Monsters of Rock: Goldman says iron ore and base metals will take the mantle from coal and lithium

Goldman Sachs analysts think iron ore and base metals will profit from China’s reopening
Battery metals and thermal coal to stand aside, with Goldman predicting Newcastle prices to fall through middle of 2023 as market ‘rebalances’
Materials up slightly on gold, coal despite iron ore hit

Last year it was battery metals and coal that set the market alight as iron ore, gold and base metals floundered amid rate rises and Chinese economic struggles.

This year the shoe is on the other foot, Goldman Sachs’ Australian analyst team believes, with Paul Young and team favouring base metals and ferrous plays over the lithium and coal stocks which dominated 2022.

“Into 2H, we are most positive on the ferrous complex (steel, benchmark 62% and high grade iron ore, and coking coal) on an expected recovery in Chinese steel production and prices, base metals (specifically copper, aluminium & zinc) on low inventories and supply side disruptions (in particular Chilean copper mine production issues and slow restart of European aluminium and zinc smelters),” they said in a note last week ahead of earnings season.

“Our least preferred commodities are the battery materials (lithium, nickel & cobalt) and thermal coal both on our forecasts for 2H surpluses.

“We remain broadly constructive on rare earths, zircon and high grade TiO2 prices in 2023 on supply tightness despite softening end market demand, but still forecast prices to decline slightly in 2023.”

Thermal coal prices are expected to drop from April, according to Young and his stablemates Hugo Nicolaci and Caleb Heiner, as an estimated 40Mt deficit from 2022 rebalances due to recovering supply from Australia, supply from Indonesia, Russian exports, lower demand and higher natural gas volumes.

But with spot prices in excess of US$360/t, GS still toggled up its thermal coal price to US$275/t from US$233/t for 2023.

Iron ore meanwhile, having already run to US$120/t, may need to wait for fundamentals to catch up.

Singapore futures fell 4.35% to a touch over US$120/t today after the Chinese Government moved to counter “speculation” it claims has sent prices up over 50% since the start of November.

Who does Goldman like heading into reporting season?

Rio Tinto (ASX:RIO) gets us off the mark with its December quarter numbers tomorrow morning around 8.30am AEDT.

Goldman forecasts it delivered 87.6Mt of iron ore in the December quarter from the Pilbara, against consensus of 86.2Mt, a figure that would see it strike the bottom end of its 320-335Mt guidance.

BHP’s (ASX:BHP) (Jan 19) December quarter production is also expected to be up slightly, while Fortescue’s (ASX:FMG) (Jan 29) is forecast to remain flat at 47.5Mt.

FMG, Sandfire Resources (ASX:SFR) and New Hope Corp (ASX:NHC) are on Goldman’s sell list, with Rio, mineral sands miner Iluka Resources (ASX:ILU), coking coal miner Coronado (ASX:CRN), BlueScope Steel (ASX:BSL), Mineral Resources (ASX:MIN) and Champion Iron (ASX:CIA) all rated buys on strong free cash flow or high production growth.

Alumina (ASX:AWC) has been downgraded to a sell, due in part to margin pressure from lower alumina prices.

GS coverage universe share prices today:

The China effect

Overall, Goldman’s analysts say stocks exposed to China have done well through the last quarter on expectations of its reopening. BHP flirted with $50 last week, not far off highs seen in August 2021.

However, negative news in quarterlies could see them retrace.

“Based on our view that the Dec Q results will show ongoing production and cost challenges, and that 1Q is typically a weaker demand period from China for iron ore and base metals, we would not be surprised if the sector retraces slightly during 1Q,” Young, Nicolaci and Heiner said.

Dividends yields could also fall this year, they said, as growth and decarbonisation capex ramps up.

“That said, we would use any share price weakness as an opportunity to increase exposure to our Buy rated names on our view of a China reopening into 2Q23, particularly those exposed to ferrous & base metals,” they wrote.

Materials today

Weighed down by the iron ore miners, the ASX materials sector rose 0.24% on the back of coal and gold producers, tracking behind the 0.82% lift across the ASX 200.

New Hope was the day’s large cap leader, up almost 5%, with Northern Star (ASX:NST) up 2.9% a more than 2% lift for the All Ords gold index.

Ioneer (ASX:INR) meanwhile collected more support in afternoon trade after receiving a commitment for a US$700 million government loan from the US Department of Energy for its Rhyolite Ridge lithium and boron mine in Nevada.