MARKETS SPECTATOR: Heavy metals

Citigroup has cut its forecasts for key commodities – such as aluminium, coal, copper and gold – by as much as 15 per cent. But iron ore is safe.

The global supply of commodities such as aluminium, coal, copper and gold is outstripping demand, Citigroup says simply. That means prices for these metals may fall in 2013 by as much as 15 per cent. This has prompted Citi analysts to cut their share price targets for Alumina, BHP Billiton, Rio Tinto, Whitehaven Coal and Yancoal Australia.

Still, Citi reckons the iron price in 2013 will be at $US128 a tonne, up from a previous forecast of $US120.

But the forecast 2013 price for hard coking coal, used by steel mills, has been cut to $US171 a tonne from $US174. Thermal coal, used for electricity generation, has been slashed to $US89 a tonne from $US99.

The 2013 forecast price of copper per pound has been cut 6 per cent to $US3.41 and aluminium by 6 per cent to $US1975. Nickel this year will be $US18,035 a tonne, a 9 per cent decrease from a previous forecast. Zinc’s 2013 price will be $US1995 a tonne, a 3 per cent cut from previous forecasts.   

Gold and silver 2013 forecast prices have been cut by 7 per cent and 9 per cent respectively to $US1555 an ounce and $US28.10 an ounce.  

In its note, Citi analysts say BHP Billiton shares are “fairly valued”. The broker’s share price target for the stock is $35 from a previous target of $36. In contrast, Rio is a 'buy' because of increased cash flow and debt reduction next year. Citi has set a share price target for the stock of $71.

“With Japanese moves to depreciate the yen to stimulate the economy combined with benign Chinese inflation and an improving US economy, we favour the risk-on trade of being long Rio over BHP,” says Citi.

Citi expects Yancoal’s share price to fall to 80 cents against its previous target of $1. Whitehaven shares are a 'buy' with a share price target of $2.30. Alumina is a 'sell' with a share price target of 80 cents, down from a previous forecast of 90 cents.

Mining companies are trying to cut their capital expenditure and increase their free cash generation. But companies such as BHP Billiton are “super tankers", says Citi, and such programs take a while to show results.

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