RE: DIB green in a sea of red...Multiply by the China factor
MELBOURNE - The booming Chinese economy is driving a structural change in the commodities market that will leave prices at high levels for years and continue to drive bumper profits for miners, according to a report by the investment bank GoldmanSachs JBWere (GSJBW).
In the report, GSJBW upgraded its long-term commodity-price forecasts by between 20% and 30%. GSJBW resource analysts have firmly backed the so-called BRICs story, which holds that rapid growth and industrialization in Brazil, Russia, India and China has permanently bumped prices to a new level.
"We believe we are witnessing a structural shift in commodity prices and demand growth and [that] this provides a supernormal
profit environment for incumbent producers and valuable growth options," the report said.
Taking into account future production and predicted demand, GSJBW has hiked its long-term forecast for the price of copper by 29%, iron ore by 21%, zinc by 37% and oil by 33%. The analysts also boosted the investment bank's short-term forecasts for commodities across the board.
Gold is now forecast to trade between US$630 and $850 an ounce, with a bias to the upside, after a previous forecast range of $550-$700 was overtaken by the actual price.
GSJBW also believes Australia's major iron-ore producers will win 15% increases in this year's negotiations with Asian steelmakers, up from an earlier forecast of a 10% rise. GSJBW then expects contract iron-ore prices to be flat next year and drop 10% the year after that.
Following on from its bullish forecasts, GSJBW also boosted profit forecasts for Australia's miners. It has lifted its earnings per share (EPS) forecasts for BHP Billiton by 4% for 2005-06, 19% for 2006-07 and 7% for 2007-08.
GSJBW now expects the world's biggest miner to register an Australian record net profit in 2005-06 of US$10.7 billion (A$13.84 billion), followed by a mammoth US$11.4 billion in 2006-07 and US$10.2 billion in 2007-08.
Rio Tinto's EPS forecasts are up 13% in 2006, 19% in 2007 and 13% in 2008. GSJBW is expecting the miner to post a net profit of US$7.1 billion in 2006, US$6.3 billion in 2007 and US$6 billion in 2008.
The report noted that suppliers of commodities have been struggling to keep pace with soaring demand growth. "In many commodities, operations are running at 100% of capacity, and the incidence of companies failing to meet their production targets is rising," it said.
At the same time, the quality of projects being developed had weakened, especially in base metals. "Today's potential projects are typically smaller and lower in grade than those of 10 years ago," the report said. Costs for producers were continuing to rise and, with much of the increase structural, looked set to stay high, it added.
(Asia Pulse/AAP