##{"id":58438,"date":"2011-07-12T11:29:10","date_gmt":"2011-07-12T01:29:10","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/07\/12\/material-matters-price-revisions-and-policy-impacts\/"},"modified":"2011-07-12T11:29:10","modified_gmt":"2011-07-12T01:29:10","slug":"material-matters-price-revisions-and-policy-impacts","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/07\/12\/material-matters-price-revisions-and-policy-impacts\/","title":{"rendered":"Material Matters: Price Revisions and Policy Impacts"},"content":{"rendered":"

\n\t– Bulk price revisions
\n\t– Copper, oil expectations also adjusted
\n\t– 2H11<\/span> price recovery still expected
\n\t– Policy impacts in China, India and Australia<\/strong><\/p>\n

\n\t
\n\tBy Chris Shaw<\/p>\n

\n\tWhile there have been concerns of a looming iron ore market surplus for some time, Citi<\/span> suggests its expectation of a 50Mt<\/span> market surplus by 2014 is now looking a little shaky. This reflects downgrades to production targets in future years by producers such as Vale and issues at emerging projects such as Oakajee<\/span>.<\/p>\n

\n\tAccording to Citi<\/span> this means the probability the expected market surplus is pushed out to a future date is much higher now than was the case just a few months ago. If project delays continue to spread across the sector, there is potential for current supply forecasts to become unattainable.<\/p>\n

\n\tThe key markets on the supply side will be Australia and Brazil, as Citi<\/span> notes they will provide two-thirds of expected supply growth over the next five years. Given the delays already announced, along with the fact project costs continue to increase, Citi<\/span> now has far less confidence in its existing forecasts.<\/p>\n

\n\tAs an example, Citi<\/span> points out if a probability of only 50% was applied to currently planned Australian projects, the forecast surplus for 2014 could be cut in half. Such an outcome would be supportive for prices. <\/p>\n

\n\tAt present Citi<\/span> is forecasting iron ore fines prices of US$165 per tonne<\/span> this year, US$149 per tonne<\/span> in 2012, US$121 per tonne<\/span> in 2013 and US$104 per tonne<\/span> in 2014. Spot price forecasts stand at US$176 per tonne<\/span> this year and US$153 per tonne<\/span> in 2012, then US$130 and US$115 per tonne<\/span> in 2013 and 2014.<\/p>\n

\n\tStill on bulks, BA Merrill Lynch notes China has returned as a buyer in the seaborne thermal coal market, something seen as substantially improving the demand outlook for 2012. Asian demand in general remains strong, economic growth in the region being the main driver.<\/p>\n

\n\tDemand for seaborne coal in particular will remain totally dominated by Asia and BA-ML expects there will be a gain in market share as domestic production issues continue to impact in both China and India.<\/p>\n

\n\tThese production issues are also pushing up costs, as BA-ML notes mine site extraction costs in China have doubled over the past five years. This has brought the price of Newcastle coal much closer to domestic Chinese prices, something expected to continue to support active imports into China in coming months.<\/p>\n

\n\tIt is a similar story in India, where the market is being hampered not only by disappointing domestic production but also a limited domestic transportation network. This should keep demand for imports high for some time in the Indian market.<\/p>\n

\n\tTo reflect this BA-ML has lifted coal price forecasts in coming years, forecasts for hard metallurgical coal being increased to annual average prices of US$293 per tonne<\/span> this year and US$265 per tonne<\/span> in 2012. Previous forecasts stood at US$280 and US$210 per tonne<\/span>, while the long-term forecast of US$200 per tonne<\/span> from 2013 is unchanged. <\/p>\n

\n\tFor PCI coal BA-ML's forecasts have increased to US$225 per tonne<\/span> this year and US$193 per tonne<\/span> in 2012 from US$213 and U$163 per tonne<\/span> respectively, while for semi-soft coal forecasts now stand at US$228 per tonne<\/span> and US$183 per tonne<\/span> for 2011 and 2012. These are up from US$215 per tonne<\/span> and US$143 per tonne<\/span>.<\/p>\n

\n\tThermal coal forecasts for BA-ML are unchanged for 2011 at US$122 per tonne<\/span> but estimates for 2012 have increased by US$8 to US$138 per tonne<\/span> and for 2013 by US$43<\/span> to US$118 per tonne<\/span>. Long-term forecasts for PCI, semi-soft and thermal coal are all unchanged at US$125 per tonne<\/span>, US$115 per tonne<\/span> and US$100 per tonne<\/span> respectively.<\/p>\n

\n\tBA-ML has also revised expectations for copper prices, this reflecting expectations of the market remaining tight through 2020 thanks to ongoing constraints on the supply side. The supply deficits are likely to force the market to source alternative supplies such as scrap, tailings and re-treatment, all of which BA-ML notes will involve higher capital and operating costs.<\/p>\n

\n\tAs higher costs should support prices BA-ML has lifted its long-term copper price estimate to US$3.00 per pound, up from US$1.94 per pound previously. When added to changes to exchange rate assumptions there have been changes to earnings and price targets across the broker's copper coverage universe.<\/p>\n

\n\tAmong the Australian plays the biggest impact is felt by PanAust<\/span> ((PNA<\/span>)), BA-ML's target increasing to $4.65 from $4.25 while its rating remains a Buy. This reflects PanAust<\/span> offering good leverage to copper prices and long mine life. Oz Minerals has an unchanged target of $18.00 and an unchanged rating of Buy. <\/p>\n

\n\tThe FNArena<\/span> database shows Sentiment Indicator readings for the two companies of 0.7 for PanAust<\/span> and 0.3 for Oz Minerals.<\/p>\n

\n\tDanske<\/span> Bank has looked more broadly at the commodities sector, taking the view while the market is in something of a summer lull at present, a recovery in the northern autumn is likely. This implies some limited upside to the prices of most raw materials.<\/p>\n

\n\tLonger-term Danske<\/span> continues to see the dynamics of a commodities super-cycle remaining in place, something that suggests sustained upward pressure on raw material prices for another 5-10 years. While average oil price forecasts have been trimmed for both this year and next to US$111 and US$117 per barrel respectively, Danske<\/span> has retained its expectation the oil price will be around the US$120 per barrel level at the end of 2012.<\/p>\n

\n\tBarclays Capital has also adjusted its view on the oil price outlook, this reflecting the expectation the market will see a further reduction in global spare capacity in 2012. While for 2011 Barclay's average price forecast is unchanged at US$112 per barrel for Brent crude, in 2012 the group has lifted its estimate by $10 to US$115 per barrel.<\/p>\n

\n\tGiven West Texas Intermediate (WTI<\/span>) prices remain severely dislocated from those of Brent crude Barclays have also adjusted estimates for this market, cutting its 2011 forecast by $6 to US$100 per barrel and lifting 2012 numbers by $4 to $110 per barrel.<\/p>\n

\n\tThe changes reflect updated supply and demand forecasts, which for 2012 show a continuation of strong emerging market demand. Barclays expects global oil demand for 2012 will increase by 1.38mb<\/span>\/d, with non-OECD demand increasing by 1.57mb<\/span>\/d. Driving this demand will be China, India, Saudi Arabia and Brazil.<\/p>\n

\n\tHaving looked more closely at China given its importance for commodity markets, Barclays suggests demand will remain strong as the central commitment of policy markers will be to sustain economic prosperity and keep employment high. <\/p>\n

\n\tA key socioeconomic element is the differing dynamic between urban and rural populations, which has seen the introduction of special policies designed to constrain the ability of rural migrant workers to settle in urban areas.<\/p>\n

\n\tThis is creating a lack of flexibility in the employment picture, which is forcing Beijing to create more training and employment opportunities as well as provide more benefits to certain households. There is also a focus on developing the less advanced western regions of China, something Barclays expects will require large inputs of commodities. This should support Chinese commodity demand and so support commodity prices in general.<\/p>\n

\n\tIn India, Barclays expects an easing in commodity demand growth in the short-term as economic activity slows slightly. Driving the slowdown will be currently tighter monetary conditions, which are impacting on interest rate sensitive sectors of the economy.<\/p>\n

\n\tAs these sectors, which include discretionary consumption and investment, are all large commodity end-use sectors, a slowing in demand is likely in coming months. A more pronounced pull-back in economic activity is unlikely in the view of Barclays, which means still supportive structural factors should continue to provide a strong basis for both economic growth and commodities demand.<\/p>\n

\n\tBarclays has also looked at the potential impact of a carbon pricing scheme in Australia, suggesting it could add to the increasing challenges facing the mining sector. As Barclays notes, two recent surveys suggest by 2020 as much as 262Mt<\/span> of coal production could be lost from existing mines and a further 380Mt<\/span> from potential mines.<\/p>\n

\n\tWhen added to what are already high costs, as Barclays notes average cash costs of copper production in Australia have risen by 200% since 2000 compared to a rise of 120% for global producers on average, cost pressures for resource companies look set to remain significant.<\/p>\n

\n\tWith the Australian dollar also strong Barclays notes commodity prices have not appreciated by as much in domestic currency terms. This means EBITDA\/revenue ratios for major mining firms with significant operations in Australia were actually lower in 2010 than in 2006, even allowing for an increase in revenues over the period. <\/p>\n

\n\tAs Barclays points out, this increase in cost pressures is making life increasingly difficult for Australian-based mining operations. A carbon scheme will only add to such pressures.<\/p>\n","protected":false},"excerpt":{"rendered":"

A glance through the latest expert views and predictions about commodities including price forecasts being revised and the impact of economic policies on commodity demand.<\/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],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58438"}],"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=58438"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58438\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=58438"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=58438"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=58438"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}