldwide Exploration ((AWE)) and Roc Oil ((ROC)) as Buys. Both Caltex ((CTX)) and Beach Petroleum ((BPT)) have been downgraded to Neutral ratings from Buy previously, in both cases thanks to recent share price strength.<\/p>\n
\n\tUBS has also downgraded AED Oil ((AED)) to Sell from Neutral, which again is largely a valuation move given recent strong share price performance. As well, there remains some uncertainty surrounding an ongoing contractual dispute regarding the Puffin prospect and this supports the broker's downgrade to a more negative view.<\/p>\n
\n\tTurning to the fertiliser market, Goldman Sachs notes while US diammonium phosate (DAP) inventories at the end of the month were up 13% compared to the end of August they remain about 24% below five-year average levels. It is a similar story in urea, where inventories are around 23% below the five-year average.<\/p>\n
\n\tThis lack of inventory is supporting prices and Goldman Sachs has responded by lifting its forecasts for DAP prices to US$500 per tonne in FY11 and US$425 per tonne in FY12. Incitec Pivot ((IPL)) is the primary fertiliser exposure on the Australian market and the FNArena database shows the stock is rated as Buy and Hold three times each and Sell once.<\/p>\n
\n\tThe other change made by Goldman Sachs in the commodities sector has been to upgrade Rio Tinto ((RIO)) to a Buy rating, the broker resuming coverage on the announcement the proposed iron ore joint venture with BHP Billiton ((BHP)) has been scrapped.<\/p>\n
\n\tAs the proposed joint venture was not included in its forecasts, Goldman Sachs makes no changes to its earnings estimates for Rio Tinto on the news the deal is off. This means a return to focus on Rio Tinto's earnings outlook. With iron ore expected to account for about 79% of earnings in 2010 and a favourable short-term outlook for the product, Goldman Sachs has a positive view in this regard.<\/p>\n
\n\tFrom an expected price in the current half year of US$131 per tonne FOB Goldman Sachs expects iron ore prices will rise to US$137 per tonne in the first half of 2011. Spot prices are even better at US$140.70 per tonne at present, which offers some upside to the broker's earnings forecasts.<\/p>\n
\n\tThese stand at earnings per share of US668.5c this year, US795.1c in 2011 and US$778.6c in 2012. For Goldman Sachs this justifies a share price target for Rio Tinto of $104.94. This compares to a consensus price target according to the FNArena database of $97.67. Targets range from $90.00 for Deutsche Bank to UBS at $107.00, while Rio Tinto is rated as Buy by all eight brokers covering the company.<\/p>\n","protected":false},"excerpt":{"rendered":"
A glance through the latest expert views and predictions about commodities with commentary from LME Week, some positive views on for mineral sands and fertiliser prices and revisions to ratings in the energy sector.<\/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":[32,23,27,89,24,88],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57325"}],"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=57325"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57325\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=57325"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=57325"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=57325"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}