Monthly Metals Update
QE3 has bolstered our modestly bullish industrial metals views over a one to two-month horizon. We expect additional monetary easing and economic stimulus measures in China to boost prices in the near term.
The current bounce in metal prices will be temporary and we remain medium-term bears. Stimulus measures will fail to sustainably reverse the economic slowdown in China and import demand from the country will disappoint. This contrasts to consensus, which foresees a continued recovery into 2013. Our 2012 and 2013 average price forecasts remain particularly below consensus for industrial metals.
Industrial metals will underperform the wider commodity complex in the coming months. Digging deeper, we expect metals with tighter supply fundamentals such as copper and tin to outperform oversupplied markets such as lead, zinc and steel.
Based on our subdued metal price forecasts, we expect mining equities to underperform the wider index in 2013 (see 'Mining Equities To Remain Underperformers', April 19). We expect gold miners to outperform in line with our expectations that gold prices will remain elevated.
|Firmly Below Consensus|
|Select Commodities - BMI 2013 Average Price Forecasts vs Bloomberg Consensus, % Difference|
Iron Ore : No Return To Highs
We are modestly positive towards iron ore prices over the remainder of 2012. Indeed, a mild pickup in Chinese steel mill sentiment encouraged by central government infrastructure stimulus announcements will likely underpin greater imports. However, the bounce should be capped by the US$120/tonne area and we retain our bearish medium-term view.
|Rebound Will Be Capped|
|China Iron Ore Import Price, 63.5% Grade (US$/tonne)|
Our below-consensus medium-term view on iron ore prices is playing out extremely well and we expect prices to remain subdued in 2013 as demand concerns dominate. This is underpinned by our expectation that demand from Chinese steel mills will weaken as a continued contraction in Chinese economic growth forces a cut in steel production rates. Government economic stimulus measures will temper rather than reverse this trend. Looking long term, weaker Chinese demand will combine with steadily improving mined supply to loosen the market and potentially push prices below US$100/tonne on a sustained basis. We forecast an average of US$115/tonne in 2013.
|Metals Gains To Moderate|
|Select Indices, Rebased|
Steel: Limited Rebound Ahead
Steel prices should stage a modest recovery in the next few weeks, as sentiment towards construction materials in general improves. The key driver of this trend will be expectations for the implementation of major infrastructure investment programmes in China, as well as the positive effect of additional quantitative easing (QE3) by the US Federal Reserve.
|US Prices Outperforming|
|Steel Prices - LME Steel Billet, US Hot Rolled Coil & China Rebar (US$/tonne)|
Looking beyond a modest recovery in the latter part of 2012, steel prices will remain weak in 2013 and 2014. Recent weakness has been even more drastic than the bearish expectations we set out in Q212 and thus we have revised down our forecasts. We forecast an average of US$360/tonne in 2013 and US$350/tonne in 2014. The global steel market will continue to be dogged by significant overcapacity in the coming quarters and low prices will be necessary to incentivise a gradual rebalancing. This process will be distorted by dynamics in the China steel market, where government support for state-owned enterprises will prevent as drastic production cuts from loss making steel mills than would otherwise be the case.
Aluminium: Further Gains Ahead
We expect a significant moderation in the pace of aluminium ' s gains over the coming weeks and highlight US$2,300/tonne as key resistance. Whilst the main effects of QE3 appear to be priced, we are still modestly bullish for alumini um in the near term. Our medium- term view remains however, that aluminium prices will head lower as the extent of China ' s slowdown becomes increasingly apparent. Indeed, stimulus measures both in the US and China will delay, rather than prevent, such a scenario.
|Bounce Has Legs|
|Three-Month LME Aluminium, US$/tonne (Weekly)|
Beyond the short term, we expect aluminium to head back to support at US$1,800/tonne as slowing economic growth in China has a significant impact on global demand of aluminium.
|Heading Back to US$8,500/tonne|
|Three-Month LME Copper, US$/tonne (Weekly)|
Copper: Relative Outperformer But Still Weak
Copper will outperform the base metals complex over the coming months as prices continue to be buoyed by stimulus measures around the globe. In addition, copper will be relatively less exposed to a significant contraction in fixed capital investment in China, which will drive the country ' s slowdown. Whilst we do not expect a continuation of the rapid gains seen over the past few weeks, copper ' s gains are not over and we highlight a move up to US$8,500/tonne. Indeed, copper has tighter market fundamentals than other metals which will cement its place as an outperformer .
|Precious Metals Outperformance To Continue|
|Select Metals - % Change year-to-date|
That said, we have repeatedly raised questions about the sustainability of Chinese copper consumption and expect weaker imports over the medium term. Prices will lose steam around the turn of the year and we maintain our below consensus forecast for copper prices to average US$7,800/tonne in 2012 and US$7,200/tonne in 2013.
|Sentiment To Push Prices Higher|
|COMEX Copper & Non-Commercial Net long Speculative Positions|
Lead: Heading For Weakness
Given the strength of lead ' s gain of late, it is likely that the metal will undergo a correction in the short term. Indeed, we do not expect the recent run down in LME inventories to continue and lead will remain a significantly oversupplied market over the medium to long term.
|Major Gains Have Already Passed|
|Three-Month LME Lead, US$/tonne (Weekly)|
We do not expect lead to significantly push above it 2012 highs of US$2,350/tonne as Chinese growth disappoints and recovery in the United States remains weak, lead demand will stay subdued in the two main markets. Overall, we forecast prices to average US$1,950/tonne in 2012 and US$1,900/tonne in 2013, compared to an average price of US$2,391/tonne in 2011.
Nickel: Gains To Disappear
The recent bounce in nickel prices is set to be short-lived and we expect sideways to lower to trade in the coming months, despite the recent break of resistance. Nickel demand is tied to Chinese steel sector, where the outlook is bearish given our below consensus forecasts for the Chinese construction sector.
|Bounce To Be Short-Lived|
|Three-Month LME Nickel, US$/tonne (Weekly)|
In addition, market oversupply will weigh on prices in the coming weeks with inventories at the LME continuing to climb, thus ruling out a return to early 2012 highs. Therefore, our below-consensus average price forecasts of US$18,500/tonne for 2012 and US$17,500/tonne for 2013 are playing out very well.
|Tin Bucking The Trend|
|Select Metals - Global Stocks-To-Use, %|
Tin: Major Gains Behind, But Outperformance To Continue
While we remain medium-term bearish towards the metals complex as a whole, we maintain our view for tin to be an outperformer over the medium term given tight fundamentals and lower exposure to a China slowdown. Our bullish views regarding tin have played out well of late , and while we expect most of the gains are now behind us , we still expect tin to outperform. Over the longer term, Indonesia, the major exporter, is looking to implement export restrictions that will further constrain an already tight market.
|Tin Outperformance Playing Out|
|Three-Month LME Tin, US$/tonne (Weekly)|
Zinc: Little Room For Optimism
Zinc prices are looking very over extended at present and we expect a pullback in the coming weeks. Whilst a retracement will be restrained by the effects of quantitative easing and stimulus in China, the picture over the medium term is particularly bearish with LME zinc stockpiles having rise n to near record levels above 941 kt (thousand tonnes) and show no signs of reversal . In addition, we expect global stocks-to-use to rise to 22.8% in 2013, from 14.9% in 2011. Furthermore, zinc will be one of the underperformers in the metals complex over the coming months as market oversupply and falling demand due to the eurozone crisis and a China slowdown weigh heavily on demand and prices .
|Pullback On The Cards|
|Three-Month LME Zinc, US$/tonne (Weekly)|
|Source: BMI, Bloomberg|
|Commodity||Unit||YTD (% Chg)||1 Year (% Chg)||5 Year (% Chg)||2011 (ave)||YTD (ave)||2012 (BMI ave)||2013 (BMI ave)|
|Steel (LME Billet)||US$/tonne||-32.5||-37.7||na||559||456||435||360|