goldman sachs "hold" rating

Mass Asian industrialisation to keep feeding into coal, iron demand

Michael Bennet
From: The Australian
September 02, 2011 3:43PM

INCREASING concerns on the global economy shaking financial markets haven't changed the Goldman Sachs view on Australia's two biggest exports - the investment bank has upped its price forecasts for iron ore and coal.
Following company reports in the August earnings season, Goldman said demand from China and other emerging markets appeared to be "holding up well", indicating a bright outlook for bulk commodities like iron ore and hard coking coal being gobbled up in Asia's mass industrialisation.

"This is important because, even with raw materials consumption in developed economies still below pre-GFC levels, the growth in consumption in emerging markets means that, for most major commodities, new global records of off-take will be set this year," analyst Malcolm Southwood told clients today.

"Fundamentally, then, commodities that are supply-constrained should remain attractively priced, and for some of them, further upside looks likely."

Goldman's call came after Rio Tinto, the world's second-biggest iron ore player behind Brazil's Vale, this week tipped ore demand to soar in the next eight years and outstrip the combined existing production of Australia and Brazil.

This, and the ensuing expectations of continued high prices, has sparked a multi-billion-dollar ramp up of operations in Western Australia's ore-rich Pilbara region by the likes of BHP Billiton, Rio Tinto and Fortescue Metals Group, driving up wages and other costs.

Many miners, including the world's biggest, BHP, which reported a record $US22 billion profit, last month pointed to cost inflation, but Mr Southwood said this raised "the support levels" for commodity prices.

He added that non-exchange traded metals like iron ore and coking coal held up well in the recent market volatility which shook global bourses, when traded metals like copper struggled.

Escalating fears last month on Europe's sovereign debt crisis and the US slipping back into recession also prompted US Fed Reserve chairman Ben Bernanke to pledge a long period of ultra-low interest rates and hint at a third round of stimulus measures, or QE3, which was also supportive of commodity prices, Mr Southwood said.

He pointed out that interest rates near zero and QE3 weaken the US dollar and allow a continuation of the "carry trade" - borrowing where rates are low to invest elsewhere for bigger gains - supporting the flow of funds into commodity investments. "All things equal, these circumstance are supportive for US dollar commodity prices," he said.

Gold is also expected to shine, with Mr Southwood tipping the precious metal to trade between $US1725 and $US2100 an ounce in the next 12 months - this morning gold fell $US2.60 to $US1829.10 - as the same themes of low interest rates, QE3, the weak US dollar and Europe's woes "point to upside price risk".

For Pilbara iron ore fines, Goldman upped its calendar 2012 forecast just 6.3 per cent to $US170 a tonne. But the bank bumped its forecast for 2013 up 33.3 per cent to $US160 and 32 per cent for 2014 to $US125, on Goldman's "growing confidence" market tightness will persist.

Its 2015 forecast was left unchanged at $US95, reflecting the bank's view of lower prices in the long-term.

Goldman also upped its forecasts for hard coking coal, semi-soft coal and pulverised coal injection in 2013 and 2014 by about 8.6 per cent. Forecasts for thermal coal, copper and oil are about unchanged.

"Moving into 2012, we would expect a modest improvement in demand for coal from traditional markets including Japan, Korea and the European Union, with further growth in demand from emerging markets, notably India," said Mr Southwood.

But he added that coal supply remained "vulnerable to disruption", following the devastating floods and cyclones that crippled Queensland's coal supply chain earlier this year.

Mr Southwood's colleagues responded to the analysis by reiterating 'buy' ratings on BHP, Rio Tinto and Fortescue, and 'hold' calls on Atlas Iron, Mount Gibson Iron and Murchison Metals.

For pure-play coal stocks, Goldman has a 'buy' on takeover target Macarthur Coal and Bathurst Resources, while calling a 'hold' on Whitehaven Coal and Aston Resources.

http://www.theaustralian.com.au/business/markets/mass-asian-industrialisation-to-keep-feeding-into-coal-iron-demand/story-e6frg91x-1226128259601