Deutsche is most positive on base metals, supported by recent solid PMI results and steady global GDP growth, as well as slowing supply growth and policy restrictions.
Copper, which broke through US$7100 per tonne (or $3.22 per pound) overnight for the first time since September 2014, has been upgraded for 2018 by 15% to $2.97/lb, and by 5% for 2019 to $3.05/lb.
Nickel, which currently sits at $5.35/lb after a solid fortnight of gains, is expected to average $5.22/lb next year and $5.92/lb in 2019, a 12% and 13% rise respectively.
“For copper, we have greater conviction over the increasingly significant market deficits in the medium-term owing to slower expected commissioning at several major projects,” Deutsche said.
“For nickel, we see a more constructive outlook based on a structural decline in output from Philippine miners and a modest export quota in Indonesia.”
Zinc prices, which are at near-decade highs of $1.46/lb, are expected to average $1.27/lb in 2018, up by 12%, and $1.13 the following year, up by 19%.
Deutsche said supply/demand balances for all three metals pointed to medium-term deficits.
Aluminium is expected to move into deficit in the current half, with Deutsche forecasting an average 2018 price of 94c/lb, just below the current price.
Coking coal forecasts for next year were bumped up by 48% to $170/t, while iron ore is expected to recover to $70/t by mid-2018 after dropping to $50-60/t this quarter.
Zircon, rutile and manganese prices were also upgraded.
As a result of the upgrades, Deutsche upgraded earnings for the Australian mining sector by 15% for the 2018 calendar and financial years.
However, analysts noted that equities generally appeared fully valued.
“The sector is trading on plus-10% free cashflow yield, with gearing dropping to just 12% in 2018,” Deutsche said.
“We continue to think that growth and M&A (globally) will be back on the agenda sometime in 2018.”
Rio Tinto was declared the top pick, with its price target being lifted by A$3 to $80,
BHP’s price target was upgraded by $1 to $29.50.
“We also rate BHP a buy, with our thesis predicated on delivering a revamped strategy to increase group returns,” Deutsche said.
Deutsche also likes Sandfire Resources in copper, and upgraded its peer OZ Minerals to hold from sell.
The preferred pick in gold is St Barbara, but Alacer Gold and Dacian Gold were also rated as buys.
OceanaGold was downgraded to hold, while peers Northern Star Resources, Newcrest Mining and Regis Resources retained sell ratings.
Independence Group was also lowered to hold, while fellow nickel miner Western Areas was downgraded to sell.
Despite higher-than-expected commodity prices, an upgrade in the Australian dollar to US78c next year will weigh on earnings for many miners.
