COLUMN-Bullish Aus commodity volumes, steady prices give equities edge: Clyde Russell

Wed Jan 8, 2014 10:17am IST

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--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Jan 8 (Reuters) - Australia, the world's top shipper of iron ore and coal, has revised higher its forecasts for natural resource exports, but this isn't necessarily all good news for battered commodity investors.

While the increase in commodity export volumes and values forecast by the Bureau of Resources and Energy Economics (BREE) in its December update is impressive, as usual the devil is in the detail.

Iron ore exports are expected to reach 649.8 million tonnes in the 2013-14 fiscal year, the government agency said, upping its June 2013 forecast of 610 million tonnes, with the value surging to A$82.1 billion ($73.2 billion) from A$66.76 billion.

Shipments of metallurgical coal, used in steel-making, are expected to reach 163.9 million tonnes, up from the June forecast of 160 million, with a value of A$23.67 billion, marginally higher than the prior forecast of A$23.54.

Thermal coal exports are predicted at 191.4 million tonnes, up from 190 million tonnes, with the value dipping slightly to A$17.2 billion from A$17.5 billion.

What these numbers reveal is that iron ore remains the standout commodity and the bureau doesn't yet foresee a slump in prices as more supply hits the market.

Rather, the expectation is that China, buyer of about two-thirds of global seaborne supplies, will continue to soak up volumes as it maintains its current pace of economic growth, while demand elsewhere will also pick up as the developing world continues its slow recovery from the 2008 recession.

This is reflected in BREE's forecast that average contract prices for iron ore in 2013-14 will be $121.2 a tonne, up from the June forecast of $112 a tonne.

This forecast may even be pessimistic given the current spot price of iron ore in Asia is $133.80 a tonne and the price was above $120 a tonne for all of 2013 apart from part of a six-week period between late May and early June.

Even the coal volumes don't look too bad, with coking coal expected to do better given the expectation of rising Chinese steel output.

But prices for coal are another matter, with coking coal average contract prices expected by BREE at $148.50 a tonne, down from the June 2013 forecast of $160, while thermal coal is expected at $88 a tonne, down from $92.

REPEAT OF LAST YEAR?

This continues the theme from 2013 of volumes holding up, but only at the expense of prices.

The pattern last year was that China, the world's biggest coal producer, consumer and importer, would boost import volumes, but only if prices were below domestic levels.

Given rising Chinese coal production and increasing pressure to act on pollution, it seems unlikely that China's domestic coal prices will rally, thus making it unlikely that global coal prices will rise either.

What the BREE forecasts also reveal is that much of the value gain is down to the expected weakening of the Australian dollar.

The bureau expects the local currency to average 91 U.S. cents over 2013-14, which seems reasonable given it has been trending lower since starting 2013 at $1.0393, and was at 89.22 cents at midday in Sydney on Jan. 8.

In other commodities, BREE presents a more mixed picture, with alumina exports tipped to decline 6.5 percent in 2013-14 from the prior fiscal year and aluminium by 0.3 percent.

Copper shipments may gain 1 percent and zinc 0.2 percent, while nickel exports are expected to drop 9.8 percent.

The overall picture that emerges is that iron ore is likely to be Australia's saving grace once again, while coal and the others will manage to keep their heads above water.

But for commodity investors, rising volumes don't really hold much appeal unless prices are gaining as well.

The BREE forecasts don't suggest strong gains in prices, even if the central expectation of robust demand from China proves accurate.

This means investors may be better off looking at the shares of resource companies, especially the major iron ore producers Rio Tinto and BHP Billiton, as well as up and coming miner Fortescue Metals Group.

BHP and Rio, in line with many of their global peers, have been reining in costs in both capital expenditure and operations, and if they can boost volumes while prices hold at least steady, then revenues and net profits stand to gain handsomely.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund. He may also own other shares mentioned as an investor in a fund.

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