Material Matters: Iron Ore, Copper, Coal, Lead & Nickel
Following a significant softening in Chinese demand, Morningstar lowers 2021-24 assumptions for iron ore prices to US$116/tonne from US$133/tonne previously, and feels BHP Group ((BHP)) is the cheapest of the diversified majors. However, investors are cautioned the current share price offers little margin of safety should the downturn persist for China’s economic activity and investment.
The iron ore impact is lessened for both BHP Group and Rio Tinto ((RIO)) by stronger near-term copper prices and for the former, higher metallurgical coal prices. Morningstar now assumes average copper prices for 2021-24 of US$4.44/lb up from US$3.70/lb, and an average US$205/tonne (US$155 previously) for met coal for the same period.
Morningstar makes a greater relative reduction to fair value for Fortescue Metals Group ((FMG)) due to a higher cost base and the discounts for lower-grade iron ore products that have widened.
Credit Suisse notes Australia’s iron ore exports to September rose marginally year-on-year. The steel industry in the rest of the world is supporting iron ore prices now, given that China’s demand has capitulated in the December half and is getting worse by the month, explains the broker.
In searching for a turnaround in pricing, the commodities team at Credit Suisse sees a December trough and anticipates China's 2022 budget may be a catalyst for a price recovery, when released next March.
Infrastructure stimulus will be needed to plug the growth gap from a crumbling property sector and to achieve the targeted 5% rise in GDP in the country’s five-year plan, according to the broker. It’s thought money allocated to Local Government Special Bonds for 2022 will far exceed that in either 2020 or 2021, and commodity prices should leap in response.
If the reader is looking for less exposure to the fluctuating iron ore price, Morningstar likes the quality of Deterra Royalties ((DRR)), which has a high moat and is essentially the equivalent of an iron ore toll road. The company’s earnings are underpinned by a long-life iron ore royalty over BHP Group’s Mining Area C, which is expanding to around 145m tonnes in 2023 from 60m tonnes in 2019. However, Morningstar notes the share price for Deterra Royalties is currently considered somewhat expensive.
Returning to copper, Credit Suisse estimates the additional demand impact from the US$1tr Infrastructure Bill in the US may be 50-250ktpa, which is almost 1% of global demand at the high end. On these figures, the broker feels the looming 2023-24 supply glut may turn out a lot less than feared by some.
Macquarie notes thermal coal prices have experienced significant volatility over the past month.
The spot Newcastle price jumped to $254/t in mid-October, before falling to $150/t this week. The big change in price was primarily driven by an even more extreme move in China’s domestic thermal coal prices.
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