BASE METALS

Base metals likely to remain volatile and move sideways this Summer - Standard Bank

Whether another supply slump emerges in base metal complex and commodities in general, depends on exogenous factors, particularly Chinese liquidity, Standard Bank suggests.

Author: Dorothy Kosich
Posted: Tuesday , 18 Jun 2013

RENO (MINEWEB) -

The base metals market has largely come to terms with China’s slower growth outlook as the base metal complex is now stabilizing “and range trading heading into the summer following several months of downwards trending prices,” Standard Bank recently noted.

Commodities strategist Leon Westgate already downgraded Standard Bank’s annual forecasts last month, assuming that “prices were already bottoming, that volatile but generally sideways trading would characterize the summer ahead of a stronger year-end.”

“So far, prices are following the script and for the most part we see no need to make further changes to our outlook yet,” he observed.

Aluminum, lead and zinc have been the most lively of the metals in recent weeks, which Westgate suggested “merely reflects short covering and CTA activity, and a propensity for many participants in engage in relative value trading—something that has dominated this trio in the absence of decisive fundamental drivers this year.”

Standard Bank anticipates volatility in aluminum prices during the remainder of the year “with the upside capped by the capacity overhang and high stocks.” Westgate advised that China will stop approving new aluminum projects, which may suggest the government will be more committed and effective at addressing overcapacity.

“As a result, we believe that this greater scrutiny and control over approval in future capacity expansions, coupled with market forces, will gradually lead to a more balanced domestic market, albeit after 2014 when the current projects under construction are completed.”

Standard Bank’s latest analysis of copper finds that “the net effect of mine disruption on [the] refined market [is] still minimal.”

Among recent price-supportive factors in the copper market are supply disruptions, scrap shortages, short positioning being unwound, improvements in Chinese demand, and declining spot availability as LME cancelled warrants rise and queues form.”

“Provided the supply disruptions keep coming however, and continue to take the edge off the rising tide of new supply…we still see scope for a tighter end to the year, which should be reflect in premiums and spreads in Q4 and potentially prices too,” says Westgate. “We still envisage a strong end to the year albeit perhaps with an underwhelming Q3 to negotiate first.”

Lead has been the most active of the base metals as tightness in the nearby spreads appeared to trigger short covering and fresh CTA-type buying activity, according to Standard Bank.

“In the West demand is solid, scrap is tight and LME stocks are on steep downtrend fueled by cancelled warrants that rose to new record highs close to 80% of stocks,” said Westgate. “Meanwhile in China, the fundamentals look tighter as well with government-enforced shutdowns of outdated smelting and recycling capacity no doubt being supplemented by price-related suspensions, offsetting the effect of new and restarted smelting capacity both in China and elsewhere.”

“With that background support for prices—both technical and fundamental, we maintain our price forecasts of $2,270/tonne for 2013, though this admittedly requires a stronger run-in to the year-end once the summer has passed.”

While Standard Bank hasn’t had much positive to say about the nickel market’s fundamentals for a while, Westgate advises that nickel demand and prices should stabilize in the second half of the year.

Nickel prices plunged from an average of $16,000/tonne over the first five months of this year and have plunged to new lows almost as far as $14,000/tonne this month.

“Given the scale of the fall, we have revised our full-year forecast lower again to $15,600/tonne from $16,350/tonne previously,” Westgate noted. “We expect that more supply cuts, a pick-up in demand after the summer, short covering and an improving macroeconomic outlook into Q4 will drive the price recovery.”

While Standard Bank is still forecasting 5-6% demand growth for nickel this year, “we have nevertheless still lowered our 2014 and 2015 forecasts.”

Meanwhile, Standard Bank doesn’t trust the appearance of improved fundamentals for zinc.

In his analysis, Westgate observed that “zinc has proved itself more than capable on numerous occasions during the past six years of perpetual oversupply, of springing bearish surprises, and we certainly would not rule that out again—most likely in the form of supply increases now that producers are fairly well insulated against lower prices by high premiums and TCs.”

“Overall, the outlook for zinc is more supportive to premiums than prices, and we wouldn’t be surprised to see spot quotes continue edging higher, led by Asia,” he noted. “For prices, while the downside may be limited, it is still hard to get bullish about zinc, especially with the huge overhang of stocks capping the upside.”

“The summer therefore looks likely to remain dominated by relative value trading activity. Our 2013 forecast is still $2,055/tonne,” he predicted.

While tin prices have been negatively affected by weakness in the other base metals, “tin’s fundamentals should come into their own more and more as H2 progresses, which should ensure that the downside risk to prices are minimal for tin, while the upside is not capped by excessive stock overhands, as is the case in most other markets.”

“This relatively optimistic outlook is reflected in our tin price forecasts which envisage a recovery over the remainder of the year to average $24,800/tonne in 2013, compared to $22,951/tonne during the first five months,” Westgate advised.