Iron ore leads the charge to rescue Canberra’s Xmas
Australia’s biggest export earner, iron ore, continues to lead a broad Christmas rally in commodity prices.
Australia’s biggest export earner, iron ore, continues to lead a broad Christmas rally in commodity prices, raising expectations that the resources sector can do the heavy lifting needed to make the September quarter’s economic growth slump a short-term issue.
Prices for the steelmaking raw material have broken through $US80 a tonne for the first time in more than two years in response to a pick-up in demand from Chinese steelmakers which, for the moment at least, are enjoying a return to profits.
According to The Steel Index, iron ore (62 per cent grade) rose $US3.80, or 4.8 per cent, to $US82.40 a tonne. The price is now more than double the year’s low of $US39.30 and has fuelled dramatic share price improvements for the miners, whose profits are now expected to come storming back from last year’s smashed levels.
Other commodities have been swept higher in iron ore’s wake, leading analysts to upgrade earnings expectations and dividend payments for the 2017 year. Tax receipts for Canberra, and state royalties, will rise sharply accordingly.
This month’s federal budget update is increasingly likely to have to take account of iron ore’s spectacular price recovery.
Treasury’s $US55-a-tonne forecast in the May budget represented a sharp 41 per cent upgrade on its December view of $US39 a tonne. It might still hold back on an upgrade given analysts are united that the current price is overdone.
But ratings agency Moody’s yesterday identified the rebound in commodity prices as a key factor in its view that Australia’s 0.5 per cent GDP fall in the September quarter — the worst since the GFC — did not herald the beginning of a weakening economic trend.
“The recovery in commodity prices is boosting the terms of trade, which experienced its first consecutive quarterly increase since the third quarter of 2011,” Moody’s said. “Higher commodity prices will support corporate profits and, if sustained, investment.”
Andrew Forrest’s Fortescue has been a key beneficiary of iron ore’s price rise. The stock has risen to five-year highs, increasing the value of Mr Forrest’s stake by $5bn to $7bn. Speaking at the Boao Forum for Asia in Melbourne yesterday, Mr Forrest reminded the audience that while commodity prices had recovered strongly, they remain well down from their boom-time highs. But operating costs have come down.
He said the maintenance of margins was important if the resources industry was to reinvest in the industry. “It’s incredibly important for China,’’ he said. China consumes about half of all commodities.
Mr Forrest said the US election victory of Donald Trump was a positive for commodity prices.
“You have a president-elect talking about a multi-trillion-dollar infrastructure campaign across North America,” he said. “That’s clearly going to start to strengthen the resources sector.’’
He said fears about trade wars were overdone. “A stronger North America leads to a stronger China. And a stronger North America and China of course leads to a stronger Australia,’’ he said. “I don’t think we have a danger of a trade war. Most US presidents have talked the game in elections but then have a natural avoidance for self-harm once they are in office.’’
The continued strength in the broad sweep of commodity prices is leading to a raft of profit upgrades for the miners which, in turn, are flowing through to strong share price gains.
The energy sector, which came late to this year’s commodity price rally after OPEC agreed to its first production cut in eight years, is up “only’’ 12.5 per cent for the (calendar) year.
The gold sector — which has taken a dive since the US election — is still up by 39 per cent for the year. But it has been left in the shadows by the share price gains for the non-gold sector, with small resources up by 59 per cent for the year and the big miners up by close to 60 per cent.
Credit Suisse is the latest to aggressively upgrade commodity price forecasts and the profit expectations of the miners.
It has raised its 2017 iron ore price forecast by 22 per to $US55 a tonne, coking coal by 68 per cent to $US119 a tonne, thermal coal by 24 per cent to $US74 a tonne, alumina by 22 per cent to $US248 a tonne, and copper by 23 per cent to $US2.45 a pound.
Most of the forecasts are below spot prices, with Credit Suisse saying that iron ore and coal prices are now at unsustainably high levels. But even using its less-than-spot forecasts, the earnings impact of increased commodities prices has a telling impact on the profit/dividends outlook for resources.
Credit Suisse has lifted its profit expectations for BHP in the 2017 financial year by 69 per cent to $US8.05bn. The dividend expectation is up from US60c to US95c a share. The 2017 calender year estimate for Rio Tinto, which is more exposed to iron ore price strength, has been increased by 85 per cent to $US7.72bn.
“This is the strongest earnings per share upgrade cycle since the financial crisis — and there is still more to go,’’ Credit Suisse said.
Goldman Sachs yesterday said miners — alongside the banks — were its preferred “reflation’’ trades for 2017.
“While commodity prices have already enjoyed a large bounce, the sector still presents as one of the few cyclical parts of the market where valuations are not stretched and earnings momentum remains strong given the significant disconnect between the Australian dollar and spot commodity prices,” Goldman Sachs said.
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