Our major miners could be on the cusp of an earnings upgrade cycle that is the result of conservative analysts' forecasts of commodity prices and the spike in the spot prices for most industrial metals.
The overnight jump in the iron ore price to over US$72 a tonne will only add to the case for a consensus earnings upgrade for many listed miners outside of precious metals even if the medium-term outlook for the steel making commodity remains convoluted at best.
Citigroup is the latest to start revising up its commodity price assumptions and is now tipping iron ore to average US$64 a tonne, up 20.8% from its earlier forecasts.
It also expects coal to average US$155 a tonne vs. US$133 per tonne, thermal coal to average US$78 a tonne vs. US$73 a tonne, manganese at US$5.10 per dry metric tonne vs. US$4.13, copper at US$3.22 a pound vs. US$2.91 a pound, aluminium at US$0.95 a pound vs. US$0.92 a pound and alumina at US$360 per tonne vs. US$340 per tonne.
Further, the weakening Australian dollar will provide another tailwind for earnings in the sector. The broker is forecasting the local dollar to average US$0.78 from US$0.79.
That may not sound like much, but in combination with the commodity price revisions, the broker has upgraded a number of miners to "buy" from "neutral". These stocks include BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), South32 Ltd (ASX: S32), Fortescue Metals Group Limited (ASX: FMG) and Alumina Limited (ASX: AWC).
"2017 has been a process of ongoing mark to market upgrades of commodity prices, for Citi and market, as better than expected Chinese growth and supply side reforms provided two pillars for the market," said the broker.
"Although we do not necessarily forecast significant price gains for the commodity complex in 2018, we do expect ongoing consensus upgrades to drive ongoing positive earnings revisions and very strong free cash flow generation."
However, the expected slowdown in investment in China's infrastructure and construction projects could put commodity prices under pressure in 2018. This is driven by the Chinese government's desire to clamp down on the debt binge that has fuelled such projects, in particular Public-Private Partnerships (PPP) between state governments and private companies.
Some forecasters believe the price of iron ore is set to dive back into the low US$50s per tonne next year.
I believe that is too bearish and I am overweight resources, but the risk of a shaper than expected slowdown in Chinese construction activity poses a real threat to the sector.
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