-Coking coal prices surge in China, reduced traffic on Chinese\/Mongolian border
-Pick-up in infrastructure activity in December quarter may arrest iron ore price decline
-Tight supply of zircon sends prices sharply higher
-Substantial incentive for shale gas suppliers to ramp up production<\/strong>
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By Eva Brocklehurst<\/p>\n
Base Metals<\/u><\/p>\n
Momentum keeps on keeping on in the electric vehicle market, benefiting nickel<\/strong>. Macquarie notes, while non-nickel\/cobalt batteries are gaining share in China, they are still only a quarter of the global market. Orders for batteries with higher nickel content are still strong, boosting nickel usage.<\/p>\n Meanwhile, lower zinc <\/strong>production and higher copper<\/strong> output in Peru was recorded in July, and in Chile copper production was down -3%, primarily because of lower output from Chuquicamata.<\/p>\n Macquarie prefers OZ Minerals<\/strong> ((OZL)), 29 Metals<\/strong> ((29M)) and Sandfire Resources<\/strong> ((SFR)) for copper with Chalice Mining<\/strong> ((CHN)) the preferred stock in exploration. 29 Metals has a strong production trajectory and provides unique exposure to zinc within the broker's coverage. Sunrise Energy Metals<\/strong> ((SRL)) offers exposure to Macquarie's long-term bull case for cobalt<\/strong>.<\/p>\n The coup in Guinea has put China's aluminium<\/strong> raw material supplies at risk, Longview Economics notes, with aluminium prices breaching another multi-year high. Guinea supplies over 50% of Chinese bauxite<\/strong> requirements.<\/p>\n The analysts also note the microchip<\/strong> shortage shows little sign of easing and the order backlog from Renesas, the Japanese supplier where the plant was set on fire in March, is now four times greater than it was before the pandemic.<\/p>\n Coal<\/u><\/p>\n Coking (metallurgical) coal<\/strong> prices have reached new highs in China's domestic market, equivalent to US$497\/t, while Macquarie notes Australia's F.O.B. index has reported prices at A$279\/t. This indicates an arbitrage opportunity, in the broker's view, or at the very least provides support for Australian coal miners.<\/p>\n Macquarie cites a Reuters report that China's NDRC has recently banned a coal trading firm from publishing price assessments in an effort to manage hefty pricing.<\/p>\n The broker notes, too, the the Chinese\/Mongolian border has been closed again after one week of operation. Macquarie's commodities team estimates daily crossings could be constrained at 180-200 trucks per day after the reopening, which compares with 800-1000 pre-pandemic.<\/p>\n Iron Ore<\/u><\/p>\n After a strong first half, Chinese steel<\/strong> production has slowed significantly through July and August. JPMorgan suspects the drop is related to general economic weakness that has been influenced by tightening controls on pollution and relatively low steel mill profitability.<\/p>\n Weakness through the September quarter leads the broker to reduce 2021 steel production growth estimates to 4.0% from 6.5% and demand growth to 0.8% from 2.8%.<\/p>\n After hovering around US$220\/t in June and July JPMorgan notes iron ore<\/strong> has corrected to US$120\/t. This is on the back of a significant change in sentiment combined with lower Chinese steel output and has led to a cut in its forecasts for 2021 and 2022 to US$165\/t and US$125\/t, respectively.<\/p>\n As a result, JPMorgan lowers earnings estimates by -10-35% for BHP Group<\/strong> ((BHP)), Rio Tinto<\/strong> ((RIO)), Fortescue Metals<\/strong> ((FMG)) and Mineral Resources<\/strong> ((MIN)), downgrading the latter to Neutral on wider iron grade spreads and lower free cash flow.<\/p>\n The broker assesses the other three are generating impressive cash flow at current prices, supporting capital management potential. JPMorgan acknowledges, on the upside, China could address weak GDP growth through increased infrastructure expenditure, which may provide a positive fillip for iron ore prices.<\/p>\n Exports from Australia are down -4% over the year to August while Brazil's exports are up 3%, highlighting a lack of growth in supply from the major miners despite the strong price.<\/p>\n JPMorgan also points out Vale has maintained 2021 guidance although lowered 2022 capacity targets to 370mt from 400mt. Negative sentiment is likely to continue over the short term while a pick-up in the fourth quarter in infrastructure activity may help arrest the decline in prices.<\/p>\n Longview Economics believes the bull run in iron ore has come to an end with several developments in China weighing on prices. This includes weakening Chinese construction activity, tighter housing regulations and measures to reduce air pollution ahead of the 2022 Beijing Winter Olympics.<\/p>\n On the supply side, Longview assesses production from the main four iron ore miners is starting to accelerate, noting Fortescue and BHP reached record highs in production earlier in the year and Rio Tinto has highlighted the potential for a re-acceleration in production later in 2021.<\/p>\n Zircon<\/u><\/p>\n Morgan Stanley observes a sharp increase in high-grade zircon<\/strong> prices, driven by the news of a shutdown at Rio Tinto's Richards Bay Minerals operations during the June quarter. Operations have restarted in August but as there are few sources of additional zircon supply the market is expected to remain tight for the next three months.<\/p>\n China's high-grade zircon price is currently US$2570\/t and Morgan Stanley calculates the price could rise a further US$230-385\/t as a result of tight supply. Demand for Iluka Resources<\/strong>' ((ILU)) product is strong and the broker notes China's ceramic factories have reduced levels of inventory, with the number holding inventory for more than two months decreasing by -30%.<\/p>\n Intermediaries are also sustaining low inventory and most have reported a shortage of raw materials. China's domestic supply is unchanged and there is no new policy anticipated that will impact production.<\/p>\n China's main sources of high-grade mineral sand<\/strong> remains Australia, South Africa and Indonesia with low grades sourced from Australia, South Africa, Mozambique and Sierra Leone.<\/p>\n Oil & Gas<\/u><\/p>\n Hurricane Ida has disrupted the oil & gas<\/strong> market, with over 80% of production in the Gulf of Mexico shutting down for a week. Prices have subsequently diverged with oil returning to August levels and natural gas prices rising 18%.<\/p>\n The issue is whether this is a natural break in the correlation of the two or a temporary event. Going forward, factors that Longview Economics considers will be key to the outlook included the prospect of a heavily oversupplied oil market by 2022 amid a significant increase in OPEC et al supply over coming months.<\/p>\n On the other side, natural gas prices are observed to be technically overbought and Longview flags the futures curve as the most backwardated – pricing in tightness – since 2008.<\/p>\n Over the medium term, the analysts suspect a supply response will be forthcoming given the high price of gas, noting rig counts are low compared to 2018 highs and the incentive for shale gas producers to increase production is substantial.<\/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\/Base%20metals\/Processed-Manganese.jpg\")
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