Look out for opportunities within the iron ore market later this year with a price correction expected in September, says Dan Morgan of UBS.
07/17/2013 | 09:35am EDT
SHOWS: SYDNEY, AUSTRALIA (JULY 17, 2013) (REUTERS - ACCESS ALL)
DAN MORGAN, GLOBAL COMMODITY ANALYST, UBS
1. REPORTER OFF CAMERA SAYING:
'Crude oil prices have been trading one way and they are at a 15-month highs now. How much more gain do you see in this and why?'
2. DAN MORGAN SAYING:
'Yeah so oil has been, it has been higher than we thought. The spread between WTI and BRENT has narrowed more than we anticipated. So it's definitely been a topical commodity. The price, looking on a 12-month outlook; we don't see too much upside from here. Looking at Western world or non-OPEC production, we're looking at supply to expand at a faster pace than demand. So that's bearish for prices unless OPEC decides to intervene and cut their quotas below what they're currently producing. So what are we looking for in prices? We're looking for an average of a hundred dollars a barrel next year, down from our forecast of a hundred and eight for this year.'
3. REPORTER OFF CAMERA SAYING:
'Base metals have been under pressure on China growth and inflation numbers. While copper is still above cost of production, where do you see nickel and aluminum headed?'
4. DAN MORGAN SAYING:
'Yeah, nickel and aluminum are both reasonably - well, significantly below the cost of marginal production. And I think there's two stories here. For nickel you are going to be seeing the high-cost mines under pressure. So expect some production cuts in the months ahead and the markets to tighten. You know a price at around six dollars a pound I don't think is sustainable going forward. Aluminum however, that commodity usually is happier to sit below the marginal cost of production. Producers seem to be willing to wear losses and seem to get government support or other forms of assistance that just leaves them producing. So we've seen that situation for quite a few years now. And I don't see that turning around anytime soon. The change in interest rates, you know the U.S. interest rates are heading higher, means that it's more expensive to hold the metal and a lot of these financing deals which we've seen in the space may start to unwind. That's bearish for aluminum because as you know significant inventories on the aluminum, if that unwinds, that could lead to price dislocation. So both are beaten up, but I prefer nickel to aluminum.'
5. REPORTER OFF CAMERA SAYING:
'Iron ore prices, while off their lows, still seem to be under pressure on weak China demand. How is the trade picking up in the metal?'
6. DAN MORGAN SAYING:
'Yeah sure iron ore prices have strengthened in the most recent few weeks. And it looks like a very tight trade. We look across a lot of indicators, and they're all exhibiting that trade tightness. And it's in line with what we'd expect at this time of year. We have, we are at the peak production rate season for steel production in China. So that leads to trade tightness usually. But now we're just about to pass that. We're entering Q3, production rates are going to start abating, and got a supply search coming. So prices should hold up for another month or six weeks. But after then, we are very cautious on prices. We're looking for another correction towards maybe September/October, and prices to go below a hundred dollars a ton. So look out for that. And I'd be looking to engage the iron ore market from an equity perspective once you see prices below a hundred or well below a hundred, you know, that looks like an opportunity to me.'