Monsters of Rock: Bank on China as Westpac sees upside on cautious commodity view
Westpac has joined Commonwealth Bank in suggesting iron ore prices are poised to head south from their US$130/t peak this year to US$100/t by year’s end, but says China’s economy is ‘well-positioned to rebound’ in a positive note for miners.
Following on from BHP (ASX:BHP) boss Mike Henry’s bullish stance on Chinese commodity demand yesterday, Westpac senior economist Justin Smirk, who expects China’s rebound from Covid Zero to turn into medium term growth.
The run in iron ore prices has prompted Smirk to lift Westpac’s forecast for 2023 iron ore prices from US$90/t in its December update to US$100/t this week, in line with Commbank analyst Vivek Dhar’s assessment this month.
“Chinese data for December supports our long-held view that China’s economy is well-positioned to not only rebound from COVID-zero, but also to grow strongly into the medium-term,” Smirk said.
“We expect it to average growth of 5% or more through 2022 to 2024 and likely beyond.
“Therefore, the key risk to our cautious view is a stronger than expected recovery in China and in the Chinese property market in particular.”
On the flipside he noted new home sales were consistent with a cautious view, rebar spreads remain weak compared to iron ore prices, port inventories are lifting and Australian iron ore shipments have been strong this year.
Longer term, Smirk says a Westpac review of WoodMac shows 300Mt of additional iron ore supply could come online over the next five years.
“WoodMac recently published its annual review of iron ore projects reporting that the number of active projects had increased from 85 in 2021 to 115 in 2022,” he said.
“Our review of WoodMac’s data suggests there is the potential for around 300mt of additional iron ore supply to come online over the next 5 years with a bit more than 100mt from the majors, 35mt from the smaller Australian miners, 40mt from the Brazilian junior miners, 110mt from Africa (mainly Simandou) and something around 10mt from the rest.”
Another 940Mt are at early stages, but are considered high cost, capital intensive or “geographically challenging” (i.e. in the middle of goddamn nowhere).
Westpac also anticipates relatively strong thermal and met coal prices.
While thermal coal has tumbled by around 50% from its US$400/t level in December, it could be close to a bottom.
Westpac sees the Newcastle coal premium continuing to narrow towards the end of the northern winter with strong Indonesian and North American output increasing supply by 12% year to date, amid weaker demand due to mild weather.
“However, we still expect thermal coal prices to remain elevated compared to history over the next two years due to ongoing supply constraints; thermal coal holding at US$200/t at end-2023 and US$175 at end-2024,” he said.
Coking coal prices, up almost 50% this year to US$344/t earlier this month, are expected to remain strong, with lower grades of met coal like PCI and semi-soft also up around 40%.
“Wet and stormy conditions continue to feature along the Australian east coast, particularly in Queensland, presenting an ongoing near-term supply risk,” Smirk said.
“We are forecasting met coal prices to hold around US$300/t through 2023 ending the year at US$280/t due to support from rising demand from China. Australia’s first coal shipment after more than two years of an unofficial ban reached China’s southern Guangdong Province in early February.
“While supply remains disrupted, the return of the Chinese market is a clear upside risk for met coal.”
Mining focused engineering contractor Lycopodium (ASX:LYL) has stunned with big lifts across the board in virtually every metric, with NPAT for the first half of 2023 up from $15.3m to $20m.
That came off a lift in EBITDA and jump in revenue from $102.4m to $159.9m, powering a fully franked interim dividend of 36c per share, a payout of around $14.3 million.
LYL has full year guidance of $320m revenue and $40m NPAT.
“We are in the process of delivering a significant portfolio of projects across the globe, including mobilising to site on several major projects over the past six months, in addition to being awarded a number of new projects and studies,” managing director Peter De Leo said.
“It has therefore been a very busy and rewarding period for the Company, reflected in the strong results achieved at half-year.”
And a couple of smaller miners posting their report cards today. Getting a pass is small iron ore producer Mount Gibson Iron (ASX:MGX), which improved from a $65.6m loss to a NPAT of $7.4m after completing work to access new high grade ore zones at its Koolan Island mine.
The company sold 1.1Mt at an average grade of 65% Fe, well above 62% Fe benchmark prices, with plans to hit the lower end of its 3.2-3.7Mt (wet) guidance range in FY23.
The 65% Fe iron ore price averaged US$113/t across the half, and has lifted since to around US$140/t. 62% iron ore was fetching around US$131/t today.
“Market commentary is increasingly positive with regard to the medium-term outlook for iron ore demand,” MGX said.
Less impressive were the largely commentary free numbers out of nickel miner Panoramic Resources (ASX:PAN), which ate an $11.8 million loss for the first half despite a 397% lift in revenue, compared to a $1.2m profit in H1 FY22.
MGX shares closed slightly down at 57c, with Panoramic down around 6.5%. Lycopodium ended the day up almost 10%.