-Gold under pressure; time to buy gold equities?
-Constraints on metal consumption and demand declines make Citi more bearish on copper
-Australia's east coast gas pricing remains disconnected from booming international prices<\/strong>
<\/p>\n
By Eva Brocklehurst<\/p>\n
Commodity Positioning<\/u><\/p>\n
Very recently the outlook for commodity demand has deteriorated, UBS observes. The financial problems of Evergrande have triggered a slowdown in China's property sales while power<\/strong> shortages and rationing have impacted industrial activity materially since July.<\/p>\n The demand impulse in developed markets has peaked and demand is changing to services from goods. Near-term supply constraints in smelting and refining in China are providing some offset while central banks are edging closer to hiking rates.<\/p>\n Hence, UBS asserts this is not the backdrop for a sharp recovery in commodity prices, which should fall further over the next 12 months. Therefore, it is too early to be a buyer and the broker remains underweight on the mining sector with predominantly Sell or Neutral ratings across its coverage.<\/p>\n UBS prefers thermal coal, nickel, aluminium and lithium <\/strong>at this stage. Thermal coal appears resilient while electric vehicle-related demand remains strong and should support nickel and lithium. The structural outlook for aluminium has also improved, although the broker does not believe spot prices are sustainable.<\/p>\n Meanwhile, the fundamentals for iron ore<\/strong> are considered challenging and UBS envisages further downside in prices. Gold<\/strong> provides a hedge against inflation risks but the broker points to rising yields and policy normalisation that should pressure prices.<\/p>\n UBS maintains a Sell rating on Rio Tinto<\/strong> ((RIO)) while in contrast a Buy rating is held for South32<\/strong> ((S32)) as it has a more attractive suite of commodity exposures.<\/p>\n Gold Equities<\/u><\/p>\n Gold has been under pressure since the recent US FOMC (Federal Reserve Open Market Committee) meeting, falling below US$1750\/oz as US10-year yields temporarily rose above 1.5%, Macquarie observes.<\/p>\n Adding to the list of uncertainties, the broker includes FOMC member resignations, a need to re-appoint the Federal Reserve chair and issues over the US debt ceiling. Macquarie expects the first hike in US official rates in the fourth quarter of 2022.<\/p>\n Movements in gold prices present a key risk to the broker's base case for gold stocks, while variations in operating costs and capital expenditure budgets also have an impact.<\/p>\n KCMG represents the largest signal catalyst in the broker's net asset valuation (NAV) for Northern Star<\/strong> ((NST)) with operating improvements and underground additions also important. Meanwhile, the extension of the mining licence at Simberi is key to unlocking the full potential of the sulphide project for St Barbara<\/strong> ((SBM)).<\/p>\n Ord Minnett envisages opportunities within the gold sector following recent equity performance and initiates coverage on seven gold stocks. Volatility has not been a help and the labour environment adds risk to company guidance targets for FY22.<\/p>\n There are also company-specific factors influencing individual stocks so the broker suggests investors be selective and focus on those with strong fundamentals and exploration potential.<\/p>\n Ord Minnett initiates with Buy ratings on Northern Star, Silver Lake Resources<\/strong> ((SLR)), Gold Road Resources<\/strong> ((GOR)) and Red 5<\/strong> ((RED)), all of which are expected to improve their business fundamentals over the next 12-24 months.<\/p>\n Accumulate recommendations are placed on Evolution Mining<\/strong> ((EVN)) and Ramelius Resources<\/strong> ((RMS)), both of which are considered having "safer" liquid gold exposure, while a Hold rating is applied to St Barbara.<\/p>\n The broker believes net asset valuation (NAV) calculations on their own underestimate the real value of a miner by relying on a mine plan that is backed by reserves. Hence, a risked valuation methodology is included. Using this framework, the broker acknowledges it is more difficult to assess those with exploration potential, such as Gold Road, until new discoveries are made and at least classed as inferred.<\/p>\n Copper<\/u><\/p>\n Citi has become more bearish about the price outlook for copper<\/strong> in the short term, lowering its forecast for the fourth quarter to US$8600\/t. Negative developments include a rapid increase in coal, gas<\/strong> and power prices, which has an unfavourable impact on Chinese and global supply chains.<\/p>\n There is an ongoing shortage of chips and containers, which constrains metal consumption and puts upward pressure on costs. China appears to be consuming copper well ahead of supply so the market remains in a small deficit. This prevents the broker from becoming too bearish for the short term. Citi contends, as demand declines over coming months, the market should re-balance.<\/p>\n The broker emphasises its strong belief in a copper super cycle and over the next three-to-six-months suspects there is an opportunity to buy into the market. The base case is for copper to trade up to US$9500\/t by the middle of 2022, supported by decarbonisation-related consumption as well as greater supply of chips, power, containers and global manufactured goods.<\/p>\n Oil\/Gas<\/u><\/p>\n Citi upgrades global gas price estimates and slightly downgrades oil<\/strong>. The gas upgrade follows increased demand ahead of the northern winter amid no supply response until 2022. Citi upgrades December quarter Henry Hub and JKM prices to US$6\/MMBtu and US$28.80\/MMBtu, respectively.<\/p>\n The probability between the broker's base and bookcases is narrowed given the uncertainty about the severity of the northern winter and heightened risk of supply disruptions from the Atlantic hurricane season.<\/p>\n Nevertheless, Citi points out high international gas prices are not translating into higher domestic producer prices. This is caused by the uneven supply\/demand balance which is expected to persist into 2022. The main issue is reduced gas demand for power generation, which has fallen by -28% in the September quarter.<\/p>\n The loss of this gas demand is largely associated with rapid increases in renewables as well as demand destruction from the pandemic. There is an excess of gas in the Australian market which is unable to be exported via LNG terminals.<\/p>\n This problem effectively disconnects the domestic market from JKM pricing. The ACCC netback for east coast gas suggests domestic prices should be around $22\/gigajoule in October yet, at the Wallumbilla hub, gas is trading at just $8\/gigajoule as of September 30.<\/p>\n In downgrading oil, Citi reduces fourth quarter Brent price forecasts to US$74\/bbl following weaker-than-expected drawdown in the third quarter. 2022 Brent forecasts are unchanged at US$67\/bbl.<\/p>\n In this scenario the broker finds Beach Energy<\/strong> ((BPT)) best placed to capture the long-term upside from oil. Over a shorter horizon, Woodside Petroleum<\/strong> ((WPL)) is the most leveraged to the oil price while Senex Energy<\/strong> ((SXY)) offers the best downside protection.<\/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\/Mining\/mining%20truck(1).jpg\")
<\/p>\n