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More Pain and Little Gain

September 2016

Prices for many base metals have moved up. Nonetheless, oversupply and global weakness still remain major headwinds

The trend in base metals has remained largely similar to the previous update. As a pack, they have trended higher supported well by the weakness in the US Dollar. A gradual recovery is visible in metals like nickel, which have otherwise been in a firm bear grip. Amongst the pack covered, the last few weeks have seen aluminium outperform while zinc continues to remain the best performing base metal for the year.

Base-Matel-Chart-Sep2016

Zinc
Prices surpassed the USD 2300 per metric ton level, levels last seen in April last year. The metal continues to lead the pack and recent surge in pricing is attributable to the continued closure of several large mines – the latest being China which has shut all lead and zinc mines in Hunan province’s Huayuan county, as part of the government’s overall efforts to clean up the lead and zinc mining sector. Hunan is main lead and zinc mining zone in China. Since August 15, the government has halted power supply to all zinc mines in the county – the mining reform, which will last until June 2017, aims to prevent mining accidents and ensure safety in mining. The demand side remains healthy – Chinese trade data highlighted the shortages owing to the pressures on the supply side as China’s imports of refined zinc jumped 65% in June. Goldman Sachs has forecast a 114,000 ton shortage of zinc this year, which will widen to 360,000 tons in 2017. As outlined in our previous month’s commentary, fundamentals are working well for the metal and the trajectory remains upwards. Prices, as seen from the chart, are now making a beeline towards the USD 2400 an ounce level which has proven to be a strong resistance zone over the last 3 years.

Copper
Antofagasta PLC, one of the major international copper producers, with its activities concentrated mainly in Chile where it operates four copper mines including Los Pelambres (recognized as one of the largest copper deposits across the world), detailed ‘the short-term outlook for the copper market is expected to continue to be volatile.’ They outline that incase prices were to weaken towards USD 2.00 / lb or below with conviction then supply cuts could be expected; in the meantime, supply surpluses are forecast until at least 2018, as demand growth is forecast to remain modest.

The metal most notably faces waning demand in its largest consumer market, China which is a major worry. China’s copper imports were down an annual 14.3% in July at 360,000 tonnes.

Nickel
Nickel prices moved to a 1 year high with prices surging over USD 11000 per metric ton in the early part of August as traders bet supplies will tighten even further following Philippines cracks down on the nickel industry. The Philippines is cracking down on mine pollution and this is impacting nickel production. The Philippines is the world’s largest exporter of nickel ore. What may act as a signal of light at the end of the tunnel is the fact that while the crackdown has already caused a major adjustment in the nickel market, the full pricing impact, may not be felt until next year. The global nickel market swung into a deficit of 42,600 tons during the May-June period, a sharp adjustment following the market’s 45 kt surplus in 2015. With mine shutdowns increasing in July, an even deepening deficit is likely.

This may well be the shot in the arm the metal may have required; given the host of developments taking place, however, it is essential to keep a keen watch before initiating a position in the metal, as till recently it has been gripped by a multi-year bear run.

Aluminium
Aluminium prices have moved higher over the last few week and gone past the range of USD 1500-USD 1700 per tonne as suggested by the Japanese Aluminium Association. Norsk Hydro, one of the largest aluminium companies worldwide, expects the rally to continue – it does not fear a curtailment on account of rising production in China, as the global car industry would continue to drive stronger demand. The company has raised its estimate of growth in global aluminium demand to between 4% and 5% from 3-4%.

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