##{"id":60968,"date":"2012-11-27T15:13:57","date_gmt":"2012-11-27T04:13:57","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/11\/27\/material-matters-metals-oil-and-fertilisers\/"},"modified":"2012-11-27T15:13:57","modified_gmt":"2012-11-27T04:13:57","slug":"material-matters-metals-oil-and-fertilisers","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/11\/27\/material-matters-metals-oil-and-fertilisers\/","title":{"rendered":"Material Matters: Metals, Oil And Fertilisers"},"content":{"rendered":"

\n\t – Subdued outlook for industrial commodities
\n\t – Zinc warrant cancellations<\/span> a bearish indicator?
\n\t – Copper may be in surplus in 2013
\n\t – NAB updates commodity forecasts
\n\t – Fertiliser<\/span> outlook updated<\/strong><\/p>\n

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

\n\tMacroeconomic data continues to show modest improvement, but in the view of Citi<\/span> the outlook for industrial commodity (metals, minerals ex gold) consumption remains subdued as a lower growth environment is likely to continue for the medium-term.<\/p>\n

\n\tWhile there will be re-stock and de-stock phases in metal markets, Citi<\/span> sees broadly flat industrial commodity prices in 2013. Given such an outlook, the broker suggests the value trap on equities in the sector is persisting, particularly as earnings are yet to bottom out. <\/p>\n

\n\tSpot commodity and foreign exchange prices indicate consensus earnings forecasts for 2013 for industrial commodity companies need to be cut by around 25%. Such changes to forecasts would leave the sector trading on a multiple of around 11.6 times forward earnings on Citi's<\/span> analysis. <\/p>\n

\n\tDespite this, Citi<\/span> estimates the sector is currently trading at a small premium to its historical trading range. Such a premium makes outperformance<\/span> unlikely in the event of any overall market rally, while significant underperformance<\/span> is likely in the event of any market decline.<\/p>\n

\n\tEarly new year earnings reports in the sector are likely to disappoint on costs, capex<\/span>, cash flow and dividends in Citi's<\/span> view, so the broker continues to select stocks it sees as better placed among the global players.<\/p>\n

\n\tAmong Australian-listed plays these include BHP<\/span> Billiton<\/span> ((BHP<\/span>)) and Aquarius ((AQP<\/span>)), while Citi<\/span> remains more cautious on Rio Tinto ((RIO)). <\/p>\n

\n\tStandard Bank points out zinc LME<\/span> inventories have seen another increase in warrant cancellation<\/span> activity. The percentage of cancelled<\/span> warrants as a proportion of total inventory now stands at 49.3%, exceeding the previous high in early 2006.<\/p>\n

\n\tStandard Bank suggests a key difference between now and 2006 is six years ago the market was tightening, so an increase in cancelled<\/span> warrants helped push the zinc price higher. In general, higher levels of cancelled<\/span> warrants are a positive for prices as they signal a significant portion of metal units in warehouses are being readied to be removed and consumed.<\/p>\n

\n\tIn 2012 the market is somewhat different however, as Standard Bank points out there are high levels of absolute LME<\/span> zinc inventory and the practice of using the metal as a financing vehicle is more common. This makes the high level of cancelled<\/span> warrants more of a bearish sign as it indicates demand remains poor.<\/p>\n

\n\tAt present Standard Bank expects the refined zinc market will remain in surplus through at least 2015, but with the current LME<\/span> warehousing structure allowing for spare supply to be stored profitably this material has found an alternative home rather than weighing on the market, so depressing spot prices and forcing some capacity to be closed.<\/p>\n

\n\tIn terms of how this excess in inventories can be unwound, while higher interest rates could help Standard Bank argues the market still needs demand to grow and exceed supply. Any such change in the market balance appears some time away, so the bank sees little upside for zinc prices in the medium-term. <\/p>\n

\n\tTurning to copper, Citi<\/span> notes while Chile's Codelco<\/span> has reported a 4% decline in year-to-date copper production relative to last year, production in 2013 is expected to increase by around 10%. This supports the view copper looks to be entering a near-term period of oversupply, market forecasts suggesting copper mine supply will grow by around 8% in 2013.<\/p>\n

\n\tOn Citi's<\/span> numbers copper supply growth will exceed demand growth of 3-4%, so putting the copper market into surplus next year. This surplus is expected to continue in 2014. This implies a flat outlook for the copper price, Citi<\/span> forecasting prices of US$7,965 per tonne<\/span> for both this year and 2013 and US$7,775 per tonne<\/span> in 2014.<\/p>\n

\n\tFor the base metals in general, National Australia Bank notes prices have generally given back the gains that followed the announcement of further monetary stimulus by central banks in September. Base metal prices in aggregate were 2% lower in October on NAB's numbers.<\/p>\n

\n\tOver the past month, underlying demand fundamentals for metals appear to have strengthened marginally though prices continue to suffer from ongoing global economic uncertainty. On a positive note, NAB notes the Chinese economy appears to have stabilised<\/span> and is showing signs of improvement in the final quarter of the year. <\/p>\n

\n\tFrom a demand perspective NAB notes political tensions in the Middle East, the US fiscal cliff and the European debt crisis continue to limit upside, even as China is showing signs of am improvement in growth.<\/p>\n

\n\tOn the supply side, NAB points out there have been signs of China restocking in copper in recent months, which is having the effect of limited spot demand. There remains a glut of supply in aluminium<\/span>, while nickel production also exceeded demand in September according to International Nickel Study Group figures.<\/p>\n

\n\tWith supply and demand fundamentals expected to evolve differently across the different industrial metals, NAB expects price activity in each of the metals to be driven by respective fundamentals. This is a positive for copper but more of a negative for aluminium<\/span>.<\/p>\n

\n\tIn general, NAB is forecasting an increase of 3.25% in the NAB Base Metals Price Index in the December quarter, following a fall of 2.4% in the September quarter. For 2012 overall base metal prices are expected to be broadly unchanged, while a rise of around 1.5% is forecast for 2013.<\/p>\n

\n\tOil prices gained in November thanks to both the Gaza conflict and improving data out of China, but NAB notes December quarter demand growth expectations have been revised lower to account for ongoing weakness in Europe and the impact on US demand of Hurricane Sandy. <\/p>\n

\n\tPrice moves have been limited by a number of competing influences such as Obama's re-election and the US fiscal cliff, factors NAB suggests on their own would have had a greater impact on oil prices. <\/p>\n

\n\tLooking forward, NAB points out US data indicate any near-term demand growth is unlikely, while improvements in Chinese economic data has not yet been matched by stronger oil demand as existing stockpiles continue to be unwound. <\/p>\n

\n\tTo reflect this NAB has made only minor revisions to oil price forecasts. For 2013 the bank expects Brent crude to average US$113 per barrel, while West Texas Intermediate (WTI<\/span>) is forecast to average US$99 per barrel.<\/p>\n

\n\tWhile fertiliser<\/span> application by growers has always been seasonal, incentive pricing by producers has meant demand has tended to be fairly evenly spread throughout the year. But increased volatility in fertiliser<\/span> prices and the global debt crisis have seen this trend break down, with growers now less inclined to pre-buy material.<\/p>\n

\n\tAs Citi<\/span> points out, agricultural fundamentals are strong at present, with global grain output expected to be down 4% this year and weather conditions still quite challenging for farmers, helping create tighter markets. At the same time, there remains significant incentive for the maximising<\/span> of farm output, which implies strong demand from growers.<\/p>\n

\n\tThis leads Citi<\/span> to suggest once Chinese and Indian growers sign fertiliser<\/span> contracts, which is expected early next year, strong demand should follow. This suggests while the price outlook is broadly flat for both urea and potash, materially higher volumes should be a positive for the fertiliser<\/span> names and drive strong cash generation.<\/p>\n

\n\tFrom an Australian perspective, the FNArena<\/span> database shows respective Sentiment Indicator ratings for Incitec<\/span> Pivot ((IPL<\/span>)) and Orica<\/span> ((ORI<\/span>)) of 0.6 and 0.8. <\/p>\n

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