##{"id":59618,"date":"2012-03-08T10:16:01","date_gmt":"2012-03-07T23:16:01","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/03\/08\/material-matters-precious-metals-oil-industrial-metals-and-zircon\/"},"modified":"2012-03-08T10:16:01","modified_gmt":"2012-03-07T23:16:01","slug":"material-matters-precious-metals-oil-industrial-metals-and-zircon","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/03\/08\/material-matters-precious-metals-oil-industrial-metals-and-zircon\/","title":{"rendered":"Material Matters: Precious Metals, Oil, Industrial Metals, And Zircon"},"content":{"rendered":"<p>\n\t<strong>&nbsp;&#8211; Precious metal positives remain intact<br \/>\n\t&nbsp;&#8211; Small and mid-cap gold companies to outperform physical metal?<br \/>\n\t&nbsp;&#8211; Oil and industrial metals<br \/>\n\t&nbsp;&#8211; Chinese lead and zinc market update<br \/>\n\t&nbsp;&#8211;&nbsp;<span class=\"scayt-misspell\">Iluka<\/span> and a weaker zircon market<\/strong><\/p>\n<p>\n\tBy Chris Shaw<\/p>\n<p>\n\tUS dollar strength contributed to a short-term sell-off in precious metal markets last week but in the view of Macquarie the longer-term attractions of both gold and silver remain as the factors supporting a positive stance remain in place.<\/p>\n<p>\n\tAs Macquarie points out, comments about the likelihood of further QE measures in the US moved both currency and precious metal markets, but bond markets were little changed. Little shift in speculative long positions was also seen and <span class=\"scayt-misspell\">ETF<\/span> inflows have remained at solid levels, implying little has changed in the market.<\/p>\n<p>\n\tWhat also hasn&#039;t changed according to <span class=\"scayt-misspell\">RBS<\/span> is that central banks remain buyers of gold, continuing a trend of the past two years. <span class=\"scayt-misspell\">RBS<\/span> sees central banks continuing to be net buyers of bullion for the foreseeable future, a trend expected to continue providing support to the gold price.<\/p>\n<p>\n\tOn <span class=\"scayt-misspell\">RBS&#039;s<\/span> numbers central banks could be net buyers of 300 <span class=\"scayt-misspell\">tonnes<\/span> of gold this year, helped in part by medium-scale gross purchases from emerging economy central banks and a lack of significant sales from Central Bank Gold Agreement members.<\/p>\n<p>\n\tThis buying by central banks may be important for supporting gold prices, as Deutsche Bank noted concerns are being raised the strength in US real economy data, the termination of QE and a rally in global equity markets will combine to derail gold.&nbsp;<\/p>\n<p>\n\tIn Deutsche&#039;s view, the main risk for the gold price in 2012 is a stronger US dollar, as unlike in previous periods of US dollar strength this time a stronger dollar is not being met by inflows into physically-backed gold <span class=\"scayt-misspell\">ETFs<\/span>.<\/p>\n<p>\n\tThe scope for sustained higher oil prices to impact on the US labour market leads Deutsche to suggest US Fed policy is likely to remain expansionary. The current negative real interest rate outlook is constructive for gold prices.<\/p>\n<p>\n\tThis leads Citi to suggest gold&#039;s store of value characteristic will be enough to keep prices supported in a range of US$1,650-$1,850 per ounce in 2012. Citi is forecasting an average price for gold of US$1,709 per ounce thus year.<\/p>\n<p>\n\tDespite this, Citi cautions it is likely a matter of time before the risk-off trade of the past three years weakens and confidence in developed market economies is rebuilt. This would be expected to limit further upside for the gold price.<\/p>\n<p>\n\tWhile higher gold prices have lead many investors to expect higher dividends from gold companies Citi sees this as an unlikely trend, as gold producers are having to spend more capital dealing with declining reserve and production profiles.&nbsp;<\/p>\n<p>\n\tWhile physical gold has outperformed gold equities 82% of the time over the past 10 years, Citi sees scope for a basket of small and mid-cap plays to outperform both the gold price and large cap peers this year.<\/p>\n<p>\n\tFrom a global perspective this basket includes Polymetal, Centamin and Randgold Resources, along with ASX-listed plays Medusa Mining ((MML)), Perseus ((PRU)) and OceanaGold ((OGC)). Such a basket is expected to deliver a total return of up to 38% this year on Citi&#039;s numbers.<\/p>\n<p>\n\tAmong other ASX-listed plays under coverage, Citi rates Gryphon Minerals ((GRY)) and Newcrest Mining ((NCM)) as Buy, while rating Alacer Gold ((AQG)), Resolute ((RSG)) and Beadell Resources ((BDR)) as Neutral. St Barbara ((SBM)) is rated as a Sell by Citi.<\/p>\n<p>\n\tTurning to the industrial metals, Deutsche Bank suggests higher oil prices are a likely culprit in terms of why the recent risk rally enjoyed by the complex so far this year has stalled. US data show the recovery in the US manufacturing sector is still fragile, making a higher oil price a greater threat to the growth outlook both in the US and globally.<\/p>\n<p>\n\tAmong the metals, Deutsche notes historically copper and aluminium have tended to be the most resilient to oil price shocks, something that is in line with their respective outperformance over the past month.<\/p>\n<p>\n\tAt the other end of the scale, both nickel and zinc have tended to be more vulnerable, possibly because demand for nickel in particular is more cyclical. On Deutsche&#039;s numbers it would take a sustained period of oil prices in a range of US$130-$135 per barrel to materially impact on economic growth.<\/p>\n<p>\n\tThis implies that if inflationary pressures subside in the coming months, a resumption in global growth and improving physical fundamentals could deliver some cyclical strength in the nickel price in particular.<\/p>\n<p>\n\tDeutsche has lifted its industrial metal price forecasts by 2-24% for 2012, tin enjoying the largest increase and lead seeing only a small lift from previous estimates. Aluminium is expected to average US$2,325 per tonne this year, copper US$8,600 per tonne, lead US$2,200 per tonne, nickel US$22,500 per tonne, tin US$25,500 per tonne and zinc US$2,250 per tonne.<\/p>\n<p>\n\tMacquarie has looked at the impact of the oil price on metal prices in a slightly different way, suggesting with China as the marginal metals producer, oil price moves now have little direct impact on cost support floors.<\/p>\n<p>\n\tIn Macquarie&#039;s view, the potential impact of oil on inflation in general in China is a bigger issue and could potentially impact on policy as higher oil prices potentially gives less room to move in balancing the twin pressures of inflation and growth.&nbsp;<\/p>\n<p>\n\tAs an example, Macquarie notes industry consultant CRU estimates a US$10 per barrel increase in the oil price would only generate a US$8-10 per tonne rise in direct aluminium production costs. This is insignificant given a current price for aluminium of around US$2,300 per tonne.<\/p>\n<p>\n\tThe oil price impact on Chinese demand may be more important in Macquarie&#039;s view, while policy makers in China are also expected to keep a close eye on food inflation. In conclusion, Macquarie suggests if Brent prices remain around U$120-$130 per barrel in coming months, current relatively conservative commodity demand growth assumptions would likely be little changed.<\/p>\n<p>\n\tBut such oil prices would be incrementally bearish for the base metals outlook, as history has shown Chinese copper demand growth in recent years has been inversely correlated to year-on-year changes in the oil price. Gold is typically the best performed metal in a rising oil price environment.<\/p>\n<p>\n\tElsewhere in the base metals, Macquarie notes Chinese lead and zinc smelters appear to be lifting production after the Chinese New Year, the incentive to do so coming from a combination of better metal prices and an upward trend in treatment charges.&nbsp;<\/p>\n<p>\n\tGiven high inventory levels, a meaningful impact from some reported production disruptions in China is not likely in the near-term, leading Macquarie to suggest it will require a turnaround in demand for lead and zinc&#039;s market balances to improve.<\/p>\n<p>\n\tThere is little evidence of this at present, zinc showing a slower than expected recovery in end-use sectors post the Chinese New Year and lead demand being held back by regulations in the lead-acid battery sector.<\/p>\n<p>\n\tAny increase in the level of environmental regulation could pose further risks to a planned recovery in lead demand from the Chinese battery sector in the view of Macquarie, so the lead price outlook remains somewhat clouded.&nbsp;<\/p>\n<p>\n\tOutside of the base metals, Goldman Sachs is concerned the zircon market may now be peaking on the back of slower construction activity in China, de-stocking of ceramic tiles and indications substitutes are gaining some traction in parts of the market.<\/p>\n<p>\n\tFactoring in some of these risks generates both a weaker price profile for zircon and reduced sales volumes for zircon producers such as Iluka ((ILU)). The good news for producers is the price weakness is not extending to the titanium feedstock market, where price risk remains to the upside.<\/p>\n<p>\n\tThis is a positive for Iluka specifically, as Goldman Sachs points out it is the titanium feedstock market that is the main driver of near-term earnings growth for Iluka. As evidence of this, even under a scenario of lower zircon volumes and prices, Goldman Sachs still expects Iluka will deliver 73% earnings per share growth in FY12 and a further 64% increase in FY13.<\/p>\n<p>\n\tThis should deliver a net increase in cash after all outgoings of around $500 million year on Goldman Sachs&#039;s numbers, which is enough for the broker to retain a Buy rating on the stock. The FNArena database shows Iluka is rated as Buy five times and Hold three times.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A glance through the latest expert views and predictions about commodities with reasons why positives for precious metals remain intact, oil and industrial metals markets and Iluka still a Buy despite a weaker zircon outlook.<\/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":[23,27,24,22],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/59618"}],"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=59618"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/59618\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=59618"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=59618"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=59618"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}