Commodities | Oct 22 2014
-Zinc deficit looms
-Aluminium supply tight
-Copper surplus soon
-Nickel deficit in 2015
By Eva Brocklehurst
Macquarie's poll at the London Metal Exchange base metals summit reveals cautious sentiment with many respondents acknowledging being caught off guard by the slowing of global industrial output. Expectations for price recovery were very specific to certain metals. The poll signalled that the raw material constraints on nickel should yield further upside in 2015. This is the favoured metal for long positions, while zinc was the best performer over the last 12 months and the second favoured long position.
Meanwhile, copper is the favoured metal for short positions on a 12-month view. This is only the second time since 2008 the red metal has been the favoured short. Macquarie considers this justified by the fundamentals, given the strong growth in mine supply predicted for next year. Overall, respondents still expect prices to show some upside in the coming year, revealing muted confidence that base metals may have reached a nadir for now.
Last year, lead and tin were the favoured long positions on a 12-month view. How did this forecast pan out? Macquarie notes tin was actually the worst performer, while lead was not that great either. Those that picked zinc as the best performer, some 12% of those surveyed, were correct. On the short side, aluminium and copper were selected in 2013. Aluminium defied the pundits while copper did indeed fall 8%. Macquarie observes nickel would have been the better bet for shorts last year, but short positions were chosen by only 1% of respondents.
JP Morgan maintains its 2015 price forecasts for aluminium, expecting tight fundamentals ex China, will lead to more than 10% in price appreciation. The analysts are neutral on copper for both 2015 and 2016, expecting the market to be balanced, as higher concentrate production is offset by contraction in SxEw treatment production and tight scrap supply. JP Morgan has increased zinc price forecasts and expects the refined market to dip into deficit next year. The analysts are again lowering nickel price forecasts for 2014, as current fundamentals are weak, with a steady price appreciation still expected over the next two years.
Natixis believes the return to prominence of fundamentals has reduced the degree of positive correlation between metals, as well as diminishing typical correlations with other assets such as the US dollar. This means it is vitally important to take each metal on its own merits. So, on the back of cutbacks in output by western producers as well as Chinese smelters, the analysts believe the aluminium market looks set to experience its first annual deficit for eight years. They are increasingly optimistic that a copper surplus will soon become visible and lead to further weakness in copper prices in 2015-16. The lead market is expected to run a cumulative deficit of perhaps 20,000 tonnes over 2014-16 and the analysts expect a modest increase in lead prices over 2015-16.
The analysts anticipate a deficit during the first half of 2015 for nickel, resulting in an average LME nickel price of around US$19,000/tonne for 2015. By 2016, the market is expected to have become more settled with the analysts forecasting an average price of US$17,375/tonne for that year. Despite forecasts for modest demand growth over the coming two years, the analysts expect the global zinc market will tighten further as supply becomes increasingly constrained. New mines are not expected to come to fruition until existing inventories are close to depletion. Against such a backdrop, the analysts expect substantial upward momentum in zinc prices over 2015-16.
Commonwealth Bank analysts have adjusted commodity prices lower to reflect new FX forecasts, now factoring in a stronger US dollar. Of the base metals, nickel forecasts have been downgraded the most, by 4%. Mineral sands and gold are unaffected by the FX changes while platinum price forecasts are downgraded 6%. Thermal coal, uranium and crude oil forecasts have been downgraded even further beyond the FX changes because of ongoing surplus concerns.
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