We remain bearish on key metals such as copper, iro n ore and steel over the medium term, and our forecasts are generally below Bloomberg consensus. We expect the recent stabilisation in the Chinese economy to unravel in 2014, and forecast continued slowdown in the coming years.
The proposed reform of the London Metal Exchange (LME) warehousing system aimed at reducing significant delivery queues presents a downside risk to even our own relatively bearish price forecasts, particularly for aluminium.
As a means to play our bearish view on China's steel sector, we initiated a bearish iron ore view in our commodities strategy table in early September . Iron ore is 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. In contrast, improving supply (copper, iron ore) or elevated stockpiles (aluminium, zinc, steel) in other markets will undermine price performance.
| Boom Years Behind Us |
|S&P GSCI Industrial Metals Index (monthly chart)|
Iron Ore: Bounce To Unwind In Q413
We remain bearish iron ore and expect the stellar bounce in prices since mid-year to significantly unwind over the coming months. Headwinds for iron ore will resurface by early 2014 as demand from Chinese steel mills begins to disappoint, while a glut of new supply from Australia comes onstream.
| Comfortable Below Consensus |
|2014 Average Price Forecasts - BMI % Difference From Bloomberg Consensus|
In our view, economic stimulus measures in China will have a diminishing impact on end-user metals demand and the country's structural downturn will come back into focus in 2014. The recent rebound in Chinese st eel production will be limited as a combination of weak margins and government pressure will pave the way for some much needed restructuring and consolidation in the bloated steel sector ( see 'Iron Ore Prices To Average US$110/tonne In 2014', September 23 ). Indeed, a growing number of Chinese steelmakers are diversifying their operations into non-steel businesses in a bid to counter the collapse in profit margins.
| Rebound Won't Last |
|China - Iron ore Import Price (US$/tonne, LHS) & Steel Production and Iron Ore Imports (% chg y-o-y, RHS)|
Steel: Global Oversupply To Endure
We expect steel prices to remain depressed as the market remains mired in significant overcapacity and sluggish demand. We forecast the MEPS carbon steel index to average US$710/tonne and US$700/tonne in 2013 and 2014, respectively.
| Supply Glut Weighing On Prices |
|Select Steel Contracts, Rebased|
The rebalanci ng of China's steel sector will be a protracted process. For the present, steel production growth in China continues to forge ahead despite the sizeable glut in global markets. On the demand side, there have been no major developments to suggest a sustainable strengthening of global demand for the metal. We highlight that any further stimulus measures enacted by the Chinese government are likely to have diminishing returns on metals demand .
Aluminium: Small Rebound
After weakness at the end of Q313, aluminium prices have regained previous losses since the start of Q413. This bodes well for our 2014 price forecast of US$2,000/tonne, though we do not expect a continued strong uptrend. Rather, we forecast continued sideways trading over the coming quarter s . Continued production cuts by major aluminium suppliers will help support prices, though such cuts are unlikely t o spur significant price gains as we forecast the aluminium market to remain in surplus. Suppliers are likely to exercise production restraint given that aluminium prices are at or below cost for many producers. However, aluminium prices could be driven down significantly if a recently proposed plan by the London Metals Exchange (LME) to ease warehouse congestion and release more metal onto the market goes into effect at the beginning of Q214 .
| Temporary Gains |
|Three-Month LME Aluminium (US$/tonne, weekly chart)|
Copper: Sideways Trading To Give Way
Copper has continued to trade sideways over the past month, though we still expect prices to see renewed weakness going into Q413. Global refined copper demand and production diverged towards the end of Q313, with production falling despite steady demand. This has led to a drawdown in global copper inventories, supporting prices in turn.
| Inventory Drawdown To Temporarily Support Prices |
|Global Copper Stockpiles, (thousand tonnes)|
However, we do not see a longer term uptrend in prices and maintain our view that Chinese growth will continue to disappoint into 2014, leading to lower Chinese copper demand, and hence prices. Mine supply growth remains strong, which should weigh on prices in 2014, and leading us to forecast average prices of US$6,800/tonne in 2014.
| Weakness Ahead |
|Three-Month LME Copper (US$/tonne, weekly chart)|
Lead: Medium Term Modest Uptrend
We expect lead prices to continue to modestly outperform other base metals including aluminium, nickel and zinc. Lead inventories have slid gradually downwards since their sudden spike in mid-September, returning to the trajectory seen from the beginning of the year.
| Autos Growth To Provide Support |
|Selected Countries - Vehicle Production (% change 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. 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 No Relief
We expect nickel prices to trend lower and eventually average US$15,000/tonne in 2014. The continued production growth of Chinese nickel pig iron (NPI), which uses lower-quality nickel grades, will further dampen demand for refined nickel amidst the downshift in the Chinese economy. Nickel continues to be the worst performer across the base metals complex, underperforming all other metals over the past month. Global refined production continues to outpace demand, and inventories are at all-time highs. Glencore Xstrata has decided to shut down its Falcondo nickel mine in the Dominican Republic for at least the next several quarters due to softening prices and environmental opposition. Indeed, further production cutbacks will be needed to rebalance the nickel market before a recovery in prices can take place.
| Downward Trend To Remain |
|Three-Month LME Nickel (US$/tonne, weekly chart)|
Tin: Outperforming A Weak Field
We expect tin to remain an outperformer in the industrial metals complex over the coming years. Compared with metals that are tied heavily to the construction industry, demand for tin is less vulnerable to a sharp slowdown in f ixed-asset investment in China. Additionally , a tightening market and constrained supply in major tin producing countries such as China and Indonesia will enhance market tightness and push prices higher over our forecast period.
| Uptrend Intact |
|Price Ratio: Tin/S&P GSCI Industrial Metals Index (weekly chart)|
We expect the tin market to remain locked in structural deficit in the coming years, with the global stocks-to-use ratio declining from an estimated 7.1% in 2013 to 1.1% in 2017. Overall, we forecast tin prices to continue a secular uptrend, from an estimated US$22,300/tonne in 2013 to US$25,000/tonne in 2017.
Zinc: Short-Term Strength
Zinc has surprised to the upside over this past month, and is likely to continue trading sideways between US$1,900/tonne and US$2,000/tonne over the coming weeks. Falling LME inventories will likely support prices in the short term. Thus, our forecast for zinc prices to average US$1,950/tonne in 2014 appears to be in line with current trends. However, we note downside risks in 2014 dominate, given that the majority of zinc is used in steel production for galvanization purposes. We expect global steel production to remain weak given persistent oversupp ly. Furthermore, zinc supply growth remains strong, which will further weigh on prices.
| Continued Range-Bound Trading |
|Three-Month LME Zinc (US$/tonne, weekly chart)|
Select Commodities - Performance & BMI Forecasts
|na = not available. Note: As of October 17. Source: BMI, Bloomberg |
| Commodity || Unit || Spot Price || Year-to-date (% chg) || 1 Year (% chg) || 2012 average || Year-to-date average || 2013 BMI average || 2014 BMI average |
|Aluminium ||US$/tonne ||1,856 ||-10.5 ||-5.2 ||2,052 ||1,908 ||1,900 ||2,000 |
|Copper ||US$/tonne ||7,260 ||-8.5 ||-10.6 ||7,953 ||7,399 ||7,300 ||6,800 |
|Gold ||US$/oz ||1,307 ||-22 ||-25.4 ||1,669 ||1,445 ||1,425 ||1,250 |
|Iron Ore ||US$/tonne ||134 ||-7.7 ||18.7 ||128 ||135 ||130 ||110 |
|Lead ||US$/tonne ||2,165 ||-7.1 ||2.4 ||2,074 ||2,158 ||2,200 ||2,250 |
|Nickel ||US$/tonne ||14,120 ||-17.2 ||-16.6 ||17,591 ||15,359 ||16,000 ||15,000 |
|Palladium ||US$/oz ||720 ||2.4 ||10.2 ||645 ||725 ||na ||na |
|Platinum ||US$/oz ||1,395 ||-9.3 ||-15.1 ||1,553 ||1,508 ||na ||na |
|Silver ||US$/oz ||21.8 ||-27.9 ||-34.5 ||31.2 ||24.6 ||na ||na |
|Steel (MEPS Carbon Steel) ||US$/tonne ||703 ||-2.5 ||-4.5 ||755 ||706 ||710 ||700 |
|Tin ||US$/tonne ||23,005 ||-1.7 ||7.0 ||21,100 ||22,160 ||22,300 ||22,500 |
|Zinc ||US$/tonne ||1,928 ||-7.3 ||1.6 ||1,965 ||1,939 ||2,000 ||1,950 |
Global Commodities Strategy
|Note: As of October 17. Returns do not take into account roll yield, unless stated otherwise. Source: BMI, Bloomberg |
| ||Entry Date ||Entry Level ||Gain/(Loss) ||Rationale |
| AGRICULTURE || || || || |
|Bearish Rough Rice (front-month CBOT) ||29-Aug-13 ||16.645 ||7.24% ||Thailand will release its stocks and scrap its subsidy policy, very well-supplied global market. |
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| METALS || || || || |
|Bearish Iron Ore (SGX third-month swap) ||05-Sep-13 ||129.1 ||0.34% ||Chinese demand to resume slowdown, supply to improve |
|Bullish Platinum (spot) vs Gold (spot) ||29-May-13 ||1.055 ||1.11% ||Supply disruption in South Africa, growing autos use to support platinum prices. Bearish gold. |