Markets: Heavy metals

Commodity prices are expected to take a further battering as Asian steel production declines and more supply comes online.

This year has been a tough year for commodities. Prices have fallen as much as 45 per cent along with similar falls in the share prices of some mining companies. UBS analyst Andreas Bokkenheuser says the gloomy picture for commodity prices and their stock is unlikely to change.

“Third quarter is just beyond the northern hemisphere’s peak in industrial production and trade flows,” says Bokkenheuser. “Over the next few months, expect to see reports of widespread destocking and production cuts. This seasonal characteristic is most developed for the markets of iron ore, metallurgical coal, copper and nickel”.

UBS expects the iron ore spot price to average $US117 a tonne through the rest of 2013 before falling to $US105 a tonne next year. The sport price for iron ore imported through the north east Chinese port city of Tianjin has gained 12 per cent since May 31 to $US123.70 a tonne yesterday, according to Bloomberg data.

“China’s strong steel production rates have underpinned iron ore’s demand and prices in the year to date and will continue to do so until September and October when steel production across Asia are cut,” says Bokkenheuser. “The downside risk this event poses for iron ore spot prices may be enhanced this year by an unprecedented, Australian-led surge in new supply”.

UBS recommends investors buy shares in BHP and Rio Tinto whose stocks have fallen 14 per cent and 21 per cent respectively since the beginning of 2013. Fortescue, whose shares have dropped 28 per cent this year, are among UBS’ “least preferred” iron ore stocks.

UBS forecasts the metallurgical coal price to be on average $156 a tonne ‘free on board’ this year and $US155 a tonne in 2014. The US east coast metallurgical coal price is $US125 a tonne, according to Bloomberg data. 

The Swiss investment bank expects the gold price to average $US1,440 an ounce this year and $US1,325 next year. At 1421 AEST the spot gold price was $US1,245.36. The price of spot gold has dropped 21 per cent in the last 12 months, according to Bloomberg.

“Stable economic activity in the US means that medium-term outlook depends on European financial crisis and inflation fears,” says UBS.