T he US Federal Reserve (Fed)'s surprise decision to delay tapering of asset purchases (QE3) has improved the short-term outlook for most commodity prices, including industrial metals.
Looking into 2014 though, w e remain bearish key metals such as copper, iron ore and steel on a medium-term basis and our forecasts are generally below Bloomberg consensus. W e expect a relapse in Chinese economic growth by Q413 and a continued slowdown over the coming years.
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 .
We initiated a bearish iron ore view in early September and despite the wildcard thrown by the US Fed, we expect a significant decline over the coming quarters. Iron ore will be the metal most exposed to a slowdown in Chinese fixed asset investment.
Tin and lead prices will outperform other metals 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.
| Boom Years Behind Us |
|S&P GSCI Industrial Metals Index (Monthly Chart)|
Iron Ore: Rally To Fade In Q413
The stellar rally in iron ore prices of recent months has limited room to ru n. While China's latest round of stimulus package has once again greased the country's economic wheels, our core view remains that any growth bounce will prove fleeting, and that China's structural downturn will come back into focus in 2014 ( see 'Another Credit Binge Will Not Cure Economy', September 12 ).
| Comfortable Below Consensus |
|2014 Average Price Forecasts - BMI % Difference From Bloomberg Consensus|
W e have re-initiated a bearish iron ore view in our commodities strategy table ( see 'Views Update: Bearish Iron Ore', September 05 ). We see room for iron ore prices to reach US$110/tonne by end-year, around 18% below current levels. A part from a glut of new iron ore supply in H213, a combination of weak margins and government pressure are set to limit the rebound in Chinese steel production , which expanded by 12.9% year-on-year (y-o-y) in August.
| Rally On Borrowed Time |
|China - Iron ore Import Price (US$/tonne, LHS) & Price Ratio (Steel Rebar/Iron Ore, RHS)|
Steel: Supply Glut To Endure
We remain bearish on steel and forecast the MEPS carbon steel index to average US$710/tonne and US$700/tonne in 2013 and 2014, respectively. The global steel market will remain mired in significant overcapacity, sluggish demand and weak margins over coming years.
| Supply Glut Weighing On Prices |
|Select Steel Contracts, Rebased|
Despite promising signs of economic recovery in the US, there have been no developments to suggest significant strengthening of global demand for steel. Surplus Chinese supply will continue to seep into global markets, as we have seen recently a strong uptick in Chinese steel exports. We expect rebalancing of the Chinese steel sector to be a protracted process as the authorities remain reluctant to close down loss-making steel mills for fear of the repercussions on employment.
Aluminium: Surge Gives Way
We expect aluminium prices to remain constrained in the coming quarters and note downside risks to our forecast average of US$2,000/tonne for 2014. Our expectation that aluminium's July and early-August rally would be pared back has proven correct, with prices falling below US$1,800/tonne by mid-September . The aluminium industry will continue to suffer from a mismatch between supply and demand, with the former outpacing the latter. This is despite production cuts by major developed market producers. For instance, Alcoa cut capacity in Brazil in August, and will likely announce further cuts in the months ahead. LME inventories have come down slightly , though still remain at record highs, which will weigh on prices in the coming months. This is particularly the case given the potential for reform of the LME warehouse system to result in a ramp up of aluminium supply from stockpiles in the coming months.
| Tin Outperformance Playing Out |
|Select LME Metal Prices, Rebased|
Copper: Weak Outlook
We expect the multi-quarter downtrend in copper prices to hold. Copper's bounce following the US Fed's decision to push back tapering should be relatively short-lived . Though positive Chinese economic data contributed to price increases in August, renewed concerns regarding economic growth appear to be weighing on prices. We also believe further Chinese fiscal stimulus will pale compared to that of 2009, thus potentially providing only a temporary and minimal bounce in prices. Mine supply growth and inventories remain strong, leading us to maintain our forecast for a slight market surplus through 2013. Going into 2014, we forecast prices to average US$6,800/tonne next year.
| Prices Coming Back Down |
|Three-Month LME Copper, US$/tonne (Weekly Chart)|
Lead: Short-Term Weakness
We do not expect lead prices to rally significantly in the coming weeks . Despite a steady decline in LME lead inventories and lead prices outperforming the other industrial metals since the beginning of the year , inventories reported a strong uptick in mid-September . The surge in lead inventories can largely be attributed to the surprise appearance of 50,450 tonnes of lead at warehouses in Vl issingen, operated by Pacorini , owned by Glencore Xstrata . I t is possible that more lead stock could appear in a similar manner in coming months, adding downside risk to lead prices . H eadwinds for prices will mount in Q413 as the structural deceleration in China's economy gains traction.
| Autos Growth To Provide Support |
|Select Countries - Vehicle Production (% chg y-o-y)|
In the medium term, we expect lead prices to continue a modest secular uptrend, with prices averaging US$2,250/tonne in 2014 . Our below consensus price forecast is largely predicated on our downbeat macro view on China. Nonetheless , demand for lead will be less affected than other industrial metals due to its primary usage in the production of lead-acid batteries for the autos sector , the demand for which we expect to continue growing . Indeed , we expect lead to remain a strong performer in the industrial metals complex as China rebalances its economy away from fixed asset investment and towards private consumption.
Nickel: Still The Laggard
Nickel's continuous poor performance and weak fundamentals recently led us to downgrade our price forecast for 2014 to US$15,000/tonne. We warned of an imminent downgrade last month given the metal's deteriorating performance. Nine months into the year and nickel still remains the worst performer in the base metals complex.
| Still Growing |
|Nickel - LME Inventories (metric tonnes)|
LME inventories remain at the highest in years, reflecting both solid mine supply and weak demand growth. Chinese nickel pig iron (NPI) production, which uses lower-quality nickel grades, is putting downward pressure on refined nickel prices. Furthermore, still weak steel demand growth in the developed world is weighing on stainless steel prices and production , which utilizes nickel.
| Still Falling |
|Three-Month LME Nickel, US$/tonne (Weekly Chart)|
Tin: Outperformance To Continue
We expect tin to remain an outperformer in the industrial metals complex over the coming quarters. T in's primary use in the electronics sector will bolster demand for the metal even as the downshift in the Chinese economy gains traction. Furthermore, supply disruption and continued price-supportive action from Indonesia will continue to support prices over the medium term ( see 'Tin Outperformance To Continue', August 14 ). We forecast the market to tighten significantly in the coming years as consumption generally outstrips production. The global stocks-to-use ratio should decline to 6.2% by 2014 comapred to a ten-year average of 9.4% after five consecutive annual deficits. In line with our view, three-month tin has broken above resistance at US$22,500/tonne and is currently trading at US$22,875/tonne.
| Uptrend Intact |
|Price Ratio: Tin / S&P GSCI Industrial Metals Index|
Zinc: Still A Surplus Market
We believe zinc may re- test support in the US$1,800-1,850/tonne area in the coming months . As with other base metals, strong mine output and an elevated stocks-to-use ratio will leave markets well supplied and in surplus through 201 4 . The majority of zinc is used for the galvanisation of steel, thus making the metal vulnerable to still weak global steel demand growth . O ur bearish outlook on Chin ese steel production growth in particular leads us to expect the metal to average US$1,9 50/tonne in 2014, below Bloomberg consensus.
| Range-Bound |
|Three-Month LME Zinc, US$/tonne (Weekly 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$/tonne ||1,839 ||-11.3 ||-14.1 ||2,052 ||1,916 ||1,900 ||2,000 |
|Copper ||US$/tonne ||7,350 ||-7.3 ||-12.0 ||7,953 ||7,417 ||7,300 ||6,800 |
|Gold ||US$/oz ||1,368 ||-18.4 ||-22.7 ||1,669 ||1,459 ||1,425 ||1,250 |
|Iron Ore ||US$/tonne ||132 ||-9.1 ||20.2 ||128 ||135 ||120 ||105 |
|Lead ||US$/tonne ||2,124 ||-8.8 ||-6.5 ||2,074 ||2,165 ||2,200 ||2,250 |
|Nickel ||US$/tonne ||14,240 ||-16.5 ||-19.8 ||17,591 ||15,512 ||16,000 ||15,000 |
|Palladium ||US$/oz ||701 ||-0.3 ||5.2 ||645 ||726 ||na ||na |
|Platinum ||US$/oz ||1,470 ||-4.5 ||-10.4 ||1,553 ||1,520 ||na ||na |
|Silver ||US$/oz ||22.93 ||-24.0 ||-33.6 ||31.15 ||24.86 ||na ||na |
|Steel (MEPS Carbon Steel) ||US$/tonne ||691 ||-4.2 ||-5.3 ||755 ||707 ||710 ||700 |
|Tin ||US$/tonne ||23,320 ||-0.3 ||9.1 ||21,100 ||22,047 ||22,000 ||22,500 |
|Zinc ||US$/tonne ||1,917 ||-7.8 ||-9.7 ||1,965 ||1,944 ||2,000 ||1,950 |
Global Commodities Strategy
| || Entry Date || Entry Level || Gain/(Loss) || Rationale |
|Note: As of September 19. Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg |
| AGRICULTURE || || || |
|Bearish Rough Rice (front-month CBOT) ||29-Aug-13 ||16.65 ||5.77% ||Thailand will release its stocks and scrap its subsidy policy, very well-supplied global market. |
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|Bearish Iron Ore (SGX third-month swap) ||05-Sep-2013 ||129.1 ||3.05% ||Chinese demand to resume slowdown, supply to improve |
|Bullish Platinum (spot) vs Gold (spot) ||29-May-2013 ||1.055 ||1.84% ||Supply disruption in South Africa, growing autos use to support platinum prices. Bearish gold. |