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Bulk Buys: Even Rio Tinto is concerned about China’s destitute property barons now
Mining
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The iron ore market is weathering, as always, a particularly confusing range of signals about its next move.
Up 1.79% yesterday afternoon in Singapore, iron ore futures hit US$105.50/t despite a host of pretty ordinary Chinese data which spooked the market last week, notably a string of tepid PMI reads.
More volatile over the past couple of years than a lead character written by Tommy Wiseau, while miners have held a united front of positivity on China’s reopening from Covid they are at least beginning to acknowledge a harsh reality.
Its property sector is pretty borked, something which came to life when Shimao Group Holdings, already in default, last week failed to spin a US$1.8 billion land portfolio at an 80% discount.
Rio Tinto (ASX:RIO) chairman Dominic Barton, speaking from an event in Mongolia where he was spruiking the significance of the miner’s Oyu Tolgoi copper and gold mine, acknowledged China’s property sector was in a pretty rough place.
“It has been bumpy but I think we need to remember that they have, in effect, come out of Covid a year after us,” he told Bloomberg.
“There are also challenges, as you mentioned. There is a big real estate issue.”
Iron ore has soared as high as US$130/t and above this year on enthusiasm around China’s reopening.
It has also sagged into the 90s.
It is somewhere analysts at Morgan Stanley see the commodity returning from amid strong supply out of Australia, Brazil and South Africa and a cloudy economic picture in China.
Yesterday’s lift in futures appeared to be linked to hopes of a renewed stimulus push from the Chinese Communist Party. Copper miners, who operate on a similar investment thesis, were also buoyant.
MS sees iron ore prices falling to US$90/t by the December quarter.
Downside risks
Some economists are wedded to the idea China’s economic outlook is bad for our headline commodity.
Commbank’s Vivek Dhar said there was downside risk to the big bank’s US$100/t price forecast for the December quarter.
He says support for the property sector will need to be “longer and stronger than previous policies”, meaning it is unlikely to stablise before 2024.
“The most relevant indicator for steel demand and therefore the most important for iron ore prices is the drop‑off in China’s newly constructed floor space,” he said.
“This reflects the start of the construction process and where steel is mostly used. After dropping ~39%/yr in 2022, China’s newly constructed floor space has declined another ~23%/yr in the first five months of 2023.
“Property sector aside, the surprise slowdown in China’s consumer price index (CPI) in June highlights broader concerns for China’s economy.
“These concerns only increase the likelihood of policy support. And with Politburo’s semi‑annual economic conference due later this month, we expect policymakers will announce some support for the Chinese economy.”
Iron ore supply is up, but steel output has also been strong in China. Should it taper in the second half of the year (with restrictions already in place this month in Tangshan), it could see demand for iron ore head lower.
“Ship‑tracking data also indicated that iron ore exports lifted 2.5‑3%/yr in H1 2023,” Dhar said.
“Combined with China’s weakening steel demand with limited policy support options, we continue to flag lower iron ore prices.”
Not that bad
Other economists are less negative on China’s economic picture however.
Westpac senior economist Justin Smirk says the fundamentals are stabilising and called the market’s view of China “too pessimistic”.
“The NBS PMI reading was not that weak compared to historical priors, nor its global comparisons,” he said.
“In addition, detail from the fixed asset investment survey suggests not only is China’s manufacturing sector showing some resilience, but it also continues to grow. Chinese authorities are unlikely to deliver a ‘big bang’ stimulus targeting infrastructure and property as many seem to think.
“Doing so would be at odds with recent policy reform, potentially putting at risk the economic development the Party believes is necessary to achieve its economic and prosperity goals to 2035.”
Westpac has kept its year-end forecasts unchanged, with iron ore still expected to fetch US$100/t on December 31, met coal projected to fall from US$201/t at the end of last week to US$190/t and Newcastle grade thermal coal to close at US$125/t, down from US$147/t last week.
Australian iron ore shipments are up 6% year to date, with South Africa up 1% and Brazil up 3%. Chinese crude steel production is up 5% so far this year.
“We remain cautious on the iron ore price as we expect demand to be broadly flat through this year while supply is set to lift,” Smirk said.
Reporting season awaits
Heading into reporting season the analysts over at Goldman Sachs are bullish on ‘only copper, met coal and mineral sands in H2.
But they’re big on commodities and Aussie miners long-term, with 65% of the stocks covered by Paul Young, Hugo Nicolaci and Caleb Heiner ‘trading under NAV’.
Ahead of June quarter reports they’ve upgraded South32 (ASX:S32) from neutral to buy on higher output and stronger base metals and met coal pricing among other things.
They also like Champion Iron (ASX:CIA) for its high grade iron ore exposure and Coronado (ASX:CRN) for met coal, as well as steel producer BlueScope (ASX:BSL). Scrap steel play Sims Metal Management (ASX:SGM) and mineral sands producer Iluka (ASX:ILU) are also on the buy list.
Bulk miners who don’t excite GS include sell-rated iron ore miner Fortescue Metals Group (ASX:FMG) and thermal coal producer New Hope Group (ASX:NHC), while iron ore and lithium miner MinRes (ASX:MIN) is among those on the sell list as well thanks to free cash flow and production concerns.
Goldman sees iron ore falling to US$90/t in the second half of 2023, seeing long term real prices of US$71/t and nominal prices of US$82/t.
Its more positive on the potential for the hard coking coal and thermal coal prices to bounce back from US$250/t and US$120/t in the current quarter to US$280/t and US$160/t respectively in the December term.
Goldman is extremely positive on long run met coal prices, which it sees at US$180/t.
When it comes to the main three players, BHP, Rio and FMG, what investors are really looking out for, alongside some of their battery metals ambitions, are iron ore output and costs.
For Rio Tinto, Goldman sees shipments dropping from 82.5Mt in the March quarter to 78.7Mt in June.
BHP is expected by GS to announce a rebound in iron ore shipments from its Pilbara ops from 59.8Mt in March to 64.9Mt in June, with costs for FY23 to rise year on year from US$16.8/t to US$18.9/t.
Goldman thinks it will ramp up to 287Mt in FY24 at US$18.9/t, 6% above consensus on costs and 2% below on forecast production.
At FMG, Young, Nicolaci and Heiner expect 48.8Mt of iron ore shipments at a price of US$97/t and realisation of 87%, in line with the previous quarter. That production rate would be enough for FMG to hit the top end of its 187-192Mt guidance range.
GS sees unit costs of US$17.7/t, 4% below the consensus forecast of US$18.50/t. For FY24, they think shipments will lift to 199Mt, but costs are expected to rise substantially to US$20.70/t.
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 |
|---|---|---|---|---|---|---|---|
| ACS | Accent Resources NL | 0.011 | 0% | 10% | -56% | -76% | $ 5,204,400.11 |
| ADY | Admiralty Resources. | 0.006 | 0% | 20% | -14% | -45% | $ 7,821,474.92 |
| AKO | Akora Resources | 0.165 | 3% | -15% | 6% | -15% | $ 15,672,164.31 |
| BCK | Brockman Mining Ltd | 0.035 | -5% | 13% | 59% | -3% | $ 324,808,124.59 |
| BHP | BHP Group Limited | 43.33 | -4% | -3% | -11% | 14% | $ 219,502,004,691.48 |
| CIA | Champion Iron Ltd | 5.68 | -4% | -10% | -27% | 17% | $ 2,937,656,955.68 |
| CZR | CZR Resources Ltd | 0.16 | -3% | 0% | -27% | -46% | $ 37,717,543.36 |
| DRE | Dreadnought Resources Ltd | 0.056 | 8% | 4% | -42% | 24% | $ 186,352,780.32 |
| EFE | Eastern Resources | 0.011 | 10% | 0% | -42% | -59% | $ 13,661,411.07 |
| CUF | Cufe Ltd | 0.015 | -25% | 36% | 0% | -32% | $ 14,491,685.48 |
| FEX | Fenix Resources Ltd | 0.29 | 0% | 23% | 12% | -2% | $ 183,906,956.80 |
| FMG | Fortescue Metals Grp | 21.65 | -2% | 4% | -3% | 28% | $ 66,659,590,474.70 |
| FMS | Flinders Mines Ltd | 0.48 | 10% | 5% | 12% | 14% | $ 81,047,316.96 |
| GEN | Genmin | 0.185 | 9% | 28% | -8% | -16% | $ 83,487,398.29 |
| GRR | Grange Resources. | 0.515 | -1% | -4% | -44% | -55% | $ 596,029,429.47 |
| GWR | GWR Group Ltd | 0.081 | 16% | 21% | 35% | -33% | $ 26,018,549.06 |
| HAV | Havilah Resources | 0.23 | 2% | -12% | -30% | -6% | $ 72,827,018.30 |
| HAW | Hawthorn Resources | 0.14 | -10% | 47% | 17% | 73% | $ 46,902,185.82 |
| HIO | Hawsons Iron Ltd | 0.041 | -15% | 11% | -56% | -91% | $ 37,681,913.42 |
| IRD | Iron Road Ltd | 0.087 | 16% | 7% | -28% | -40% | $ 70,199,558.06 |
| JNO | Juno | 0.079 | 11% | 13% | -12% | -28% | $ 10,716,982.08 |
| LCY | Legacy Iron Ore | 0.02 | -9% | 25% | 11% | 8% | $ 128,136,523.98 |
| MAG | Magmatic Resrce Ltd | 0.073 | -22% | -20% | -23% | -1% | $ 22,315,574.25 |
| MDX | Mindax Limited | 0.061 | -3% | -13% | 3% | 3% | $ 124,779,085.58 |
| MGT | Magnetite Mines | 0.415 | 4% | 0% | -13% | -62% | $ 31,524,731.74 |
| MGU | Magnum Mining & Exp | 0.036 | 44% | 50% | 38% | -12% | $ 25,891,337.77 |
| MGX | Mount Gibson Iron | 0.41 | -4% | 3% | -22% | -15% | $ 497,911,926.53 |
| MIN | Mineral Resources. | 67.9 | -7% | -3% | -23% | 48% | $ 13,205,235,727.60 |
| MIO | Macarthur Minerals | 0.2 | 18% | -9% | 29% | -7% | $ 33,170,697.60 |
| PFE | Panteraminerals | 0.089 | 2% | 24% | -23% | -34% | $ 4,583,599.68 |
| PLG | Pearlgullironlimited | 0.028 | -7% | -13% | -7% | -36% | $ 4,379,654.66 |
| RHI | Red Hill Minerals | 4.53 | 0% | -2% | 6% | 33% | $ 289,141,514.97 |
| RIO | Rio Tinto Limited | 111.91 | -2% | -2% | -6% | 17% | $ 41,542,806,508.74 |
| RLC | Reedy Lagoon Corp. | 0.007 | 0% | 40% | -30% | -61% | $ 3,967,037.21 |
| CTN | Catalina Resources | 0.003 | 0% | 0% | -63% | -67% | $ 3,715,460.68 |
| SRK | Strike Resources | 0.07 | 1% | 4% | -20% | -36% | $ 19,862,500.00 |
| SRN | Surefire Rescs NL | 0.018 | 20% | 13% | 20% | -14% | $ 29,724,542.59 |
| TI1 | Tombador Iron | 0.02 | 0% | -5% | -23% | -17% | $ 42,992,147.46 |
| TLM | Talisman Mining | 0.165 | 0% | -3% | 0% | 22% | $ 31,072,857.59 |
| VMS | Venture Minerals | 0.014 | 0% | -7% | -44% | -52% | $ 27,300,182.49 |
| EQN | Equinoxresources | 0.11 | 5% | -12% | -12% | -21% | $ 4,950,000.11 |
| AMD | Arrow Minerals | 0.004 | 14% | 33% | -20% | 60% | $ 12,095,060.38 |
Ensham extended to 2045
The Greens have let fly at the Federal Labor Government over the approval last week from environment minister Tanya Plibersek of the Ensham coal mine extension.
Set to be purchased this year by a consortium led by South Africa’s Thungela off Japan’s Idemitsu Kosan in a $340m deal, it is the latest extension to clear the federal hurdle.
The mine near Emerald in Central Queensland will now be able to operate for another eight years to 2045.
It’s life on mine under the extension — producing 4.5Mtpa — is out to around 2037, with commissioning and rehabilitation expected to be completed to 2039.
Confirmation of Ensham’s extension drew anger from the Greens, whose environment spokesperson Sarah Hanson-Young said Plibersek “should stop approving new coal mines”.
Front month futures are currently paying US$137.05/t for High CV Newcastle thermal coal. They have come down significantly from as much as US$450/t late last year as high European gas stores, a mild winter and cool start to summer dulled demand for the energy fuel.
ASX coal 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 |
|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.005 | 0% | -17% | -38% | -17% | $ 7,897,444.01 |
| CKA | Cokal Ltd | 0.097 | -3% | -16% | -50% | -39% | $ 106,815,949.02 |
| BCB | Bowen Coal Limited | 0.145 | -9% | -12% | -54% | -34% | $ 306,022,040.50 |
| SVG | Savannah Goldfields | 0.105 | 0% | -25% | -36% | -48% | $ 21,543,328.18 |
| GRX | Greenx Metals Ltd | 0.99 | -7% | 16% | 15% | 395% | $ 247,598,856.08 |
| AKM | Aspire Mining Ltd | 0.071 | -5% | 16% | -4% | -11% | $ 36,042,225.94 |
| AVM | Advance Metals Ltd | 0.007 | 0% | -13% | -22% | -36% | $ 4,119,911.08 |
| AHQ | Allegiance Coal Ltd | 0.013 | 0% | 0% | -70% | -97% | $ 13,063,647.08 |
| YAL | Yancoal Aust Ltd | 4.7 | -2% | 0% | -26% | -8% | $ 6,232,474,142.64 |
| NHC | New Hope Corporation | 4.76 | -3% | -12% | -22% | 26% | $ 4,209,020,834.85 |
| TIG | Tigers Realm Coal | 0.005 | -17% | -29% | -70% | -71% | $ 65,333,511.84 |
| SMR | Stanmore Resources | 2.45 | -5% | -9% | -25% | 35% | $ 2,226,437,335.98 |
| WHC | Whitehaven Coal | 6.6 | -5% | 3% | -25% | 30% | $ 5,513,199,166.56 |
| BRL | Bathurst Res Ltd. | 1.02 | -1% | 16% | 20% | 2% | $ 195,186,975.60 |
| CRN | Coronado Global Res | 1.55 | -1% | 12% | -23% | 14% | $ 2,514,680,595.00 |
| JAL | Jameson Resources | 0.055 | -7% | -21% | -39% | -21% | $ 23,099,154.90 |
| TER | Terracom Ltd | 0.475 | -1% | 1% | -53% | -25% | $ 364,439,636.93 |
| ATU | Atrum Coal Ltd | 0.005 | 0% | 0% | -17% | -14% | $ 6,958,495.86 |
| MCM | Mc Mining Ltd | 0.165 | 3% | 22% | -49% | 73% | $ 66,943,921.34 |
| DBI | Dalrymple Bay | 2.64 | -1% | 0% | 8% | 30% | $ 1,308,810,800.88 |
| AQC | Auspaccoal Ltd | 0.14 | 4% | 8% | -42% | 59% | $ 48,623,533.42 |
