Morningstar analysts continue to see commodity and miner share prices as overvalued, propped up by Chinese stimulus. Iron ore's relative buoyancy since early 2016 is typical of most industrial commodities. Recent conditions have been highly favourable for miners such as Rio Tinto (RIO), but we do not expect this to last. With China's credit growth slowing, we continue to expect mined commodity prices in general, and particularly for iron ore, to fall and for share prices to follow.
The miners we cover are generally substantially overvalued. This reflects our expectation for a change in demand growth from China as its economy matures and moves toward less commodity-intensive and more consumption-driven growth. High-cost miners and those with larger exposure to iron ore and coking coal tend to look the most overvalued.
Aluminium has fared better than iron ore in recent months, with prices revisiting 2012 highs. Prices have moved higher because of better-than-expected demand and reduced production capacity in China. We believe investors have become overly enthusiastic on both counts. We forecast a significant slowing in aluminium demand growth and anticipate that the impact of capacity cuts will prove far overstated.
We forecast a long-term aluminium price of only $1,475 per metric ton, roughly 25% below current levels. This will impact on London-listed miners such as Rio Tinto and BHP Billiton (BHP).
Gold Prices Under Pressure in 2018
On the demand side, the key factors underpinning our bearish outlook are our lower forecast for China investment and fading benefits from Chinese stimulus. We also contend that India is still some years away from picking up the slack as the next major driver of global aluminium consumption. On the supply side, we expect Chinese overcapacity to remain in place, as new, low-cost capacity more than offsets the country's progress in closing high-cost facilities.
Gold is among the few mined commodities that isn't directly tied to the fortunes of Chinese domestic investment. Despite market expectations for higher US interest rates as well as the beginning of Federal Reserve’s reduction in its balance sheet, gold investment in exchange-traded fund (ETF) holdings remains as high as it did when rates were meaningfully lower.
As yields on US government bonds and other safe-haven asset prices rise, the opportunity cost of holding gold will rise. During the fourth quarter of 2017, investment demand for gold began to slow and prices fell below $1,250 per ounce from over $1,300 during the third quarter.
On the back of weak investment demand, we forecast gold prices to fall further to $1,150 an ounce by the end of 2018. Nevertheless, we still believe gold has a promising future, and we forecast a nominal gold price of $1,300 per ounce by 2020. We expect that in the long term, Chinese and Indian jewellery demand will fill the gap left by waning investor demand. However, the rise of consumer demand will take time, which suggests prices are at risk of falling the short term.
