##{"id":58430,"date":"2011-07-11T10:00:14","date_gmt":"2011-07-11T00:00:14","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/07\/11\/material-matters-oz-steel-oil-coal-and-iron-ore\/"},"modified":"2011-07-11T10:00:14","modified_gmt":"2011-07-11T00:00:14","slug":"material-matters-oz-steel-oil-coal-and-iron-ore","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/07\/11\/material-matters-oz-steel-oil-coal-and-iron-ore\/","title":{"rendered":"Material Matters: Oz Steel, Oil, Coal And Iron Ore"},"content":{"rendered":"<p>\n\t<strong>&#8211; Strong AUD diminishes Oz Steel&#039;s competitive advantage<br \/>\n\t&#8211; Positive medium-term oil price outlook<br \/>\n\t&#8211; <span>Citi<\/span> offers order of preference for Aussie coal plays<br \/>\n\t&#8211; Brazilian iron ore exports likely to increase in <span>2H11<\/span><\/strong><\/p>\n<p>\n\t<br \/>\n\tBy Chris Shaw<\/p>\n<p>\n\tAs Australia&#039;s only domestic steel producers, both <span>Bluescope<\/span> ((<span>BSL<\/span>)) and <span>OneSteel<\/span> ((<span>OST<\/span>)) have traditionally had a competitive advantage over imported steel thanks to supply certainty, working capital benefits and the ability to price relative to import parity.<\/p>\n<p>\n\tBut as BA Merrill Lynch notes, the value of this competitive advantage diminishes in periods when the Australian dollar is stronger, as this lowers the import price parity. This gives customers increased reason to consider imports.<\/p>\n<p>\n\tWhile the stronger Australian dollar is impacting on profitability for Australian <span>steelmakers<\/span> at present, BA-ML points out steel import volumes have slowed during <span>2H11<\/span>. This means the relative share of imports as a percentage of domestic steel volumes has declined in the period.<\/p>\n<p>\n\tFor BA-ML this indicates <span>BlueScope<\/span> and <span>OneSteel<\/span> are not losing market share to imports, even while profitability is being impacted by the strength of the domestic currency. To reflect this, BA-ML continues to rate <span>OneSteel<\/span> as a Buy, with a price target of $2.95, while <span>BlueScope<\/span> is rated as Hold with a target of $2.00.&nbsp;<\/p>\n<p>\n\tAccording to BA-ML, <span>OneSteel<\/span> is the lowest priced on an earnings multiple basis. The broker sees this as a reflection of iron ore sales, rather than the group&#039;s <span>steelmaking<\/span> operations. The <span>FNArena<\/span> database shows Sentiment Indicator readings and consensus price targets for <span>OneSteel<\/span> of 0.7 and $2.62 and for <span>BlueScope<\/span> Steel of 0.4 and $2.09.<\/p>\n<p>\n\tTurning to oil and following a review of the market, Deutsche Bank continues to see solid fundamentals that should support the medium-term oil price outlook. Asia should also continue to generate strong demand for transport fuels, which should push global oil demand above <span>100mmb<\/span>\/d by 2020.&nbsp;<\/p>\n<p>\n\tAccording to Deutsche, increased OECD production will fall short of demand growth, so reducing OPEC&#039;s spare capacity to 3.5% by 2015. This level is similar to that experienced in 2008, when the oil price traded close to US$150 per barrel. In terms of actual numbers Deutsche estimates current global oil inventories stand at around 59 days of supply, with a fall to 55 days by the end of 2012 expected.<\/p>\n<p>\n\tHaving made minor adjustments to its model, Deutsche Bank is forecasting average crude oil prices this year of around US$100 per barrel. By 2015 Brent crude prices should be trading around US$125 per barrel on the broker&#039;s numbers.<\/p>\n<p>\n\tIn terms of the outlook for Australian plays in the energy sector, the fact there are wage and cost <span>headwinds<\/span> still in play sees Deutsche Bank <span>favour<\/span> oil leveraged names with lower project execution risk. This means limited exposure to major project <span>capex<\/span> blowouts and time-line delays becomes a key investment attribute.<\/p>\n<p>\n\tIn such an environment Deutsche prefers Oil Search ((<span>OSH<\/span>)) as its top pick, as the <span>PNG<\/span> LNG project has high oil linked revenues, while the project has less exposure to Australian inflationary pressures. Oil Search is rated as a Buy, as are Santos ((<span>STO<\/span>)) and Woodside Petroleum ((<span>WPL<\/span>)).&nbsp;<\/p>\n<p>\n\tElsewhere in the sector Deutsche rates Australian Worldwide Exploration ((AWE)), Eastern Star Gas ((<span>ESG<\/span>)) and Dart Energy ((<span>DTE<\/span>)) as Buys, while Origin Energy ((ORG)), <span>Caltex<\/span> ((<span>CTX<\/span>)), Nexus Energy ((<span>NXS<\/span>)) and <span>AED<\/span> Oil ((<span>AED<\/span>)) are rated as Holds.&nbsp;<\/p>\n<p>\n\tHaving lifted coal price forecasts earlier this week by 13-45% for thermal coal (implying average prices of US$122 per <span>tonne<\/span> this year, US$139 per <span>tonne<\/span> in 2012 and US$148 per <span>tonne<\/span> in 2013) and by an average of 15% for <span>coking<\/span> coal over the next 10 years, <span>Citi<\/span> has also factored in the impact of the proposed carbon tax in Australia.<\/p>\n<p>\n\tThe tax equates to between $1.50-$2.50 per <span>tonne<\/span> in additional cost above and beyond what <span>Citi<\/span> suggests are already rising cost pressures. <span>Citi&#039;s<\/span> model has incorporated an increase in cost inflation to 5-10% over the next 10 years across the sector.<\/p>\n<p>\n\tIn terms of preferences, <span>Citi&#039;s<\/span> top picks in the Australian coal sector are <span>Whitehaven<\/span> Coal ((<span>WHC<\/span>)), Resource Generation ((RES)) and New Hope Corporation ((<span>NHC<\/span>)). All three stocks the broker rates as Buys, having upgraded New Hope post its sector review.<\/p>\n<p>\n\tThe attraction of <span>Whitehaven<\/span> is a growing thermal coal profile and continued potential for M&amp;A activity, Resource Generation appears to offer value relative to peers given exposure to a large, long-life asset and New Hope management has shown the ability to control costs and markets.<\/p>\n<p>\n\t<span>Citi<\/span> also rates Coal and Allied ((CNA)), Cockatoo Coal ((<span>COK<\/span>)) and White Energy Company ((<span>WEC<\/span>)) as Buys, Coal and Allied being upgraded post the sector review, while <span>Macarthur<\/span> Coal ((<span>MCC<\/span>)) is rated as a Sell.<\/p>\n<p>\n\tFinally on iron ore, the latest port data from Brazil confirms iron ore supply from that country was restricted in the first half of this year. Macquarie attributes this to a combination of weather-related, operational and loading issues during the period.<\/p>\n<p>\n\tJune exports in <span>annualised<\/span> terms came in at <span>309M<\/span> <span>tonnes<\/span> but Macquarie continues to expect a strong bounce-back in second half, enough to bring full year exports to <span>320M<\/span> <span>tonnes<\/span>. This would be an increase of <span>14M<\/span> <span>tonnes<\/span> in year-on-year terms.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A glance through the latest expert views and predictions about commodities with the strong Aussie dollar impacting on domestic steel plays, updates to oil and coal forecasts and a note on iron ore.<\/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":[27,89,24,88],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58430"}],"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=58430"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58430\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=58430"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=58430"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=58430"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}