The market volatility is dampening the outlook for 2019 with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index looking to end this year in the red.
But Morgan Stanley believes the mining sector is looking particularly attractive in the new year after it revised its price forecasts for the bulk commodities like iron ore and coal.
These upgrades, coupled with the price weakness among some of the high-profile names in the sector, are the reason why the broker has changed its outlook for the sector to "attractive" from "in-line" – but that isn't the only upgrade that Morgan Stanley has made.
The upside potential for the sector stands in contrast to the more than 7% drop in the ASX 200 since the start of this calendar year.
Big Upgrade
"Our December price deck contains revisions to both short- and long-term commodity prices. In 2019, the nickel price has seen the biggest negative revision of ~12% while met and thermal coal have added 16% and 7% respectively," said Morgan Stanley.
"For long term prices, the biggest revisions have been focused on the bulk commodities with thermal coal and iron ore both gaining 16% and 12%, respectively."
This big uplift to iron ore has prompted the broker to upgrade its recommendation on the Fortescue Metals Group Limited (ASX: FMG) share price by two full notches to "overweight" from "underweight" and has pegged a price target of $5.05 on Fortescue.
The collapse in the profit margins of Chinese steel mills (the main consumers of Australian iron ore) has cast a long dark shadow over our miners, including BHP Group Ltd (ASX: BHP) and Rio Tinto Limited Fully Paid Ord. Shrs (ASX: RIO).
The contraction in Chinese steel mill margins is below Morgan Stanley's forecast for the March 2019 quarter but the broker thinks the margin will rebound due to a step up in winter production cuts and the impact of circa RMB 800 billion of approved National Development and Reform Commission (NDRC) projects from the June 2019 quarter onwards.
Another top pick
Another of Morgan Stanley's top pick for the resources sector is Mineral Resources Limited (ASX: MIN).
The Mineral Resources share price has gone into a trading halt on Friday to allow management to announce a binding sales agreement and share subscription with Albemarle Corporation in relation to the sale of a 50% interest in the Wodgina Lithium Project and the formation of a 50:50 joint venture that will produce spodumene concentrate and lithium hydroxide.
The stock is trading at a significant discount to the broker's valuation and Morgan Stanley has an "overweight" call on Mineral Resources with a price target of $22.20 per share.
