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From Macquarie this morning:
Friday, 8 October 2010

Australian miners
Pushing the iron ore boat out

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Event
Macquarie's commodity forecast changes.
Impact
The world remains a volatile place: Chinese growth and destocking appears to have bottomed, although not without concurrent inflationary pressures. The US manufacturing renaissance has stalled but a much vaunted double-dip recession is yet to be evidenced in the broader economic data. Growth remains anaemic in many parts of Europe yet some of the powerhouse economies are performing admirably and sovereign default among the weaker EU members has not materialised. The Macquarie world view can be expressed fairly simply - Chinese growth is set to reaccelerate in the short term, while the ex-China world is clearly slowing but growth should remain in positive territory (albeit likely sub-trend).
What does this mean for global commodity markets? For markets in which there is already fundamental tightness and where supply growth into next year is expected to be limited, China's demand predominance suggests price upside remains (from current spot levels). In this basket, we place copper, iron ore, metallurgical coal, thermal coal and platinum group metals (PGMs). In those commodities where supply surpluses prevail, such a demand environment is unlikely to be sufficient to drive prices out of existing range trading - think aluminium, nickel and uranium.
The major moves: The big call is iron ore: +US$120/dmt FOB Aus (62% Fe) prices for the next three years and a 20% lift in our long-term expectation to US$58/dmt FOB (equiv around US$70/dmt CFR China). Moreover, we flag the clear potential for spot prices to again spike towards US$200/dmt in First Half 2011 on inadequate seaborne supply growth. Similarly in copper, we are now forecasting an average US$3.80/lb next year with the strong possibility that prices test new highs well above US$4/lb. We have also broadly chased strong spot price rises in gold and the A$.
Outlook
It's not all beer and skittles out there: The major driver of the increase in our long-term iron ore price expectation is anticipated capital cost inflation in core brownfield (Pilbara, Brazil) and greenfield (West Africa) growth provinces. This dynamic, along with accompanying operating expenditure pressures, has been reflected in our modelling of the global iron ore players. In the same vein, A$ forecast rises have provided a large offset to metal and bulk price rises in the short term, and driven significant net downgrades in the coal and nickel sectors particularly.
At the big end of town, both BHP Billiton and Rio Tinto remain in attractive historical and relative valuation territory, and offer critical iron ore and copper leverage. Given the copper market outlook into 2011, it is equally hard to go past the key Australian red metal names - Equinox and OZ Minerals. Our premier pure play iron ore exposure remains Mount Gibson, and the coal picks for our money are Whitehaven Coal and Aston Resources.