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The Cycle Hasn’t Turned Yet

April 2016

Some base metals have seen short-term rising trend. But is the metal sector really turning around?

The falling price trend in base metals which dominated most of 2015 crept into sentiment for the early part of this year. Concerns around the global economy, dominated by the negative sentiment surrounding the Chinese economy in particular, led to a direct fallout in demand and prospects for industrial metals. While prices have recovered since then, it would be imprudent to opine that the cycle has turned. While February saw a broad-based rally across the commodities market, March has seen some level of cynicism creep into sentiment prevailing around the bounce back buoyancy. The year remains heavily laden with economic events and related data is expected to continue to dictate the sentiment around the base metal markets.

Copper Recovers
Copper prices reversed the downwards trend which continued during the beginning of the current year and have seen some price stabilization come in. The fallout of the near 25% price correction during 2015 has been witnessed in a number of producers cut production or completely suspend output. Results for Antofagasta PLC, amongst the top 10 producers of copper miners worldwide, which reported a pre-tax profit of $259 mn over 2015 from $1.5 bn, a year ago are a stark reflection of the year gone by and the hit the industry has taken.
As per the recently released outlook by the International Copper Study Group (ICSG), the global refined copper market is expected to remain ‘essentially balanced’ in 2016 compared with a previous forecast in October for a 175,000 tonne surplus. This downward revision, they highlight has been made for both supply and demand, in view of global weaker economic outlook, project delays and price related production cuts.


Nickel Slides
While commodities have had it difficult over the last few years, few metals have had it as difficult as Nickel, a key ingredient in stainless steel, which trades a level close to the lows seen at the peak of the 2008 global crisis. Nickel futures prices at approximately $8600 per metric ton currently seem a distance away from the highs of $49700 per mt levels seen in April 2007. It is of little surprise that China remains the major reason for Nickel’s woes. With the country accounting for nearly 30% of global consumption, price trend remains inherently correlated to the sentiment around the economic reality. Besides, Nickel stockpiles continue to mount – at 441,912 metric tons as on end February for the London Metal Exchange (LME), they stand at nearly 3.5 times for the same period in 2011. The World Bank in its quarterly update, ‘Commodities Markets Outlook’ published in January 2016 predicted a 16% drop in prices for the current year – given the woes around the metal including a glut of supply, there is little to suggest a reversal of the long term bearish trend which has gripped the metal.

Aluminum Rises
Aluminum prices too have enjoyed the ascent seen across metals since late January, with the metal moving towards its highest price point seen since October 2015. However, the rally around the metal which again has suffered in light of an industry burdened by overcapacity and stagnating demand across primary markets is expected to see a gradual halt. The Goldman Sachs Group, which outlined its views around commodities during the month envisaged a slide as much as 20% in the prices of Aluminum over the next year. According to the data released by the International Aluminum Institute, China produced 2.48 million metric tons of aluminum in January 2016, a YoY decline of nearly 4.5%. This is the second consecutive month where Chinese aluminum production has fallen, an event not seen since December 2010.

Zinc Prices Jump
Zinc prices have recovered on the back of strong fundamentals. The month of February saw prices rebound 8% seeing some cool off in March to the current levels around $1750 per mt. This has been aided by significant supply cuts by Glencore and a consortium of Chinese smelters. Stock piles at the LME at current levels around 459,000 mt continue to trend lower – to give a perspective, warehouse piles in 2013 stood at over 1.2 million mt. While demand has trended lower as is the case with most other metals, supply growth has fallen more sharply which is leading to expectation of the industry seeing a deficit for the current year. With mining company MMG declaring the end of production at Century Mine, one of the world’s largest zinc deposits earlier and Horsehead Holding Corp, a leading US zinc producer, operational for around 150 years filing for Chapter 11 bankruptcy in February, the supply side constraints are expected to see prices supported going ahead.

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