Category: Financial Markets

Meanwhile, vaccination rates continue to rise in much of the developed world, where a nearly normal summer seems to be in the works. As such, our forecast for a full recovery in demand in 2022 looks safe.

At the same time, supply remains constrained. OPEC has reiterated its plan to bring back volumes in a measured way, which should allow for a resumption of Iranian volumes if a deal is reached to do so. In the United States, public companies have not shown a willingness to increase spending, meaning volume growth will remain tepid. The combined effect is a continued drawdown in inventories over the next 18 months. The market seems to agree, having pushed Brent prices back to $70/barrel. As supply typically lags demand, prices could be headed higher.

• We have slightly lowered our 2021 demand forecast to account for India, but 2022 demand remains unchanged and above 2019 levels. In 2023, we expect record-high global oil demand of 101.7 million barrels a day.
• At its June 1 meeting, OPEC+ reaffirmed planned supply additions of 350 thousand b/d in May, 350 mb/d in June, and 450 mb/d in July as it remains cautiously optimistic for a rear-end 2021 recovery.
• The U.S. rig count increased in May to 372, twice the number in mid-August last year, but even with West Texas Intermediate crude prices approaching $70/bbl, further additions will be limited.

OPEC Wary of Pandemic Setbacks but Goes Ahead With Planned Increases

OPEC+ reaffirmed that it will proceed with the easing of production cuts that it proposed the meeting prior. The cartel will go forth with its planned additions of 350 mb/d in May, 350 mb/d in June, and 450 mb/d in July, while acknowledging pandemic-driven headwinds in many parts of the world. Members declined to adjudicate on production policy past July, but further upticks are likely (the group meets again on the first of the month). Despite vaccination shortages and mounting coronavirus cases throughout much of Asia and Latin America, OPEC remains cautiously optimistic for a rear-end 2021 recovery; its total oil estimate is unchanged from last month.

During April, the producers participating in the cuts produced 21.1 mmb/d, almost exactly in line with the combined target. These producers have held volumes flat for three straight months now, but the cartel expects to gradually ramp up output in the summer. De facto head Saudi Arabia is also expected to bump up its own production after enduring self-imposed incremental cuts. Overall, conformity with agreed production ceilings has been strong since the pandemic began, but it remains to be seen if OPEC members can be trusted to accelerate production at the agreed rate; historically, the cartel has struggled with producers willing to sacrifice group targets for their own benefit. We forecast an incremental 2.2 mmb/d and 4.2 mmb/d, respectively, in 2021 and 2022 from OPEC, Russia, and Kazakhstan combined.

Iran seem to be edging closer to a resolution as negotiations in Vienna motor onward and are optimistic that an agreement can be reached by August. If so, Iranian production, which has steadily increased in the past six months, could see the floodgates burst open. However, this sentiment was tempered by the International Atomic Energy Agency, which chastised the country in a June 1 report for failing to explain undeclared nuclear material at multiple locations. Iranian output fell over 1.5 mmb/d when the current sanctions came into effect, so an agreement could materially boost supply in the region. We’d argue, though, that the rest of OPEC would be willing to make sacrifices to accommodate these volumes (despite Iran-Saudi tensions). Otherwise, the cartel’s progress reducing inventories since the peak of the pandemic would be quickly undone, and the market would be thrown back into oversupply.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital. We expect a well-supplied lithium market in the longer term, coupled with weaker demand growth for steel, particularly from China, to drive lower prices and reduce the pool of available contracting work. Despite this, we think Mineral Resources can drive EPS growth on volume.

Key Considerations

• Management has significantly improved disclosure, earnings streams have been materially diversified and the investment strategy has consistently generated high returns on invested capital.

• We think the business model is demonstrably sustainable, centring on Mining Services around Australian bulk commodities.

• Mineral Resources will selectively own and develop its own mining operations, though with the aim of subsequent sell down while retaining core processing and screening rights.

• Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.

• Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.

• Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.

• Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

• Mineral Resources’ profits are exposed to volatile iron ore price. We expect future iron ore prices to be much less favourable than the decade-long boom to 2014.

• Investments developing lithium bear fruit now in a booming market, but a strong third-party supply response into a small market risks hollowing out returns.

• Mineral Resources has poor geographic diversification, with a high dependence on capital activity in Western Australia. Mineral Resources is highly dependent on likely Chinese demand for iron ore.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.