Macquarie hikes short-term iron ore price forecasts, cautious on miners

In a research note dated 16 May the broker hiked its 2017 iron ore price forecast by 11.1% to $50 per metric tonne and for 2016 by 1.5%.

Furthermore, 'stability' would be key in the Asian giant going forward, the Australian broker said, ahead of next year's political changes in Beijing, when half of the current Politburo's mandarins were set to step down.

Hence, investors could look forward to credit support for key infrastructure and social housing projects remaining firm, but the pace of investment would slow from the heady levels seen over the first three months of 2016.

Medium-term iron ore price forecasts revised lower

However, looking further out the analysts pared their price forecasts.

Macquarie cut its projections for the price of iron-ore in 2018 and beyond by approximately 20%, arguing that 100 metric tonnes of seaborne supplies still needed to be taken out of the market by 2018-19 for the market to rebalance.

Looking out to 2018, it now expected the price of iron ore to be at $47 per tonne, versus $55 per tonne previously. In 2019, it was now pegged at $50 per tonne instead of $60 per tonne.

As well, even after the latest data for April the broker deemed the rebound seen in China's property sector to be "unsustainable".

Medium and long-term forecasts for the price of nickel were also marked down by between 6% to 12%.

Forecasts for other commodity prices saw smaller revisions of about 2% after Macquarie marked-to-market its estimates.

Miners shares left facing 'air pocket'

Following on from all of the above, the rally in mining shares was still "at risk", it said.

"For most other miners (excl. gold), earnings estimates are still 10-20% lower YTD and our spot analysis indicates earnings downside risk for non-iron ore producers."

The sector was trading at a 6% premium to its historical relative market valuation with most stocks left facing a valuation 'air-pocket'.

Among diversified miners Glencore was Macquarie's 'top'pick', while Antofagasta continued to be its key short in the base metal arena.

Centamin was its preferred pick among the gold diggers while Petra Diamonds offered 50% volume growth by 2019 and a positive free cash flow outlook.

The broker remained "cautious" on the steel sector, but said it preferred Thyssenkrupp in the space because of its free cash flow-positive capital goods businesses and the potential for multiple re-rating through the divestment of its crude steel businesses.