Material Matters: Base Metals And Gold

Commodities | Jun 11 2020

A glance through the latest expert views and predictions about commodities. Copper; aluminium; zinc; lead and gold.

-Citi becomes more bullish on copper
-Negative impacts on aluminium to partially reverse
-Probability of a zinc stockpile developing in China
-Renewed vehicle usage to support lead
-Divergent performance among gold stocks


By Eva Brocklehurst


Citi has become more constructive about copper, noting the pick-up in China is happening faster and stronger than previously expected. Historically, China's credit impulse has been the best single leading indicator of an upturn in copper consumption as well as the broader economic cycle.

The broker acknowledges it is "dangerous" to become more bullish after a 20% rally in the metal but now forecasts a price of US$5300/t in the second quarter of 2020 and a six-month forecast of US$6000/t.

Citi also tweaks aluminium, nickel and zinc forecasts for the near term to reflect the improved balance of risks. Palladium is also upgraded given the outperformance of automotive industry in the US and China and a pull-back is no longer expected.

The cheap entry point may be behind the market but the broker still envisages value as a rebound in base metal prices is not yet fully priced into the stocks. That said, the broker stresses that a more bullish base case in the short term, particularly in copper and palladium, is not without substantial risk.

Shifting down a gear, Citi lowers Sandfire Resources ((SFR)) to Neutral/High Risk and IGO ((IGO)) to Neutral from Buy. While OZ Minerals ((OZL)) remains at Buy and the top copper choice the High Risk designation is removed.


Macquarie envisages a partial reversal of the drivers that negatively impacted on aluminium prices in March-April. This is largely just a normalisation of activity levels, with the recovery being driven by China.

The global market, otherwise, appears quiet and balanced. Beyond this, the outlook for aluminium will eventually return to increasingly bearish medium-term fundamentals are the trade conflict between the US and China returns.

Aluminium is dependent on China to both stimulate local demand and resume its smelter reform program, in turn restricting growth in both production and exports. Yet China has reported another year of smelter capacity growth.

A forecast lift in the aluminium price beyond 2020 assumes the virus is under control and demand stabilises, prompting a tightening of the market post 2022. Macquarie's long-term price forecasts is US$1820/t.


A rebound in demand is considered essential for zinc. Chinese zinc smelter activity, while down sequentially, was still up strongly in the first four months of the year. Macquarie notes supply anxiety and a bidding frenzy has meant huge volumes of international material arrived in China.

On the demand side, industrial activity is certainly picking up as construction, automotive and infrastructure investment have strengthened. However, a contradictory and rather important development has materialised, in the broker's view.

Galvanising plated steel output was sliding again in April and, given strong automotive data, this should have begun to recover. Macquarie can only reconcile the conflicts in the data by assuming that a certain amount of zinc material has moved to illiquid reserves, and there remains a probability that a stockpile is developing.


Macquarie assesses lead continues to suffer from its exposure to automotive industries but, nevertheless, tagged along with the broad-based rally in base metals. This has allowed the spread to zinc to expand to over US$400/t at one stage.

The broker notes the tightness of scrap during the lockdown has been a buffer for the refined market in the face of severe demand reductions but this did not have the same benefit for lead as for copper.

This is likely the result of lead scrap being bound to automotive demand. The broker considers it very likely that the reactivation of idled vehicles as lockdowns ease will result in an uptick in battery failures and drive a jump in demand.

Producers appear to be ready for this event and should be well covered for both refined feedstock and finished batteries. Moreover, with a staged return to full office attendance, automotive usage of lead looks set for prolonged weakness. Macquarie suspects the underperforming metal will continue to do so at least until the end of 2020.

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