Here are the commodities that look best for the year ahead
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Buy copper, nickel, gold and uranium.
Sell lithium, coal, iron ore and alumina.
At its simplest, that’s the pecking order in the mining world, according to two recently published investment-bank surveys of the outlook for the resources sector.
Broad-brush in the way of all such assessments, the value in what Morgan Stanley and Macquarie have to say about supply, demand and price for minerals and metals should be treated as the first step in an investment selection process.
Lithium, for example, is tipped to be a poor performer because of the potential for chronic over-supply.
But that should not dim interest in low-cost producers of the lightweight metal because they will win the battle for market share in the business of making batteries for electric cars.
The same can said of iron ore where there is a significant shift underway which will see the industry return to the clutches of the mega-miners, such as BHP and Rio Tinto, with their high-grade ore and supremely efficient bulk-mining and transport systems.
Iron ore, it should never be forgotten, is all about transport economics and less about orebodies.
Different in their presentation, the banks timed their latest big-picture reports to coincide with the start of the final quarter of 2018.
Morgan Stanley has a 16-commodity preference list for the next 12 months with copper on top and alumina at the bottom.
Macquarie has three time-based selections of winners and losers; 12 months, more than two years, and five years.
A third investment bank, Citi, doesn’t provide a detailed list of commodity preferences but in a “bulk v base” report it has generally upgraded price forecasts for bulks such as iron ore and coal, and downgrades for base metals such as copper and nickel.
Copper, according to Morgan Stanley, will see reduced supply growth and strong demand as China stimulates its economy as part of its trade-war defence. Macquarie agrees, but stretches the good time for copper to a “more-than” two year stretch.
From a price perspective the banks see copper trading between around $US2.90 a pound for the next 12-months, up slightly on where it is today, before moving above $US3/lb next year and then up to $3.77/lb over the next four years.
Gold, perhaps the most keenly followed metal, is eighth on Macquarie’s list of rising metals on a 12-month horizon, moving back up to around $US1219 an ounce next year and then up to $US1313/oz in 2020.
Morgan Stanley sees a more rapid recovery in the short-term with gold rising to $US1273/oz next year, but then flattening out at $US1280/oz.
Palladium, of which there are very limited investment entry points as most of the metal comes from Russia, is Morgan Stanley’s third pick thanks to a widening market deficit, it also features on Macquarie’s most-preferred list for the next 12 months with the price forecast to rise $US989/oz this year and to $US1056/oz next year.
Macquarie’s three commodities on its 12-month most preferred list is topped by nickel, followed by palladium and its sister metal platinum, with uranium also featured as production cuts eat into a global surplus of the nuclear fuel.
The least preferred metals on the Macquarie list are lithium (“price-killing surplus”), manganese ore as inventories build and thermal coal as rising supply performs the same trick as is expected to happen with lithium.
Out-performers over a two-year time frame, according to Macquarie are: nickel, platinum and copper, while five-year winners are uranium, nickel and copper – and five-year “strugglers” are coal, lithium and steel.
Looked at in totality and it is nickel, copper and uranium which feature prominently from a short-or-long-term perspective, which should provide investors with a useful starting point in managing the resources component of their portfolios.
Morgan Stanley’s full 16-commodity list, ranging from good to bad, looks like this:
Missing from the commodity lists is the wild card in the Australian resources sector, the currency effect – code for a rising or falling dollar which can have a significant effect on earnings when metals sold in US dollars (which is everything) is converted to Australian dollars.
In Citi’s words, after its over-arching observations about bulks v base: “The biggest kicker to earnings is a lower Australian dollar that has (already) resulted in earnings upgrades for most stocks.”