We have turned short-term neutral from bearish towards industrial metals as there is potential for a modest relief rally in Q313. Price sentiment has declined to bearish extremes in recent months.
Nonetheless, we continue to expect an H213 China growth relapse and for a continued slowdown over the coming years . As a result , we remain bearish key metals such as copper, iron ore and steel on a medium-term basis.
We retain a bearish iron ore view in our commodities strategy table, a position that has moved 15.3 % in our favour since initiation. That said, we recognise that iron ore prices coul d well rally further off their 2013 lows in the next few weeks.
Tin and lead will outperform other metal prices over the coming quarters due to supply disruption and resilient demand, respectively. In other markets, improving supply (copper, iron ore) or elevated stockpiles (aluminium, zinc , steel ) will undermine price performance .
The proposed reform of the LME warehousing system aimed at reducing significant delivery queues presents a downside risk to even our own relatively bearish price forecasts, particularly for aluminium.
| Boom Years Are Over |
|S&P GSCI Industrial Metals Index (Monthly Chart)|
Iron Ore: Rebound Unsustainable
While iron ore prices ha ve climbed to the highest level since May ( US$1 30 /tonne ) , our downbeat macro view on China continue s to suggest further price declines over the course of 2013. As the downshift in the Chinese economy gains momentum ( see: 'Core Views Reiterated Following Q213 Growth Print', July 15 ) , the string of precarious fundamentals weighing heavily on t he bloated steel sector will see iron ore import demand from China disappoint over 2013 as a whole.
| Comfortable Remaining Below Market Consensus |
|Select Commodities: BMI 2013 Average Price Forecasts - % Difference From Bloomberg Consensus|
The evolving trade downturn in China will see significantly weaker demand growth for construction materials over the coming quarters ( see: 'China Future Imports: Enduring Trends & New Trajectories', June 17 ) . Furthermore, the wave of iron ore projects in Australia and Brazil expected to come online in H213 will take the wind out of the price rally and eventually herald a resumption of the price downtrend .
| Downtrend In Place |
|China Iron Ore Import Price, 62% Grade (US$/dry metric tonne, CFR)|
Steel: Sustained Glut To Limit Gains
Although the US economy is on the cusp of a cyclical upswing ( see: 'Slower 2013 Growth, But Upside Risks In 2014', July 04 ), we see no compelling reason for steel prices to make substantive gains over the medium term. Underpinned by the uninspiring economic picture in China and Europe, we expect the global steel market to remain plagued by significant overcapacity, s luggish demand and weak margins over the coming years.
| Weakness To Persist |
|Select Steel Contracts, Rebased|
While low prices will be necessary to rationalise excess production, this process will be de layed by dynamics in the Chinese steel sector. Specifica lly, efforts to consolidate the industry in China will be pushed back repeatedly due to artificial support and subsidies from local and provincial governments. T he European, Asian and North American markets will come under growing pressure from the wave of cheap steel exports from China.
Aluminium: Still Further Declines
After aluminium prices were pared back in June , prices have weakened further and are currently hovering around US$1,800/tonne, a long-standing level of support . Sustained price weakness will eventually help bring the oversupplied market back into balance as major producers cut capacity , but we expect this to only occur by 2016. Chinese production remains a downside risk, as major producers do not appear inclined to cut capacity, putting a cap on global aluminium prices. LME inventories also remain at historically elevated levels. Proposed plans by the LME to reform the metals warehousing system and drastically reduce waiting times for delivery mean that these elevated stockpiles now present a greater downside risk to prices than ever before.
| Elevated Inventories Persist |
|Aluminium - LME Inventories, tonnes|
Copper: Continued Weakness
Though recent weeks saw a slight bounce in copper prices, we believe the bounc e will be short-lived and that current price levels will weaken over H213 . Elevated global inventories and slower growth from China, illustrated by weak manufacturing data, will lead to lower prices in H213. We forecast 2013 prices to average US$7,300/tonne and US$7,000/tonne in 2014. We expect Chinese economic rebalancing to continue, with fixed-asset investment growth falling, leading to slower growth for copper imports. Though June import data surprised to the upside, we do not believe it marks the beginning of a persistent trend in the coming quarters. Moreover, we forecast that healthy mine supply growth over coming years will add to already elevated global inventories, with the copper market in surplus in the second half of 2013, keeping a cap on prices.
| Slight Bounce Unlikely To Persist |
|Three-Month LME Copper, US$/tonne (Weekly Chart)|
Lead: Outperforming A Weak Field
With prices currently trading at US$2 , 055/tonne, we expect three-month lead to stage a sustained move higher and eventually average US$2,200/tonne in 2013. Supported by its primary use in the production of lead-acid batteries, we believe demand for the metal will be less affected by the slowdown in Chinese growth compared with other industrial metals such as steel and nickel which are tied heavily to the construction industry. Indeed, lead is set to be a strong performer among the wider industrial metals complex as China's rebalancing process begins in earnest.
| Autos Sector To Drive Prices Higher |
|Select Countries - Vehicle Production (% chg y-o-y)|
Nickel: Persisting Fall
We remain bearish towards nickel, with continued gains in LME inventory levels and further price declines since the start of Q213. Nickel is in a pronounced downward trend, with its stocks-to-use ratio remaining at a multiyear high and burgeoning Chinese nickel pig iron output cutting into refined nickel consumption. Both factors will continue to weigh on prices. Furthermore, our below-consensus view on the Chinese economy suggests challenging times for nickel in H213. Nickel consumption is tied to the Chinese steel sector, where a number of precarious fundamentals are we ighing heavily on the industry. With lacklustre stainless steel demand growth and a string of new nickel projects to be commissioned soon, we forecast 2013 prices to average US$16,000/tonne, below consensus estimates .
| Nearing Support |
|Three-Month LME Nickel, US$/tonne (Monthly Chart)|
Tin: Supply Constraint Warrants Optimism
In our view, tin prices will remain supported by the metal's heavy usage in the consumer electronics sector, as well as the constrained nature of the supply market in Indonesia. Indeed, the world's largest exporter of refined tin has on several occasions restricted exports in a bid to bolster prices and support domestic smelters.
| Tin Bucking The Trend |
|Select Metals - Global Stocks-To-Use For Refined Metal (%)|
Zinc: Holding Steady, For Now
Renewed weakness in China's economy in H213 will prevent prices from making substantive gains over the long run , though prices will see further sideways trading in the coming weeks . Strong mine output and an elevated stocks-to-use ratio will leave markets well supplied. At the same time, we expect demand for zinc to weaken given its use in the galvanisation of steel.
| Underperformance To Continue |
|Select Indices, Rebased|
We forecast continued weakness in steel prices given global overcapacity and our bearish outlook on the Chinese construction sector. However, we forecast global zinc supply to see a surplus later in this decade, leading to our forecast for nominal price growth. To reflect this view, we lowered our zinc forecast price and now expect the metal to average US$2,000/tonne in 2013 and US$2,050/tonne in 2014, below consensus.
| Holding Steady For Now |
|Three-Month LME Zinc, US$/tonne (Monthly Chart)|
Select Commodities - Performance & BMI Forecasts
| Commodity || Unit || Spot Price || YTD (% Chg) || 1 Year (% Chg) || 2012 (ave) || YTD (ave) || 2013 (BMI ave) || 2014 (BMI ave) |
|Source: BMI, Bloomberg |
|Aluminium ||US$/tonne ||1,796 ||-13.4 ||-5.9 ||2,052 ||1,941 ||1,900 ||2,000 |
|Copper ||US$/tonne ||6,892 ||-13.1 ||-9.8 ||7,953 ||7,506 ||7,300 ||7,000 |
|Gold ||US$/oz ||1,280 ||-23.6 ||-18.5 ||1,669 ||1,496 ||1,575 ||1,450 |
|Iron Ore ||US$/tonne ||130 ||-10.0 ||0.8 ||128 ||135 ||120 ||105 |
|Lead ||US$/tonne ||2,022 ||-13.2 ||5.9 ||2,074 ||2,174 ||2,200 ||2,250 |
|Nickel ||US$/tonne ||13,968 ||-18.1 ||-13.2 ||17,591 ||15,953 ||16,000 ||16,500 |
|Palladium ||US$/oz ||733 ||4.2 ||26.8 ||645 ||725 ||na ||na |
|Platinum ||US$/oz ||1,412 ||-8.3 ||-0.5 ||1,553 ||1,534 ||na ||na |
|Silver ||US$/oz ||19.29 ||-36.1 ||-28.8 ||31.15 ||25.83 ||na ||na |
|Steel (MEPS Carbon Steel) ||US$/tonne ||686 ||-4.9 ||-8.2 ||755 ||714 ||710 ||700 |
|Tin ||US$/tonne ||19,475 ||-16.8 ||3.6 ||21,100 ||22,217 ||22,000 ||22,500 |
|Zinc ||US$/tonne ||1,850 ||-11.0 ||-1.0 ||1,965 ||1,956 ||2,000 ||2,050 |
Global Commodities Strategy
| || Entry Date || Entry Level || Gain/(Loss) || Rationale |
|Note: Returns do not take into account roll yield, unless stated otherwise. *SGX Asiaclear Iron Ore, cfr China 62% Fines (First Month Swap). Source: BMI, Bloomberg |
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|Bearish Iron Ore (SGX Asiaclear Swap)* ||16-Jan-2013 ||150.2 ||15.32% ||Less bullish than consensus on sustainability of China's economic recovery |
|Bullish Platinum (spot) vs Gold (spot) ||29-May-2013 ||1.055 ||4.31% ||Supply disruption in South Africa, growing autos use to support platinum prices. Bearish gold. |