Bulk Buys: All eyes on Evergrande as property plays havoc with commodities

All eyes will be on China today as the bear awakes from its slumber following a public holiday.

More so than the iron ore price itself, the world is watching with their hands over their eyes to see if China’s Evergrande property group collapses under the weight of its US$300 billion debt pile.

If so, will it cause ‘contagion’ to spread through property markets elsewhere in Asia and around the world if one of Asia’s largest companies goes broke?

The time off has halted speculative activity on the Dalian Commodity Exchange, the canary in the coal mine for future iron ore price movements, and the reopening of the paper trade in China will be closely watched today for signs of a bounce or further contraction.

According to Fastmarkets MB prices dropped below US$100/t to US$92.98/t on Monday. That followed a 60% fall from record highs of more than US$230/t seen back in May.

Since then China has mandated steel production cuts as it aims to restrain 2021 steel production to to ~1.05Bt mark it hit in 2020 after the industry overshot by 12% through the first half of the year.

Given the role of Chinese property and construction in the end market for iron ore, coal and steel, what impact will the Evergrande situation have on prices?

Contagion risk ‘relatively contained’

Speaking to Stockhead this week, Tribeca Investment Partners head of research Todd Warren said he believes the ‘contagion’ risk is relatively contained.

“Will the China Evergrande story ultimately be resolved? Yes. Is this part of the broader plan on behalf of Beijing to gain greater control of those markets? Take some of the heat out of the property speculation market? Yes, I think so,” Warren said.

“Will there be a restructuring of that market? Yes, I think so. Is there the risk that you know, there’s contagion into other Asian credit markets? More of a question.

“That is clearly the fear as we stand today. But I would argue that with most of that Chinese property debt being held domestically, I think that contagion risk is relatively contained.”

That heat in the property market when the Chinese economy was in post-pandemic stimulus mode was part of the cocktail that drove steel and by extension, iron ore prices sky high in the first half of the year.

UBS property analyst John Lam said that support had come off as the Communist Party seeks to limit the risk the highly leveraged property sector poses for the banking system.

Housing completions are expected to be up 10% year on year, but Lam says new starts will slow by 20% year on year in the second half of 2021.

“Barring a meaningful shift to a much more supportive government policy stance towards the property sector, property construction activity risks are building to the downside, in line with UBS views, and result in a growing headwind for commodity demand related to house construction, eg, steel/iron ore, copper, aluminium, nickel, zinc and mineral sands at least,” he said.

At the more severe end of the spectrum, there are concerns an Evergrande collapse could be a repeat of the Lehman Brothers collapse that signalled the beginning of the Global Financial Crisis in 2008.

Can China stomach recession?

China has an autocratic government but it also has an implied contract with the Chinese people to maintain economic growth.

And many analysts question whether it can stomach the sort of deflationary pressure being put on the economy by uncertainty in the property market and interventionist actions like its pollution (and trade dispute) related cuts to steel production.

Minelife analyst Gavin Wendt told Stockhead China would eventually need to come back into the market, especially after the Winter Olympics, the reason for much of the pollution crackdown, winds up in February.

“Ultimately, China is going to have to come back into the market, because its construction sector is a major contributing factor to economic growth,” he said.

“And I think the Chinese understand that, and they have parked the steel sector, they parked the construction sector temporarily.

“And of course, you know what’s going on with issues around their construction sector at the present time, it’s a convenient way for China to take the heat out of iron ore prices.

“So I think it’s going to be sustainable now, (but) I think they’re going to come back and start buying again.”

Hedged juniors breathe sigh of relief

ASX iron ore stocks

Scroll or swipe to reveal table. Click headings to sort.

CODE	COMPANY	PRICE	1 WEEK RETURN %	1 MONTH RETURN %	6 MONTH RETURN %	1 YEAR RETURN %	MARKET CAP
MDX	Mindax Limited	0.059	40	31	1867	1867	$ 101,138,477.85
RLC	Reedy Lagoon Corp.	0.0315	31	85	17	142	$ 13,500,654.15
EFE	Eastern Iron	0.04	25	208	329	376	$ 29,076,226.30
SRN	Surefire Rescs NL	0.0145	4	-3	-40	-15	$ 14,356,035.32
DRE	Drednought Resources	0.038	3	-7	100	90	$ 104,234,484.88
CZR	CZR Resources Ltd	0.008	0	-11	-33	-58	$ 27,890,586.22
ACS	Accent Resources NL	0.054	0	4	-43	440	$ 25,165,473.28
HAV	Havilah Resources	0.1925	-1	-1	-13	20	$ 61,255,445.60
HAW	Hawthorn Resources	0.047	-2	7	-32	-52	$ 15,341,718.20
FEL	Fe Limited	0.063	-3	15	43	163	$ 47,950,079.00
RHI	Red Hill Iron	3.8	-3	-5	850	1627	$ 225,517,840.24
AKO	Akora Resources	0.215	-4	5	-42		$ 11,515,560.32
LCY	Legacy Iron Ore	0.014	-7	0	0	250	$ 89,666,339.24
MGX	Mount Gibson Iron	0.435	-7	-37	-48	-41	$ 481,132,012.59
GEN	Genmin	0.18	-8	-10	-31		$ 52,223,252.25
PFE	Panteraminerals	0.335	-8	-4			$ 13,860,000.00
BHP	BHP Group Limited	37.81	-9	-15	-16	0	$ 110,722,934,816.82
RIO	Rio Tinto Limited	95.87	-10	-11	-12	-5	$ 35,354,632,221.36
HIO	Hawsons Iron Ltd	0.077	-10	-18	106	87	$ 56,331,183.05
MAG	Magmatic Resrce Ltd	0.098	-11	-18	-7	-51	$ 25,448,679.80
ADY	Admiralty Resources.	0.016	-11	14	-27	23	$ 20,857,266.45
GRR	Grange Resources.	0.4775	-12	-24	-9	91	$ 532,375,801.08
MIN	Mineral Resources.	45.51	-13	-11	17	77	$ 8,630,454,642.70
TI1	Tombador Iron	0.038	-14	-24	-51	81	$ 36,230,942.34
BCK	Brockman Mining Ltd	0.041	-15	8	37	86	$ 380,448,517.37
CIA	Champion Iron Ltd	4.665	-15	-17	-17	45	$ 2,269,083,604.48
FMS	Flinders Mines Ltd	0.785	-16	-9	-37	-43	$ 143,521,290.45
IRD	Iron Road Ltd	0.175	-17	-10	-35	53	$ 150,972,155.86
TLM	Talisman Mining	0.135	-18	-23	48	23	$ 27,061,115.83
MIO	Macarthur Minerals	0.48	-20	-8	-4	5	$ 69,325,312.80
FMG	Fortescue Metals Grp	14.71	-20	-28	-26	-10	$ 45,260,784,294.60
SRK	Strike Resources	0.115	-21	-34	-52	-8	$ 31,050,000.00
JNO	Juno	0.145	-22	-15			$ 21,705,280.16
GWR	GWR Group Ltd	0.14	-22	-39	-45	-29	$ 42,390,102.02
FEX	Fenix Resources Ltd	0.215	-25	-19	-4	39	$ 108,609,201.60
SHH	Shree Minerals Ltd	0.009	-25	-10	-40	-25	$ 10,632,368.92
MGT	Magnetite Mines	0.021	-30	-32	-46	62	$ 72,332,214.65
MGU	Magnum Mining & Exp	0.061	-32	-31	-45	42	$ 31,320,129.58
VMS	Venture Minerals	0.048	-47	-40	-17	23	$ 65,377,550.97

More power to former mining analyst and Fenix Resources (ASX:FEX) boss Rob Brierley, who either read the tea leaves or benefitted from an abundance of caution by locking hedged tonnes in at $230/t Australian before the correction began.

He told local paper The West Australian this week it was ‘business as usual’ for the Mid West iron ore miner, which declared a $25 million maiden dividend this month on the back of a $49 million profit from its humble Iron Ridge operations.

A swap deal for 45% of its production means it will have most or all of its operational costs written covered by the arrangement until September 2022, giving Fenix plenty to time to assess where the iron ore price settles in the long run.

Strike Resources (ASX:SRK) has a similar arrangement for the first shipment from its Apurimac iron ore project in Peru, which is also shielded by premiums for its high grade 66% lump product and the fact it is also selling to South America.

Based on premiums paid for similar ore out of Brazil, that would retail currently at around US$117/t in northern China. The hedge is locked in at US$141/t, around $195/t Australian.

Other tonnes will be shipped to South American steel makers, which will eliminate a large amount of shipping costs given they will take just six days to reach their port of call as opposed to a month for shipments to China.

GWR trading halt to lift

Tony Sage’s Fe Limited (ASX:FEL), which has been locked in a trading halt for several days with plans to announce a project acquisition, is also a hedger.

Its offtake and funding partner Glencore has booked the first shipment from Geraldton to a steel mill in South East Asia for product from its JWD mine between September 24 and 28, which will carry a floor price of US$160/t.

More uncertain is its neighbour, and part-owner of JWD, GWR Group (ASX:GWR), which is set to return from a trading halt pending a ‘material update’ about its Wiluna West iron ore mine.

GWR carts its ore around 800km from Wiluna West to Geraldton and has cash costs in the vicinity $120/t Australian. On face value, that is a loss-making enterprise at $92/t.

Junior iron ore stocks share price today:

Coal miners gear up for profits as tightness continues in seaborne market

ASX coal stocks

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CODE	COMPANY	PRICE	1 WEEK RETURN %	1 MONTH RETURN %	6 MONTH RETURN %	1 YEAR RETURN %	MARKET CAP
NAE	New Age Exploration	0.011	-15	0	-8	0	$ 17,230,786.92
CKA	Cokal Ltd	0.15	-9	25	124	200	$ 145,247,758.52
NCZ	New Century Resource	0.155	-3	-9	-9	11	$ 187,538,847.13
BCB	Bowen Coal Limited	0.145	-12	32	147	175	$ 181,826,994.30
LNY	Laneway Res Ltd	0.005	25	0	-9	-38	$ 19,520,329.67
PDZ	Prairie Mining Ltd	0.31	3	5	48	27	$ 70,790,077.59
AKM	Aspire Mining Ltd	0.081	-5	9	-19	3	$ 41,626,232.77
PAK	Pacific American Hld	0.016	-14	14	-18	-29	$ 5,415,943.30
AHQ	Allegiance Coal Ltd	0.59	-6	-8	37	69	$ 182,481,804.42
YAL	Yancoal Aust Ltd	2.45	-5	13	4	24	$ 3,129,441,465.69
NHC	New Hope Corporation	2.14	-7	11	62	75	$ 1,714,655,588.92
TIG	Tigers Realm Coal	0.016	-6	78	100	132	$ 209,067,237.89
SMR	Stanmore Resources	0.8	-9	13	1	10	$ 220,381,167.92
WHC	Whitehaven Coal	2.86	-5	34	69	223	$ 2,839,771,638.00
MR1	Montem Resources	0.043	0	10	-70	-83	$ 8,955,528.30
BRL	Bathurst Res Ltd.	0.785	19	22	91	91	$ 135,051,782.17
CRN	Coronado Global Res	1.235	0	30	25	35	$ 2,070,420,356.55
JAL	Jameson Resources	0.08	0	-16	-20	-30	$ 24,266,551.20
TER	Terracom Ltd	0.165	-3	0	99	27	$ 120,577,220.80
ATU	Atrum Coal Ltd	0.038	6	-16	-84	-87	$ 24,070,841.76
MCM	Mc Mining Ltd	0.125	0	4	0	25	$ 25,479,226.58

If iron ore miners were the ones to watch in FY2021, coal stocks are expecting serious windfalls in 2022.

Fastmarkets MB reported premium hard Aussie coking coal almost touching US$400/t on Tuesday.

But hard coking coal and thermal coal producers are also catching serious tailwinds.

Thermal coal miner New Hope Corporation (ASX:NHC), which owns the Bengalla and New Acland mines, swung from a $157 million loss in FY2020 to $79m profit in 2021, announcing a 7c a share dividend.

That mostly came from cost reductions and price increases through the latter half of the year as the market heated up.

New Hope shares are up 77.69% over the past 12 months, propelling its market cap to $1.8 billion.

Meanwhile, Allegiance Coal (ASX:AHQ) was up 8.1% yesterday after announcing plans to ramp up coal production to 100,000t per month from November at up to an annual rate of 1.5Mtpa by 2022.

With offtake from a third party near its newly-acquired Black Warrior mine it plans to ship or sell 1.8Mt in 2022.

The New Elk mine has suffered from worker shortages, losing 35% of its employees in the past two months, pushing its first shipment back to October this year.