Industrial Metals Monitor
Base metals prices are struggling
Group Economics
Casper Burgering
casper.burgering@nl.abnamro.com
December 2014
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Aluminium, nickel and zinc prices are still up compared to January levels
At this stage, non-fundamental drivers seem to have the upper hand in base metals price direction
No year-end rally for base metals in 2014; fresh gains expected in Q1 2015
Figure 1: Growth prospects 2015
Confidence in the global economy has increased
Economic confidence worldwide has improved during the fourth quarter.
Strong figures have emerged from both the US labour market and the
manufacturing sector and we think the US economy is set to grow above
trend in the coming quarters. In Europe, confidence in the economy is also
strengthening. Germany posted significant gains in the retail and construction
sectors, while factory orders increased sharply on buoyant domestic demand.
Meanwhile, the manufacturing PMI in China fell from 50.4 in October to 50.0
(a six-month low) in November.
Increase in base metals demand
Source: Metal Bulletin, ABN AMRO
Figure 2: Base metals vs. oil, dollar & gold 2014
On balance, the economic outlook for 2015 is buoyant for the US, while the
European economy is recovering slowly and in China, the government
remains committed to maintaining control over the gradual economic
slowdown. In addition, the slump in oil prices will prove to be a significant
tailwind for the global economy, and for the eurozone in particular. The
current low oil prices will support stronger growth through the boost to real
incomes. In China, hopes are up for more economic stimulus. All in all, global
economic activity is expected to improve, which is good for metals demand.
Non-fundamentals give direction to base metals prices
Source: Thomson Reuters Datastream
Figure 3: Base metals price % change
In most base metals markets, supply has been a key driver until Q3. The
relatively high aluminium premiums for immediate delivery suggest that the
availability of primary aluminium is restricted. In nickel and zinc, supply
issues have also been strong drivers for prices, particularly the Indonesian
export ban (nickel) and future mine closures (zinc). But since Q4, nonfundamental drivers seem to have the upper hand in the base metals price
direction. Over the last couple of months, prices were influenced by the fall in
oil prices, uncertainty over the Chinese economy (and thus demand),
inventory movements and a stronger US dollar against other currencies. This
has been particularly true for copper, where the link between price and nonfundamentals has always been higher, because copper is directly connected
– more strongly than other base metals – with economic activity in various
sectors as well as indirectly connected with the overall economic activity.
Economic growth supportive for base metals prices
Source: Thomson Reuters Datastream
Base metals prices have generally held up well this year. Prices are still up
for aluminium, nickel and zinc compared to January levels. Copper is the odd
one out and its price has declined 11% since the start of this year. This is
because major events, such as the Qingdao probe and the default of Chaori
Solar, damaged confidence in the copper market and pressured prices. From
November onward the effect of the fall in oil prices and the strengthening of
the US dollar has become visible. Aluminium, copper and zinc have softened,
while nickel was supported by the announcement that the Indonesian
government will stick with the export ban on unprocessed materials. We think
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Industrial Metals Monitor - Base metals prices are struggling - December 2014
Figure 4: Aluminium stocks remain relatively high
most base metals prices will be able to finish this year with gains compared
to 1 January, with the exception of copper. Still, we will have to be patient for
a revival in base metal prices. Investor demand could remain relatively soft,
which will have a dampening effect on prices. In 2015, we expect base
metals prices to regain some strength during Q1 and to finish higher on a
yearly basis, driven by increases in economic activity and metal demand.
‘Aluminium, aluminium everywhere, nor any lot to use…’
Source: Thomson Reuters Datastream
Figure 5: Copper LME stocks plummeted
Since our previous monitor (25 November), aluminium prices have decreased
by 7%, in part due to the strong drop in oil prices. The prospect of lower
energy prices in future could trigger a ramp-up of idled capacity in China,
which will result in more Chinese aluminium material on the global markets.
This was reason enough for investors to pull out. The aluminium stock level
at LME warehouses has been in a downtrend since May 2014 and has
already lost 19%. However, from an historic perspective, LME stocks are
relatively high and have just arrived at the level of 2009. And because a
major share of this material is locked up in financing deals, the physical
availability of aluminium is limited. As a result, premiums in China and in the
US are still high and increased in 2014 by more than 35% on average. Going
forward, we expect aluminium prices to strengthen further on increased
physical demand. But the capacity overhang will limit strong gains.
‘Dr. Copper & Mr. Slide…’
Source: Thomson Reuters Datastream
Figure 6: Nickel LME stocks soar
Currently, macro-economics are in the driving seat for copper prices, but from
a long-term perspective, fundamentals (especially global demand for copper)
will continuously play an important role in its price formation. For now, three
major trends in particular are giving direction to the copper price: the oil price,
the US dollar and inventory levels. Of all the base metals, copper is the only
one that has decreased since the start of this year. From a fundamental
perspective, however, the copper market looks fundamentally sound: LME
stocks plummeted during 2014 and the surplus is very small, representing
only 0.3% of consumption. According to the ICSG and Metal Bulletin for
2015, the copper market will continue to be in surplus, although this surplus
will also be relatively small. If the macro economy develops according to
plan, copper price should at least stay stable. At the moment the Chinese
economy continuous to disappoint, prices will soften further.
‘A nickel for every time Indonesia is mentioned…’
Source: Thomson Reuters Datastream
Figure 7: Zinc stocks in downtrend since 2013
The Indonesian export ban and the strong increases in LME stocks shaped
nickel prices for most of 2014. The export ban was a particular game-changer
and resulted in strong increases in Chinese imports ahead of the ban as well
as higher prices. Nickel pig iron (NPI) producers bought substantial volumes
of nickel ore (laterites) for stockpiling. A similar policy move by the Philippines
is still a possibility and could immediately trigger a new price rally if rumours
continue to increase. So far, buying activity in the nickel market has been
generally cautious. However, reports show that NPI inventories in China are
falling steadily, which suggests that buying activity could return when stocks
are depleted.
‘Zinc: in surplus or not in surplus, that’s the question…’
Source: Thomson Reuters Datastream
ILZSG expects that global demand for refined zinc will outpace supply in
2015. But other sources suggest that the balance in 2015 will be on the
positive side. Whatever the outcome may be, the surplus or deficit is
expected to be relatively limited. From a fundamental perspective, the zinc
market is sound. So far this year, demand for zinc has been holding up
relatively well in most parts of the world. And going forward, major end-use
sectors in most regions will show increased activity, especially construction
sectors. The outlook for the global automotive sector is also expected to
remain positive. But China will remain the centre of gravity for the zinc
market, with a 40%+ share of both supply and demand.
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Industrial Metals Monitor - Base metals prices are struggling - December 2014
ABN AMRO Group Economics
Casper Burgering
Senior sector economist – Manufacturing Sector & Industrial Metals
Phone: +31 20 383 26 93
casper.burgering@nl.abnamro.com
All publications of ABN AMRO on macro-economics and sector developments can be found on: insights.abnamro.nl/en. Follow
Group Economics on Twitter: https://twitter.com/sectoreconomen
Disclaimer
Last editing of this publication on 17 December 2014.
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