Analysts trim commodity forecasts, shining spotlight on miners

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A number of agencies have downgraded their forecasts on key Australian commodity exports, potentially posing problems for Australia’s listed resource exporters.

Last week, the Department of Industry, Innovation and Science on Friday downgraded its forecasts iron ore, meteorological coal and copper.

Iron ore could yield just $US48 a tonne by 2018 – a sharp fall for the metal that sold for $US62.80 per tonne on Friday and whose price touched $US94.86 in February.

The figure is in keeping with those of several other forecasters, including Macquarie – which expects an average iron ore price of $US50 per tonne in the second quarter of this year.

Capital Economics is an unusually accurate forecaster and its chief commodities economist said in an interview with Bloomberg that the price would average $US50 per tonne by the end of the year. 

Meteorological coal would fall to $US137 a tonne for coking coal in 2018, a 28 per cent decline year-on-year, the government forecaster estimated.

Meanwhile copper prices could decline 4.1 per cent in 2018, to $US5,438 per tonne.

Copper was at the end of last week also downgraded by UBS – one of the most bullish analysts on the metal. It nonetheless downgraded its price by between 11 to 14 per cent in the 2017-18 financial year, citing a greater abundance of scrap metal and concerns over Chinese housing construction. 

Falling commodity prices could provide headwinds for Australia’s mining sector. Nonetheless, it remains a favourite with some analysts.

UBS for one retains its overweight rating on the sector in the third quarter of this year. And it isn’t alone.

Deutsche Bank strategist Tim Baker told clients at the end of June that the sector was cheap to the rest of the market.

While commodity prices are a key part of resource earnings, the correlation between the stock prices of listed miners and commodity prices is far from absolute, Mr Baker argued.

“Our earlier work found that while resource share prices have been tied to commodity prices since 2004, prior to then it was a different story. Miners’ earnings and share prices historically did better than commodities, as they created value through volume growth and development of new assets, and were careful with costs.

“We see scope for this to happen again – capex has dropped sharply, which historically has been good for share prices, and costs are much lower. As a result, free cash flows are surging, with free-cash flow yields in double-digits in many cases.”

Not all fund managers agree.

Tom Shelmerdine, of T Rowe Price’s Australian equities team, recently told clients the global asset manager remained broadly sceptical on the sector. 

“T. Rowe Price’s Australian equity team has taken a contrarian stance toward the mining sector in recent years, and we remain comfortably underweight.

“However, the current environment does offer a number of idiosyncratic, stock-specific opportunities, in our view – companies that are exposed to growing end markets and that offer optionality by virtue of their high-quality assets.”



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