You’d need balls of steel to punt iron ore

Whether it’s going long or short, the iron ore market is not for the faint-hearted, as its latest unexpected rise shows. And the coming year is likely to see more of the same, while copper looks set for good gains.
13th December 2019
Tim Treadgold

Iron ore wasn’t supposed to be the star commodity of 2019 but thanks to a shortfall in Brazilian production and stronger than expected Chinese demand, that’s how it turned out, and next year could be just as interesting, though perhaps with a “back-to-the-future” twist.

The performance of iron ore, and a strong year for gold, were coloured by a terrible 12-months for battery metals and a roller-coaster ride for nickel, leaving open the critical question of what’s best for 2020 –with copper the early favourite.

Before looking ahead, it’s worth a glimpse back, and at current events, to set the scene for the New Year, starting with iron ore because there are a number of interesting changes emerging, and not all are positive.

From a starting point of around $US70 a tonne for premium-grade iron ore, the price rocketed to a 12-month high of $US126/t in July before easing to $US80/t – and then came the big surprise, a second wind, which has taken the price back above $US90/t.

The effect on iron ore miners has been significant, with Fortescue Metals Group more than doubling over the past 12-months with a rise from $4.15 at this time last year to latest sales around $10.43, a move which has also doubled the fortune of the company’s founder, Andrew Forrest who has joined the unique club of Australians worth more than $10 billion.

The handful of small iron ore stocks also did well, led by born-again Mt Gibson, which delivered a 60% rise for its true believers as the price rallied from 52c to 84c.

Next year, however, could produce a different result because FMG’s biggest challenge, relatively low-grade ore, is returning and bringing with it a hefty discount on the price received by producers of the material such as FMG and Mineral Resources.

The first hint that iron ore was reverting to a more normal pricing regime of a premium for high-grade ore and a discount for low grade started to emerge last month and has moved ahead rapidly as Chinese steel making methods change.

The reason low-grade ore attracted a price similar to high grade earlier this year was a result of steel mills seeking cheap feedstock.

But, and this is an important point about all commodities in 2020, profits in the steel industry have risen sharply because of the stronger demand mentioned earlier, a trend which flies in the face of investor fears about the damage done by the China v US trade war.

Iron ore is benefiting from a China revival story thanks at this stage to government economic stimulus, but if the trade war ends next year, which seems likely as the US President, Donald Trump, will not want to face a November election while also fighting China, then all commodities could do well.

Forecasts for the iron ore price vary widely, as they always have. Among the leading investment banks, JP Morgan has revised up its price average price for 2020 to start the year in the mid-to-high $US80/t range thanks to an upgraded forecast for China’s annual rate of steel production growth from 1% to 2% -- another comment on a country-wide recovery in the most important market for commodities.

Overall, however, the commodity star in 2020 is expected to be copper, thanks to strong demand from the transport, communications and electronics sectors – including copper-heavy electric cars.

Morgan Stanley singled out copper in its 2020 preview, which includes a forecast of metal deficits next year and in 2021, followed by a surplus in 2022. Of the local copper producers, Sandfire is singled out as the best bet despite a weak 2019 which saw a price contraction from $6.71 to $5.72 over the past 12-months.

All commodities, other than iron ore and copper, could face price headwinds in 2020 if the trade war persists, even gold.

Among Australian gold producers, Evolution is Morgan Stanley’s top pick for next year, but partly because it’s been heavily sold off since August and is overdue for a recovery.

Citi’s picks for 2020 are nickel, alumina and coking (or steel-making) coal, with a more cautious view on iron ore than JP Morgan.

“Global growth will be modestly higher (in 2020) with much of the improvement coming from emerging markets,” Citi said. “On the whole that’s positive for commodities.”

UBS is also a nickel fan, telling clients this week that the metal has been oversold with the start next year of Indonesia’s well-flagged export ban a wake-up call for the metal and its miners.

A call of the UBS commodities card over the next 12-months includes:

  • Nickel, poised for a recovery as the 2020 Indonesian export ban gets closer.
  • Copper is starting to reflect long-term supply-deficit concerns as demand continues to grow, a recipe for a higher price.
  • Lithium should benefit from a run-down of stockpiles and a boost from higher electric-vehicle sales, and
  • Gold remains a long-term “risk diversifier” in what looks like being a long period of low interest rates.

Closer to home, the past week’s stock market activity has shown another slide towards pre-Christmas lethargy with this run down of interesting activity reflecting yesterday’s prices around midday, with most moves over the week modest either way.

  • Northern Star returned to the winner’s circle after positive media reports about its Pogo mine in Alaska, with its price rising by 33c to $10.16, the highest since mid-October.
  • Kirkland Lake added $2.10 to $61.25 after reporting that its Robbin’s Hill project could become its second high-grade gold mine in Victoria.
  • RTG, a low-profile deal-making specialist, bit off another big potential transaction with a move to buy the tricky Mt Kare gold project in Papua New Guinea. RTG is already in the running for partial acquisition of the even more troubled Bougainville copper mine. On the market, the stock moved up by 0.6c to 8.6c.
  • Oklo Resources added 2c to 14c after reporting encouraging assays from drilling at its Seko project in Mali with a best hit of 65 metres at 7.11 grams a tonne from a depth of 13m.
  • Legend Mining added 0.5c to 7.8c in what was a subdued reaction to a potentially significant nickel and copper drill result from its Rockford project in the Fraser Range of WA with a best intersection of 14.9m grading 1.07% nickel and 0.75% copper from a depth of 114m, with a 2.1m core in that section assaying 2.03% nickel and 1.34% copper, plus 0.11% cobalt.
  • Lynas Corporation rose by 25c to $2.37 after announcing the selection of Kalgoorlie for its rare earth cracking and leaching plant which will replace a controversial mineral processing stage at its Malaysian facility, and
  • Mincor gained 2c to 62c after announcing government approval for its Cassini nickel project near Kambalda in WA.

# Merry Christmas and a prosperous New Year.

 

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