Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


What lies ahead for Australia's mining and energy companies

Glenn Freeman  |  28 Apr 2017Text size  Decrease  Increase  |  

Page 1 of 1

The looming structural shift in Chinese demand for iron ore and coal will have a monumental impact, while fundamental differences in the way oil and gas are consumed versus mined commodities should see demand stay higher for longer, say Morningstar equity analysts.


Mathew Hodge and Mark Taylor, senior equity analysts covering mined commodities and energy, on Thursday provided their expert insights into Morningstar's overall medium-term outlook for the sector, during our exclusive webcast, "Mountains still to climb: What lies ahead for mining and materials".

"What drives our forecast is the outlook for China. Eighty per cent of that is coming from fixed asset investment--that's where we're more bearish. It's about the rate of urbanisation and how much of China's runway in terms of total steel consumption and steel in the economy it's going to use up. We're anticipating a low single-digit decline," Hodge says.

He forecasts a Chinese consumption decline of around 1 per cent, in combination with more supply coming online: "It's a very different world where you have demand growing at 5 per cent-plus, versus a demand world where we think iron ore is not going to grow, so you've got additional iron ore coming on at a lower cost, which is flattening the cost curve."


Exhibit 1: China's steel stock-in-use continues to outpace peers despite our bearish annual demand forecast steel stock per capita


Source: Penn World Tables, World Bank, Pauliuk et al, Morningstar


Hodge also discussed the potential effect other emerging economies, such as India, may have on the overall demand picture for iron ore.

"India is still quite a long way behind--if you look at copper and aluminium demand, it's about a tenth of China's in terms of the intensity per person. That can grow at quite rapid rates, and still not be a massive driver of overall global demand," he says.

"We think the trajectory around India's economy is going to be a little bit different. It's a much more services-orientated economy. China kind of industrialised the world, and we think it's quite unlikely that India will go down that same road of reindustrialisation."

In terms of the overall growth outlook for coal, Hodge says: "We're seeing new projects being stimulated, some that were mothballed are coming back on. But in terms of overall demand, it's quite a flat picture similar to what we see in iron ore."

"I think there's been a bit of a change in sentiment ... yes, China's had some really good numbers, but they're in the past now. So, the attention is turning to what is the rest of this year, and next year, going to look like."

He expects that in the absence of fiscal stimulus, the market for mine commodities will go back to genuine structural change: "Those are the things that the market is weighing around. There's been a lot of volatility and I'd expect to see more."

Along with BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO)--which are lower-cost producers, though are still not considered by Morningstar to have an economic moat--Hodge also addressed some of the higher-cost producers such as Arrium and Mineral Resources.

On energy, Mark Taylor explained Morningstar's mid-cycle oil price forecast of $60 per barrel for Brent crude.

With Morningstar holding a moderately more upbeat outlook for energy producers than mining companies, he highlights the fundamental difference in the way steel and oil are consumed: "[Oil] goes up in a puff of smoke--it's gone--whereas steel is left in the bridges and the buildings and has ongoing utility."

"That fact alone is going to mean that the demand for oil is higher for longer, and we see that as the core underpinning of oil's demand and price being more attractive in the medium term," Taylor says.

"The major drivers are population growth, any change in average global growth per capita and energy efficiency, and stagnating populations in the developed economies. We think that global primary energy demand is going to increase at around 2 per cent per annum over the next 10 years or so ... that's because we think energy intensity is going to increase globally," Taylor says.

The growing urbanisation and development in the emerging economies of Bangladesh, Vietnam and India, with combined populations of more than 2 billion people, "are going to increasingly influence the overall global demand level".

"And on top of that basic structure is the interplay between the six key primary energy sources of gas, coal, oil, renewables, hydro and nuclear. There will be swings and roundabouts in those, but we see oil demand growing at approximately 1 per cent per annum for the next 10 years, which is in line with the 10-year historical average," Taylor says.

Morningstar anticipates oil's share of the overall market will fall from 34 per cent to 30 per cent, but will still support a healthy oil price of $60 per barrel.

Mining services was also discussed, including the effect increasing infrastructure spending on roads and bridges could have.
"It's not a huge portion of the total, and if you look at our and third-party estimates for growth in dollars spent on road and rail, you're looking at an increase of between $10 billion and $20 billion," Taylor says.

"That sounds like a lot but that has to replace a fall of $100 billion of investment on the mining and energy side down to $30 billion, so it's a very big hole that has to be filled."

More from Morningstar

Contrasting outlooks for these 2 resource stocks

Is your data safe with ASX 100 companies?

Make better investment decisions with Morningstar Premium | Free 4-week trial


Glenn Freeman is a Morningstar senior editor.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.