End-game for iron ore, run for cover; CL Buy GLEN, Anglo/Kumba to Sell
Iron ore entering the end game; FoB AUS into the $30s
Our commodities team has lowered the near- and long-term iron ore price forecasts to $47/$37/$33 FoB Aus in 2015/16/17 and LT 2015 real to $39/t.
China rebalancing gains pace; steel demand in negative territory
Steel production and apparent demand in China are negative yoy as a shift away from investment-led infrastructure spending has reduced demand, which combined with a focus on reducing air pollution has seen apparent domestic demand for steel down 6.2% yoy through to end March 2015.
Enough sub-$40/t supply to meet demand; Tier 2 names at risk
Our supply analysis suggests that Rio, BHP, Vale, Anglo and FMG will deliver enough supply to meet all seaborne demand with the majority of this below $40/t FoB cash cost. The implication is that there is no need for prices to rise and higher cost producers will likely cease trading.
Two key implications:
1) risky talk of trough multiples, and 2) dividends are not covered and offer limited share price support 1) With c.250mn t more supply on the way and China’s steel demand in negative territory for 2015, putting iron ore names on trough multiples (implying future price recovery) is risky in our view. With no upside to prices on our long-term iron ore price, we see little chance of material improvements in earnings from current levels. 2) Dividends don’t backstop shares when they are not covered by free cashflow our analysis shows. At iron ore under $40/t, we estimate that BHP, Rio Tinto and Anglo would be unable to cover their dividends and Kumba would have to suspend its.
Anglo, Kumba down to Sell; reiterate Sell on Rio Tinto
We downgrade Anglo and Kumba to Sell, from Neutral, and reiterate our Sell on Rio Tinto. We also downgrade BHP to Neutral, from Buy, and remove it from our Conviction List. Our main thesis for all is the same – we see an inability to cover dividends from FCF on our commodity price deck, yet they trade at a significant premium which we believe is unwarranted.
Glencore our top pick of the large-cap names; up to Buy, on CL
On our price outlook Glencore is the only large-cap name that can cover its dividend with FCF, has no iron ore and more exposure to preferred base metals, its marketing division provides more stable cashflow and it has a stable credit outlook – it is our preferred name. On to CL Buy, from Neutral.