The gulf between consensus forecasts and spot prices has been widening this quarter, and extends to the futures market too. The gap means large upgrades lie ahead for energy and mining stocks, which could bolster both sectors in a volatile trading environment.
“The quarterly earnings and forecast revision cycle usually comes out around this time and analysts are only just playing catch up now,” said Ben Cleary, portfolio manager of the Tribeca Natural Resources Fund.
“They probably started the year too bearish on commodity prices anyway and the prices are going to have to be upgraded.
“The last couple of years, most commodity prices have proved that consensus was quite conservative in hindsight, anyway. It’s shaping up like 2022 might be the same again.”
Morgan Stanley on Thursday improved its 2022 financial year estimates.
The broker upgraded its copper forecast by 9 per cent to $US4.40 a pound while its nickel price was raised 19 per cent to $US12.81 a pound and its iron ore price 9 per cent to $US155 a tonne. Its zinc price was raised 48 per cent to $US1.72 a pound.
In energy, the upgrades were even larger.
Morgan Stanley raised its financial 2022 hard coking coal price by 70 per cent to $US418 a tonne while its thermal coal price was raised by 96 per cent to $US255 a tonne.
Its lithium carbonate price was upgraded 225 per cent to $US46,000 a tonne.
Two weeks ago, Goldman Sachs upgraded Brent crude to average $US135 a barrel through 2022, a sharp increase from its previous forecast of $US98 a barrel.
Those are set to flow through to equity earnings forecasts in the coming weeks as stock analysts absorb the new projections.
“It should increase the valuations for those respective commodity miners, so you’ll see those earnings increases coming through,” said Mr Cleary.
Events in the first three months of the year have turned sell-side forecasts on their heads, leaving brokers largely underestimating the strength of commodity prices, even for those unaffected by the Ukraine conflict.
In December, Morgan Stanley was forecasting the price of iron ore would decline through the fourth quarter and remain below $US100 a tonne through the first quarter of 2022.
At the same time, UBS was forecasting the price of iron ore would average $US85 a tonne through 2022 and then $US80 a tonne through 2023.
In reality, the price of iron ore has remained well above $US100 a tonne through the first quarter of the year, trading closer to $US150 a tonne. On Wednesday, it traded at $146.45 a tonne according to S&P Global Platts.
“No one had Russia in their numbers at the start of the year, but it’s had a material impact on a number of different commodities, and it’s been surprising we’re just not seeing the supply response,” said Mr Cleary.
“There was a lot of fuel on the floor with these commodities already in tight markets and Russia was just the match.”
Analyst assumptions are in stark contrast to the bullish sentiment from the buy-side, where a number of fund managers are tipping another commodities supercycle is playing out.
Regal Investment Management’s Phil King said earlier this month resource stocks were at the beginning of a decade-long boom, with neglected avenues of new supply and increasing demand for commodities set to drive gains into the 2030s.
High iron ore prices and the rally in energy commodities have been an asset to Australia’s terms of trade. They have also enabled the S&P/ASX 200 Index to post what stands to be its best outperformance over Wall Street’s S&P 500 in seven years when the quarter ends on March 31.
