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Catching the Tailwind

May 2016

Improving confidence surrounding China’s economy has pushed select base metals prices higher, but the sector continues to face near-term headwinds

Base metals ended the quarter with a comparably stronger performance prices after the disastrous performance over 2015. The pack was led by Tin which returned nearly 15% over the quarter. With demand across base metals reeling under the fears of a global economic slowdown, the supply side is expected to remain the differentiator of price performance. Recent sentiment on the demand side has seen a catalyst in China showing signs of a turnaround with March exports rising at the fastest pace since February 2015.


After a near 26% correction over 2015, the metal has regained most of the lost ground in the initial part of the current year moving towards highs of $1900 per metric ton in April, levels last seen around July 2015. The supply side remains constrained by production cuts and mine closures. As highlighted by the International Lead and Zinc Study Group (ILZSG), the global market for refined zinc recorded a surplus of 183,000 tonnes in the first half of 2015, before swinging to a deficit of 60,000 tonnes in the second half. Stock piles at the LME currently stand at around 415,100 mt as against 459,000 mt reported at the time of writing last month.


After falling to a level of nearly $4327 per tonne, the lowest level since 2009, in the early part of the year, the red metal has traded at an average price of $4678 a tonne over the first quarter, pressured downwards on attempts to cross the $5000 a tonne level. Recent weeks have seen the metal trend lower following concerns over the demand side, voiced by miners and investors, at the 15th World Copper Conference, Chile. Participants highlighted prospects for more supplies globally and weaker demand in top-user China are damping sentiment. Only a quarter of the traders, analysts and producers surveyed at the conference believed the metal has reached a bottom. The other respondents opined a fall of 14% as a median forecast in the coming
12 months.


The fortunes for Nickel prices remain far from showing signs of reversal. The metal ended the quarter with a near 4% decline adding to woes of an industry which remains closed in the grip of the bears. As per the CRU Group, around 70% of Nickel producers are losing money. Also, they highlight that for miners to be encouraged to come back to the market, prices have to ascend to about $10,000 a ton from the current levels of around $8900 a ton. While inventory levels remain elevated, steadying demand coupled with supply cuts is expected to see prices inch closer towards the break-even level in the coming months. The International Nickel Study Group Global estimates demand to rise to 1.965 mt in 2016 from 1.905 mt in 2015, reflecting a marginal 3% growth.


The metal remained largely flat over the first quarter continuing to witness the downwards pressure it was plagued by for 2015. It remains one of the few metals which sees both demand and supply side economics closely linked to the fortunes of the Chinese economy. To give a perspective, China’s share of global aluminium production has grown from approximately 20% in 2006 to over 50% in 2015. In recently released data, the International Aluminium Institute (IAI) reported aluminium output from the People’s Republic of China having dropped by 461,000 mt per month between December 2015 and February 2016. The same augurs well in terms of prices, which has seen a marginal upwards drift since the announcement.


Tin outperformed the rest of the base metals, reflecting a high degree of volatility. Prices averaged $15,460 per tonne against the 2015 close of $14,600 a tonne, which declined 25.13% YoY. Prices have continue to trend higher, reaching levels of $17,200 as of mid-April on the back of improving demand and restricted supply levels. The tin market is expected to remain in a deficit condition until the year 2018.



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