\n\tBy Chris Shaw<\/p>\n
\n\tJanuary was a tough month for precious metals prices as RBS notes investor attitude towards the sector took a turn for the worse. Sentiment was impacted by reduced safe haven buying, the broker noting investors have rotated some funds into more attractive assets during the past few weeks.<\/p>\n
\n\tAs evidence of this, RBS notes there was hefty outflows from both gold and silver physically backed ETFs or Exchange Traded Funds, with over 60 tonnes of gold and 486 tonnes of silver being liquidated. Add in price declines and around US$9.6 billion was wiped off the value of holdings during the month.<\/p>\n
\tRBS's view is pressure will remain on precious metal prices in coming weeks, as Asian inflation fears are currently being overwhelmed by expectations of a stronger US dollar and the start of a normalisation process for interest rates globally.<\/p>\n
\n\tBase metals have also struggled to begin the year, with only nickel and tin having posted gains so far in 2011. The price weakness has been driven by sharp increases in reported metal inventory, this at a time when RBS notes producers have already committed to bringing additional supply to the market.<\/p>\n
\n\tWith the Chinese New Year period starting this week trading volumes in commodities should thin out, so given this and currently bullish price forecasts in the market RBS suggests there is a risk the price falls seen so far this year generate some cuts to current price expectations. <\/p>\n
\n\tTurning to a different metal, China recently ordered 200 aircraft from Boeing at an estimated cost of US$19 billion, which follows an Indian order for US$15.6 billion worth of planes from Airbus. As Nomura International points out, such orders have significant implications for titanium given it is one of the most important metals used in aircraft design.<\/p>\n
\n\tNaturally occurring titanium mineral concentrates are ilmenite and rutile, with Australia having one of the largest reserves. In terms of refined product Japan and China are major producers, but China is also a major importer of the metal thanks to strong demand growth in recent years. <\/p>\n
\n\tNomura has analysed the titanium market in light of this growth in aircraft demand, noting Boeing has more than 3,400 unfilled aircraft orders at present. This suggests demand for titanium will remain firm in coming years as these orders are filled.<\/p>\n
\n\tIn the view of Nomura, 2011 could see titanium prices record their first rise in Japanese export prices in two years, as export volumes are expanding despite the currently strong yen. Australia offers a way to play Nomura's bullish view on titanium, this via minerals sands producer Iluka ((ILU)).<\/p>\n
\n\tThe FNArena database shows Iluka is rated as Buy five times, Hold twice and Sell once, with a consensus price target of $9.10. The stock is trading around $8.60 at present, which implies share price upside of circa 6% relative to the consensus price target.<\/p>\n
\n\tIn the steel market, RBS notes rising prices and signals of improved demand are offering some more positive signs to steelmakers. Given this, producers have attempted to push through price increases to counter rising raw material costs.<\/p>\n
\n\tBut margins are still at depressed levels, RBS estimating at current spot prices a typical blast furnace in the middle of the cost curve is losing US$25-$75 per tonne on hot rolled coil production. This reflects a lack of pricing power, as industry mill utilisation rated are currently around 74% globally compared to RBS's estimate of a level above 85% being necessary for producers to enjoy sustained pricing power.<\/p>\n
\n\tGiven a combination of strong raw material prices and weak Australian steel demand, RBS is not expecting steel prices to continue to rise, which has implications for its ratings on the listed Australian plays in the sector.<\/p>\n
\n\tThe two key risks for Australian steelmakers, according to RBS, includes the current willingness of buyers to accept higher prices is not likely to continue given current utilisation rates suggest demand is not strong enough to allow for a full push through if higher input costs. <\/p>\n
\n\tAs well, current raw material price increases appear to be more a function of supply constraints than stemming from stronger demand, meaning any decline in steel buying activity could push prices lower. Such a decline is possible as RBS notes leading indicator approvals data for both residential and non-residential construction in Australia declined over most of 2010.<\/p>\n
\n\tWith respect to the Australian plays, both BlueScope Steel ((BSL)) and OneSteel ((OST)) are rated as Buy by RBS, but OneSteel is preferred given its leverage to iron ore prices. BlueScope offers long-term value according to RBS, but has a more challenging 2011 outlook. Sims Metal ((SGM)) has been downgraded to a Sell rating from Hold previously, RBS making the change after a recent rally in the share price of the company.<\/p>\n
\n\tIn contrast, BA Merrill Lynch rates both BlueScope and Sims Metal as Neutral, the former as operations currently appear to be operating at below break-even in EBIT (earnings before interest and tax) terms that will require a pick-up in demand to address and the latter reflecting the broker's lack of confidence with respect to a sustained improvement in scrap prices and earnings into FY12. <\/p>\n
\n\tAs with RBS, BA-ML rates OneSteel as a Buy, this reflecting a preference to play any recovering regional steel theme through the company's iron ore operations as this also offers an indirect price benefit on manufactured domestic steel.<\/p>\n
\n\tMacquarie has assessed the thermal coal market, noting the rally and recent pullback in prices has followed a similar pattern to the same period in 2009\/10, though it has started at a higher base. In Macquarie's view a likely rebound in prices in coming months will be more dramatic than occurred in 2010.<\/p>\n
\n\tFrom September of 2009 to a peak in January of 2010 Newcastle FOB prices rallied 52%, so if Macquarie is correct and prices strengthen in the next few months by more than the gains last year, any rally should be significant. <\/p>\n
\n\tThere are reasons in support of Macquarie's view, one being supply in the first quarter of 2011 will be significantly below that of the same period in 2010 thanks to persistent rain over the last nine months in key markets such as Indonesia, Australia, South Africa and Columbia.<\/p>\n
\n\tAs well, Macquarie expects European coal imports will rise this year after a period of de-stocking in 2010. One possible area of concern at present is that seaborne prices are much higher than Chinese prices at present, but Macquarie suggests this could see greater competition for material in the shorter-term. This is likely to generate a further drawing down of Chinese stocks, something Macquarie expects will push up prices beyond the highs seen early in January.<\/p>\n
\n\tMacquarie has also updated its views on the Australian energy sector, concluding 2011 should be a strong year thanks to rising oil prices and strong LNG demand growth, which should eat into some of the surplus supply evident last year.<\/p>\n
\n\tIn the sector Macquarie expects oil will be the standout, the broker forecasting an average price of US$95 per barrel this year. A peak average price of US$104 per barrel in the second quarter of the year is expected before prices decline in the second half on the back of a supply response from OPEC.<\/p>\n
\n\tAsian spot LNG prices are also tipped to rise and given a lot of the expected company specific news is already in the market, Macquarie expects the sector should track the oil price more closely this year. This should support share prices across the sector, making stock picking less important in 2011.<\/p>\n
\n\tAmong the majors, Macquarie rates Santos ((STO)) and Oil Search ((OSH)) as Outperform, while Woodside ((WPL)) is rated as Neutral. There is scope for the market to look to the mid-caps for better leverage and among these stocks Macquarie rates Beach Petroleum ((BPT)), Australian Worldwide ((AWE)) and Tap Oil ((TAP)) as outperform. Caltex ((CTX)) in contrast scores a Neutral rating.<\/p>\n
\n\tBy way of comparison with the broader market, the FNArena database shows Sentiment Indicator readings of 0.8 for Santos, 0.5 for Australian Worldwide, 0.4 for Oil Search, 0.3 for Beach, 0.2 for Tap, 0.1 for Woodside and minus 0.5 for Caltex. <\/p>\n
\n\tOver at BA-ML, the broker notes any escalation of political events in the Middle East would affect all oil and gas producers either directly or indirectly. The positive for the Australian plays is little asset exposure in the region, meaning benefits should stem for the Australian energy sector as a whole from any near-term oil prices increases and security of supply concerns.<\/p>\n
\n\tIn terms of possible outcomes, BA-ML suggests any closure of the Suez Canal for a period would mean the economics of spot cargo sales in the LNG market would shift to favouring Asian destinations, which could see a softening of prices in the region. <\/p>\n
\n\tBut it would also see buyers look for greater security of supply longer-term, which BA-ML suggests could favour Australian shippers in markets such as India given buyers there may be willing to trade-off on shipping costs versus supply risk. <\/p>\n
\n\tIn oil, BA-ML notes a risk premium has already been priced into the market, but the broker sees scope for a greater impact if the current unrest results in any supply disruption to either production itself or regional tanker routes. <\/p>\n
\n\tAcross the companies in its Australian Energy coverage universe, BA-ML rates Horizon Oil ((HZN)), Oil Search and Woodside as Buy, while Australian Worldwide, Karoon Gas ((KAR)), Roc Oil ((ROC)) and Santos are rated as Neutral. Underperform ratings are applied to Beach, Nexus Energy ((NXS)) and Tap Oil. <\/p>\n
\n\tThe FNArena database shows Sentiment Indicator readings of 0.7 for Horizon, 0.0 for Karoon, 0.2 for Roc and minus 0.3 for Nexus.<\/p>\n","protected":false},"excerpt":{"rendered":"
A glance through the latest expert views and predictions about commodities with positive views on the Australian energy sector and titanium but reasons for caution on precious and base metals and the steel 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":[23,27,89,24,88,22],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57659"}],"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=57659"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57659\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=57659"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=57659"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=57659"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}