Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

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Thematic (Sector/Industry)

Australia Metals and mining / Thematic (Sector/Industry)

Bulk commodity miners are overvalued. Shares of iron ore and met coal miners have rallied to levels not seen since 2014, when Chinese steel demand peaked. In effect, the market appears to be extrapolating the 2016 Chinese demand growth trajectory far into the future. Our conviction that a sell-off is coming has strengthened, as the underlying drivers of the 2016 rally are unsustainable. The credit-fueled stimulus led to steel demand surprising to the upside; however, this pulled forward future steel demand and only delays the structural decline already under way. Short-term supply disruptions have further exacerbated the temporary tightening in the market. As the effect of credit growth wanes, we expect Chinese steel demand to revert to a long-term structural decline.While we slightly increase our midcycle price forecasts, we still see significant downside from current levels. Our updated forecasts account for greater supply disruptions, lower Chinese supply, and higher freight and maintenance capital costs. We expect roughly 50% downside from recent iron ore prices, from around USD 80 per tonne to our midcycle forecast of USD 35 per tonne (up from USD 30 previously), as demand growth stalls and the cost curve flattens with low-cost supply expansions and incremental efficiencies. While they will exit the market in the long run, the recent rally will catalyze a short-term supply response from high-cost players, driving prices down significantly over the next year. We see similar downside for metallurgical coal prices from recent levels of USD 150-USD 175 per tonne to our midcycle forecast of USD 80 per tonne (up from USD 75).<div class="content-remarks">Companies mentioned: <a href="https://www.smartkarma.com/entities/22654" target="_blank" data-smartkarma-citation="entities:22654:1">South32 Ltd (S32 AU)</a>, <a href="https://www.smartkarma.com/entities/15103" target="_blank" data-smartkarma-citation="entities:15103:1">Mineral Resources Ltd (MIN AU)</a>, <a href="https://www.smartkarma.com/entities/14253" target="_blank" data-smartkarma-citation="entities:14253:1">Whitehaven Coal Ltd (WHC AU)</a>, <a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a>, <a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a>, <a href="https://www.smartkarma.com/entities/19043" target="_blank" data-smartkarma-citation="entities:19043:1">Mount Gibson Iron Ltd (MGX AU)</a>, <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">BHP Billiton Limited (BHP AU)</a> and <a href="https://www.smartkarma.com/entities/41" target="_blank" data-smartkarma-citation="entities:41:1">Fortescue Metals Group Ltd (FMG AU)</a>. </div>Analysts: Matthew Hodge, CFA and David Wang, CFA

Bulk commodity miners are overvalued. Shares of iron ore and met coal miners have rallied to levels not seen since 2014, when Chinese steel demand peaked. In effect, the market appears to be extrapolating the 2016 Chinese demand growth trajectory far into the future. Our conviction that a sell-off is coming has strengthened, as the underlying drivers of the 2016 rally are unsustainable. The credit-fueled stimulus led to steel demand surprising to the upside; however, this pulled forward future steel demand and only delays the structural decline already under way. Short-term supply disruptions have further exacerbated the temporary tightening in the market. As the effect of credit growth wanes, we expect Chinese steel demand to revert to a long-term structural decline.While we slightly increase our midcycle price forecasts, we still see significant downside from current levels. Our updated forecasts account for greater supply disruptions, lower Chinese supply, and higher freight and maintenance capital costs. We expect roughly 50% downside from recent iron ore prices, from around USD 80 per tonne to our midcycle forecast of USD 35 per tonne (up from USD 30 previously), as demand growth stalls and the cost curve flattens with low-cost supply expansions and incremental efficiencies. While they will exit the market in the long run, the recent rally will catalyze a short-term supply response from high-cost players, driving prices down significantly over the next year. We see similar downside for metallurgical coal prices from recent levels of USD 150-USD 175 per tonne to our midcycle forecast of USD 80 per tonne (up from USD 75).Companies mentioned: South32 Ltd (S32 AU), Mineral Resources Ltd (MIN AU), Whitehaven Coal Ltd (WHC AU), Wesfarmers Ltd (WES AU), Rio Tinto Ltd (RIO AU), Mount Gibson Iron Ltd (MGX AU), BHP Billiton Limited (BHP AU) and Fortescue Metals Group Ltd (FMG AU). Analysts: Matthew Hodge, CFA and David Wang, CFA

False Dawn: The Bulk Commodity Mining Rally Will Prove Short-Lived