-Heavy hand of China's government on coal
-Deficits looming long-term for copper, aluminium
-Iron ore could be in surplus within a year<\/strong>
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By Eva Brocklehurst<\/p>\n
Gold<\/u><\/p>\n
Macquarie observes gold<\/strong> has found support from headlines regarding the side effects of the Johnson & Johnson coronavirus vaccine and the US roll-out pause. Also, the US headline CPI rose to 2.6% (annual) in March but the core rate increase was sufficiently modest for bond yields to fall on the news and gold to head towards US$1750\/oz.<\/p>\n Nevertheless, almost half of the US population has now received one vaccine dose and, with measures of mobility (people getting out and about) at around 90% of pre-pandemic levels, the broker expects strong growth momentum will be sustained and ultimately push up bond yields.<\/p>\n While this should place commensurate pressure on gold, Macquarie asserts that until a tapering of rates by the US Federal Reserve begins to be priced in with greater conviction, gold should be able to hold its current range.<\/p>\n Canaccord Genuity updates pricing assumptions for gold and silver<\/strong>, along with the Australian dollar, to reflect the current spot forward curve. Since January, the broker notes the long-term US dollar gold curve has reduced by -10.5% to US$1796\/oz.<\/p>\n Shorter-term assumptions have decreased on average by around -12% for 2021-23. The broker reduces its Australian dollar forecast to US$0.75 resulting in a -8.8% decrease in the long-term Australian dollar gold price forecast to $2391\/oz.<\/p>\n As a result of the updated assumptions, the broker's price targets for the gold producers are reduced by an average of -15% along with -14% for developers\/explorers.<\/p>\n Evolution Mining <\/strong>((EVN)) is downgraded to Hold from Buy. The broker's top pick among the senior producers is Northern Star Resources<\/strong> ((NST)) amid the unlocking of synergies now the merger with Saracen is complete.<\/p>\n Among intermediate and junior producers, Canaccord Genuity prefers Perseus Mining<\/strong> ((PRU)) as the successful delivery of the Yaoure project is expected to increase production by around 90%. The broker also likes Gold Road Resources <\/strong>((GOR)) because of its proven ability to deliver constant cash flow.<\/p>\n In developers\/explorers Bellevue Gold<\/strong> ((BGL)) is the preferred stock with a stage 2 feasibility study expected later in the current quarter.<\/p>\n Thermal Coal<\/u><\/p>\n It is becoming more and more apparent to Macquarie that China's domestic coal<\/strong> supply is now linked to central and local government policy rather than market forces. After a recent spike in the price, the central government is now asking the large miners to increase output again.<\/p>\n The other possibility is an increase in import quotas (of non-Australian material), the broker suggests. The domestic thermal coal price has been very volatile since late last year and, as Macquarie points out, a large rebound in the price recently attracted government intervention.<\/p>\n After production was pushed up during winter months the broker notes output has now become relatively constrained, consistent with the increase in environmental and safety inspections observed on the ground.<\/p>\n Official data for March has not been released but railway transport data to northern ports signals domestic coal supply may be at a similar level to January\/February instead of showing a normal seasonal improvement.<\/p>\n Should local governments relax their restrictions under pressure from the central government, Macquarie estimates April's coal supply could grow by over 7-8% year-on-year, although with three accidents over the past week – in Shanxi, Guizhou and Xinjiang – this could limit the extent to which they comply.<\/p>\n Copper<\/u><\/p>\n Goldman Sachs upgrades estimates for copper<\/strong>, expecting US$5.39\/lb in 2022 and a long-run price of US$4\/lb. The outlook for copper producers under the broker's coverage improves, resulting in an upgrade for Sandfire Resources<\/strong> ((SFR)) to Buy from Neutral.<\/p>\n Most of the value is ascribed to the growth project in Botswana. On the other hand OZ Minerals <\/strong>((OZL)) is continuing to run well ahead of spot copper and the broker maintains a Neutral rating.<\/p>\n Aluminium\/Alumina<\/u><\/p>\n Goldman Sachs is also bullish on aluminium<\/strong> expecting a price of US$1.13\/lb in 2022, 10% ahead of spot prices. The broker foresees long-term deficits for both copper and aluminium on rising demand from the renewables and a lack of new greenfield projects.<\/p>\n A Buy rating is maintained for Alumina Ltd<\/strong> ((AWC)). The broker also highlights Rio Tinto<\/strong>'s ((RIO)) first-class aluminium division but retains a Neutral rating on the stock, envisaging higher operating and physical risks across the broad portfolio.<\/p>\n Credit Suisse notes higher freight rates are undermining the alumina<\/strong> price in a traditionally quiet period. Current price weakness involves more than destocking, the broker suggests, and reflects the surge in freight rates to the mid US$40\/t range for 'Handysize' vessels from Australia to China.<\/p>\n Being a marginal buyer, China sets the seaborne price. Deducting freight and allowing for Australian quality premiums explains the Australian price of US$269\/t, the broker points out.<\/p>\n Alumina prices are expected to rise as demand from China is rising rapidly along with its output of aluminium. This could impact on bauxite<\/strong> trade as Australian exporters may now have negative margins if freight on cargoes continues to be around US$41\/t.<\/p>\n Iron Ore<\/u><\/p>\n Goldman Sachs reiterates a negative view on iron ore<\/strong> for the next 6-12 months, expecting the market will be in surplus in the second half of FY21 because of higher Brazilian exports.<\/p>\n The price is expected to fall back to US$110\/t by the fourth quarter, even with a 4-5% increase in global steel <\/strong>production, and the broker anticipates this falling below US$100\/t in 2022.<\/p>\n Still, strong demand should limit any sell-off. Fortescue Metals<\/strong> ((FMG)) is downgraded to Sell from Neutral on relative valuation and the widening of low-grade 58% Fe product discounts by the year's end. There is also expenditure risks associated with the Iron Bridge project and uncertainty surrounding the Fortescue Future Industries diversification.<\/p>\n Credit Suisse also expects, as China's steel prices are in the super profits region, there is a possibility of steep discounts opening up for low-grade iron ore. This is even more significant taking on board the potential for capacity restrictions across China in order to curb emissions.<\/p>\n Fortescue Metals, which controls its own port sales now, may also become more resistant to steep discounts. In 2018, the broker points out, Fortescue was pre-selling large volumes to a Chinese trading company for sales to smaller mills.<\/p>\n Find out why FNArena 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![](\"https:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/Precious%20metals%20%26%20stones\/Molten%20gold.jpg\")
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