##{"id":59756,"date":"2012-04-04T10:37:19","date_gmt":"2012-04-04T00:37:19","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/04\/04\/material-matters-nickel-zinc-pgms-and-bulks\/"},"modified":"2012-04-04T10:37:19","modified_gmt":"2012-04-04T00:37:19","slug":"material-matters-nickel-zinc-pgms-and-bulks","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/04\/04\/material-matters-nickel-zinc-pgms-and-bulks\/","title":{"rendered":"Material Matters: Nickel, Zinc, PGMs, And Bulks"},"content":{"rendered":"

\n\t – Updates on Chinese copper and aluminium<\/span> markets
\n\t – Correction in nickel may have gone too far
\n\t – Reasons to be positive on PGMs<\/span>
\n\t – Industrial action and met coal markets
\n\t – BA-ML revises commodity sector expectations<\/strong><\/p>\n

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

\n\tA recent meeting with copper fabricators, smelters and physical traders in China has left Barclays Capital with the view conditions in the Chinese copper market have softened recently. <\/p>\n

\n\tBarclays notes spot demand for copper remains weak, which in part reflects negative sentiment among Chinese fabricators and manufacturers. Orders have been slow to increase post the Chinese New Year, while inventories of finished product are higher than is usually the case at this time of the year.<\/p>\n

\n\tDemand in China is varied across industries at present report the analysts, with transport and infrastructure demand solid but whitegoods<\/span> and building wire demand weak. Bonded warehouse stocks of copper have risen, while Barclays notes March and April copper imports could be stronger than the market currently expects. <\/p>\n

\n\tThis leads Barclays to suggest Chinese copper demand in the short-term is likely to disappoint, before recovering later in the June quarter. It may take until the third quarter of this year before bonded copper stocks in China are run down to more normal levels.<\/p>\n

\n\tStill in China, Barclays has also updated its view on aluminium<\/span> to account for what has been a sharply divergent trend in the data in that market relative to the rest of the world. Global output ex-China fell in February to its lowest level since December of 2010, while Chinese output for the same month was up 19% in year-on-year terms.<\/p>\n

\n\tThis reflects three factors in the view of Barclays. The first is while Chinese smelters at the top of the cost curve are dealing with highly negative margins, cost pressures for average smelters may not be as intense as has been suggested. <\/p>\n

\n\tAs well, much of China's new capacity is at the lower end of the cost curve given improved levels of energy efficiency, so is not being significantly impacted at current price levels. As well, some capacity continues to operate thanks to access to credit through the use of aluminium<\/span> as collateral in inventory financing.<\/p>\n

\n\tThis leads Barclays to suggest unless prices moderate Chinese aluminium<\/span> production is likely to continue to grow in 2012, even as output is constrained in the rest of the world.<\/p>\n

\n\tIn nickel, Macquarie notes prices have underperformed<\/span> the base metals market as a whole in recent weeks and the metal is now the only one of the industrial metals to be trading at a lower price than at the start of the year.<\/p>\n

\n\tMacquarie suggests at least some of the recent price weakness can be attributed to short selling, as falling prices have coincided with rising open interest levels. The rationale for this in Macquarie's view is nickel is expected to be in surplus this year and prices have been above the industry's marginal cost of production.<\/p>\n

\n\tSluggish demand for stainless steel in China has also likely weighed on the nickel price but Macquarie sees this as not showing the full picture. Chinese stainless steel demand has been weak because nickel prices are falling, meaning new orders are being delayed as the expectation is prices will fall further. Outside of China primary nickel demand has been solid, with stainless steel mills in Europe and the US seeing rising orders and longer lead times. <\/p>\n

\n\tShort-term Macquarie suggests the sell-off in nickel is overdone, so a switch to the long side may be appropriate. Supporting this is industry feedback suggesting Chinese buyers are re-stocking at current levels as prices are regarded as low at present. Physical spot premiums have risen over the past week or so in support of this argument.<\/p>\n

\n\tWhile data from China in relation to imports of platinum and palladium remain questionable given apparent issues of double counting, Macquarie notes directional changes in the numbers do reflect changes in apparent demand.<\/p>\n

\n\tThe latest data suggest to Macquarie the rise in apparent demand in platinum stemming from the fall in prices in the final quarter of last year is now slowing, this despite still solid looking end-use demand indicators.<\/p>\n

\n\tWhile auto demand appears subdued at current levels, good interest from Chinese buyers coupled with supply problems means the outlook for platinum is relatively bullish over the balance of this year in Macquarie's view.<\/p>\n

\n\tIn coming months Macquarie expects the annualised<\/span> run rate of auto production in China should rise, creating more of a pull for palladium. Better Chinese auto production could also spur increased investor interest in the metal, so Macquarie also sees reasons to be positive on the outlook for palladium.<\/p>\n

\n\tIn the bulk commodities market, Goldman Sachs notes industrial action in the metallurgical coal market in Australia has resumed, the latest impacting on all BHP<\/span> Mitsubishi Alliance (BMA<\/span>) operations except at Broadmeadow<\/span>.<\/p>\n

\n\tWhy this is significant in the view of Goldman Sachs is BMA<\/span> production represents 18% of the seaborne coking<\/span> coal market. This means any disruption could be enough to disrupt market sentiment and prices in the short to medium-term.<\/p>\n

\n\tBeyond just the met coal market implications, Goldman Sachs sees the dispute as important given the established practice in Australia of deploying a fly-in, fly-out workforce for mines in remote areas. Such a workforce offers both advantages and disadvantages, the latter particularly when there are also resident employees at a project.<\/p>\n

\n\tThe difficulties of managing such projects is likely to continue for some time, leading Goldman Sachs to suggest investors should pay close attention to the ability of management when assessing companies in the Australian bulk commodities sector. Those companies that can differentiate themselves should benefit from better productivity and lower costs than peers.<\/p>\n

\n\tHaving reviewed first quarter activity in the resources space, BA Merrill Lynch notes US natural gas was the lone underperformer<\/span> in the period. The iron ore group was among the best performers for the quarter, BA-ML seeing scope in coming weeks for the likes of Rio Tinto ((RIO)) and Atlas Iron ((AGO)) to play some catchup relative to Fortescue<\/span> ((FMG<\/span>)), the market leader in the period. <\/p>\n

\n\tIn gold, BA-ML expects a further round of QE will eventuate, likely in the third quarter of 2012, which should prove supportive to gold prices. Improving production performance should see Newcrest<\/span> ((NCM<\/span>)) rewarded in the sector, while Alacer<\/span> Gold ((AQG<\/span>)) is forecast to underperform<\/span> relative to peers.<\/p>\n

\n\tWhile the March quarter saw aluminium<\/span> prices rebound, the alumina price has stayed weak. In the view of BA-ML there needs be evidence of a demand recovery before a more positive view on industry heavyweight Alumina Ltd ((AWC<\/span>)) is justified.<\/p>\n

\n\tElsewhere, Paladin ((PDN<\/span>)) was among the best performed of the Australian resource stocks in the March quarter, while iron ore stocks in general outperformed the broader market. Rio Tinto, Fortescue<\/span>, Saracen ((SAR)) and BC Iron ((BCI<\/span>)) remain among the most preferred commodity plays in terms of ratings ascribed by brokers covering the Australian market.<\/p>\n

\n\tWith commodity prices gaining more gains sooner than BA-ML had expected, and to account for changes in foreign exchange assumptions as well, the broker has marked to market the commodity price deck.<\/p>\n

\n\tAs an overview, BA-ML expects a slowdown rather than a meltdown in China, while a likely weakening of US economic data in coming weeks implies some downside risk through the second quarter for the industrial metals in particular.<\/p>\n

\n\tBA-ML sees scope for zinc to become the new copper in coming years given a lack of mine projects, while gold remains one of the broker's favoured plays.<\/p>\n

\n\tChanges to base metal estimates have ranged from a cut of 1.7% for lead this year to an increase of 9% for nickel prices, while price changes for the precious metals range from minus 5% for gold to a 1.5% increase for palladium. Changes to bulk price forecasts have been minimal.<\/p>\n

\n\tThe result has been changes to earnings forecasts, with earnings per share (EPS) estimates lowered across 2012 and 2013 by an average of 12-24%. The largest portion of this cut has been due to revised forex estimates.<\/p>\n

\n\tThe changes in forecasts have seen price targets adjusted for Ampella Mining ((AMX)), BHP Billiton, Energy Resources of Australia ((ERA)), Intrepid Mines ((IAU)), Kingsgate Consolidated ((KCN)), Mount Gibson ((MGX)), PanAust ((PNA)), Perseus ((PRU)), Rio Tinto and Saracen ((SAR)). <\/p>\n

\n\tThere have been no changes in ratings, leaving BA-ML's top picks in the sector as Atlas Iron, Rio Tinto, Newcrest<\/span>, Saracen and Oz Minerals ((OZL<\/span>)). Preferred commodities for BA-ML are gold, copper, met coal and zinc.<\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"