Supply stubbornness

MINERS are stubbornly pushing out too much product to reluctant buyers, says Macquarie, which has cut its commodity price forecasts. But stubbornness works both ways and the bank still sees “significant” value in its favourite mining picks. The Metal Detective, By Stephen Bell
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Stephen Bell

Most metals alongside iron ore and coal have taken a pounding this year, but we’d all like to know whether the worst has passed.

On the surface, Macquarie’s latest crystal-ball gazing doesn’t offer much hope, with the bank taking a knife to its medium-term aluminium, coal, nickel and precious metals forecasts.

The bank chopped its 2014 nickel price call by 14%, thermal coal and aluminium 8% and gold 7%.

Macquarie also trimmed its second half 2013 copper price by 7%, reflecting the red metal’s move towards the bank’s existing 2014 target of $US6550/t.

“Even Chinese demand – the bright spot thus far in 2013 – looks increasingly fragile,” Macquarie said, in surveying overall conditions for mining commodities.

Along with China’s slowdown, the market has already been rocked by higher-than-expected mine supply and brutal volatility in emerging markets as investors grapple with the looming end of “quantitative easing” in the US.

Yet despite finding plenty to fret about, Macquarie continues to see “significant value in the Australian resources sector”

That’s not surprising when you dig deeper into the bank’s 2014 price forecasts.

Of the 10 commodities studied, only copper is expected to fall significantly compared with current spot prices.

So either we’ve seen the worst of the selling or, if you are of a cynical nature, perhaps Macquarie is being stubbornly optimistic in order to justify its stock picks

It keeps “outperform” ratings on BHP Billiton, BC Iron, Whitehaven Coal, Regis Resources, PanAust, and Western Areas.

Alumina was the lone casualty from the price revisions, with the bank downgrading the stock to an “underperform” rating.

In addressing its “stubbornness of supply” theme, Macquarie reckons that significant capital expenditure plans for 2015 and beyond have been “pulled back” for most commodities.

“We are now at a stage where prices should trade at a level where immediate supply should be under pressure to come offline,” it said.

The one exception seems to be iron ore, where Macquarie believes its call of $125/t for next year “adequately reflects the volume of Chinese domestic ore which will continue to be required to balance the market”

The bank is also sticking to a $129/t forecast for this year.

Any positive sentiment emanating from the Chinese Congress in October could see a year-end rally as mills restock, “even with 60Mt more supply in the market from Rio Tinto and Fortescue”, the bank said.

The big supply-side question for iron ore, though, is whether Rio Tinto stubbornly pushes ahead with its rolling Pilbara expansion beyond the 290Mtpa rate due later this year.

There have been repeated calls by some investors for Rio follow the herd by scrapping plans to reach 360Mtpa by 2015 and return $5 billion in savings to shareholders.

The latest analyst chatter argues Rio could engineer a quick repair of its badly injured share price by delaying a go-ahead of the next phase, due by the end of this year.

The last box to be ticked by Rio’s board is a big Greenfields mine development – probably a Koodaideri or a Silvergrass.

The company could choose to defer the $5 billion capital spending for a couple of years and eke out the extra production from existing mines.

But the Metal Detective reckons any short-term share price gain may lead to longer-term pain for Australia’s lowest-cost iron ore producer.

The argument that Rio should show some market “discipline” may look good in theory, but the last thing it wants is to give a free kick to competitors by virtue of higher spot prices.

Both Fortescue (this year) and Brazil’s Vale (a year or two hence), are planning major production spurts and would be tempted to send Rio CEO Sam Walsh a thank-you card if he does rein in the Pilbara expansion.

Gina Rinehart’s Roy Hill would also be tickled pink, along with Atlas Iron - which is pushing ahead with its higher-cost Mt Webber development.

Rio Tinto may be viewed as “stubborn” in pushing out more tonnes of a commodity less in vogue these days.

But satisfying the whims of a few fund managers with their eyes on quarterly returns is hardly a way to run a long-term mining business, even in the age of austerity.