MARKETS SPECTATOR: Shifting sands

In a report issued by Goldman Sachs this morning, it has noted that the sector is fast heading for oversupply as the efforts by producers to restrict production will be too little, too late.

"Zircon will remain in oversupply as tile manufacturers reduce use. The zircon market has been a victim of its own success. Following a period of scarcity and high prices, ceramic tile manufacturers have learned to live with a lower amount of zircon per square meter. Based on industry sources, we believe that the process of substitution (e.g. mixing zircon with alumina) and demand destruction (e.g. removing zircon from the tile body) is structural, and the zircon market will be oversupplied for an extended period”, Goldman said.

However, the outlook for titanium dioxide, or pigment, is relatively better – although the broker still sees a contraction in demand, albeit somewhat milder and shorter than what it expects in the zircon market.

Consequently, Goldman has lowered 2013 earnings forecasts for a number of stocks which have in turn resulted in ratings downgrades.

Two of the bigger names to be downgraded are Mineral Deposits and Iluka Resources.

Mineral Deposits was cut to neutral from a Conviction List buy, with its target price lowered to $4.45 from $7.56. "We remove Mineral Deposits from the Conviction List and downgrade to neutral due to the impact of the revised mineral sands prices and thus our forecast of materially lower earnings from 2014 when the new Grand Cote MSP is operational”, Goldman noted.

Iluka Resources has been downgraded to sell from buy and its target price slashed by more than 50 per cent to $7.33 from $15.12. This is due to the deteriorating price outlook for the mineral sands complex and the need for Iluka to cut production to bring the global zircon and high grade feedstock market back towards equilibrium, Goldman noted.

Elsewhere, Goldman also reduced its recommendation on Base Res to neutral from buy and cut Alkane Resources to sell from neutral.

The below performance chart over the past year illustrates just how much selling pressure these stocks have been under when compared against broader index. As always, the market seems to have been a leading indicator, pricing in a deteriorating environment for some time before the broker downgrades started.

Source: Iress