BASE METALS SECTOR REVIEW Kishore Narne MRAI s 4th International Conference 27th Jan 2017 Jaipur
2016 Green Shoots Falling Energy Prices Currency Volatility Brexit Donald Trump Demonetization
Major Global Currency Change YoY (%) 5.00% Dollar Index 3.12% 0.00% -5.00% INR -2.64% EUR -3.20% JPY -2.85% -10.00% CNY -6.95% -15.00% -20.00% GBP -16.30%
Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 US GDP v/s Dollar Index US GDP data and Dollar Index 4.0 3.0 2.0 1.0 0.0 105 100 95 90 85-1.0 80 Source: Reuters US GDP % Dollar Index $ US GDP continue consolidated for much of 2016, showing some strength in Q4, while dollar index rallied above 100, closing the year at a 14 year high
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Global Mfg. PMI numbers rising Manufactuing PMI(%) 55 54 53 52 51 50 49 48 47 Source: Reuters US Euro Japan China
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Metals on the LME LME Prices in 2016 - rebased to 100($) 200 180 160 140 120 100 80 Source: Reuters copper lead zinc aluminium nickel
Copper
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Copper - 3M Cash Spreads($) Copper - 3M Cash Spreads($) 50 30 10-10 -30 An estimate 500KT of copper in China is believed to be tied to carry trades The basic premise behind these deals is the arbitrage between interest rates in China and the US US and China NRR Difference (%) 5 USADifference in % China Difference in % 4 3 Interest rate differential between US and Chinese to narrow following the Fed rate hike 2 1 0-1 Unwinding in copper carry trades could impact financial demand and also release inventories locked-in
Thousands Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Thousands Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Copper LME stocks ShFE stocks and LME Price Copper LME stocks ShFE stocks and Price 400 350 300 250 200 150 100 50 0 6400 6200 6000 5800 5600 5400 5200 5000 450 400 350 300 250 200 150 100 50 0 50000 45000 40000 35000 30000 Source : Reuters LME Copper stocks LME Copper($) Source : Reuters SHFE Copper stocks Shanghai Price Sudden flow of material during the year-end pushed ME inventories towards the highs seen in 2015 Financial deals no more lucrative, Unwinding will lead to material flow in the LME warehouse
Copper Ref Global Production and Demand Copper Ref Global Production and Demand 23500 162 200 Copper market for 2016 almost balanced 23000 22500 22000 21500 100 0-100 -200 2017 surplus is expected at ~160Ktons higher than earlier estimate of 20K tons surplus. Thousand Tonnes 21000-300 20500-400 20000-500 2013 2014 2015 2016e 2017f Global Ref Production Global Ref Demand Balance Source: Reuters, ICSG Global mine production is estimated to be up by 4% in 2016 to over 20 million tons 2017, mine production is expected to be flat, higher availability of concentrate to boost refined production to over 23 million tons
Billions Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 1-Jan-14 1-Apr-14 1-Jul-14 1-Oct-14 1-Jan-15 1-Apr-15 1-Jul-15 1-Oct-15 1-Jan-16 1-Apr-16 1-Jul-16 1-Oct-16 Chinese Demand Elements 600 China Electricity Production vs Imports 500000 3500000 China - Automobile Sales 550 450000 3000000 500 400000 2500000 450 350000 300000 2000000 1500000 400 250000 1000000 350 200000 500000 300 150000 0 Source: Reuters Refined Cu Imports Chinese Electricity production
Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Chinese Demand Elements 15 China Housing price index 10 5 0-5 -10 China Housing price index change
Chinese Demand Elements
What next? Donald Trump s victory, boosting hopes of infra spending & consumption China accounts for half of metals global demand, with improving demand scenario Rise in Chinese infrastructure and electricity output, with more investments planned Supply growth limited as, new mining projected are sparse, given modest investment in recent years Resilient demand and low inventories, keeps prices vulnerable for sudden spurts in case any supply disruptions The current rally could exhaust over disappointment on policy front and the stronger dollar, which could take it to $5,400, worst case $4,950 should not be breached Price have the ability to surprise on the upside towards $6,450 and $6,850 towards the fag end of 2017
Zinc
Thousands Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Thousands Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 China the Primary Driver 75 65 55 45 35 LME Zinc and Iron Ore Price($) 3000 2750 2500 2250 2000 1750 1500 LME Zinc Price and SHfE Inventory 140 130 120 110 100 90 80 70 60 2900 2700 2500 2300 2100 1900 1700 1500 Source: Reuters 100,000 90,000 80,000 70,000 60,000 Iron Ore Prices China Iron ore and Zinc Ore imports LME Zinc Prices (RHS) Iron Ore imports into China Total Zinc ores & concentrates Import 400 350 300 250 200 150 100 50 Zinc shanghai Stock LME Zinc Price China s increased infrastructure spending boosted demand Concerns over China s infrastructure spending, as largely funded with debt First half looks bright, after which expect some cool off Miners on sidelines awaiting Chinese actions before any major production decisions.
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 000 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 LME Zinc Inventories and Cancelled warrants 700 650 600 550 500 450 400 350 20 10 0-10 -20-30 LME Zinc Stocks & Cancelled warrants Inventory Zinc Cancelled Warrants % Zinc Cash-3M Spread($) 26 24 22 20 18 16 LME inventories are down by 7% in 2016, and long way off the peaks of 2013, when LME stocks were in excess of 1.2 million tons Warehouse stocks are at comfortable levels, as stocks in exchange warehouses and elsewhere totaling nearly 2 million tons or about 7 weeks of usage. Cancelled warrants have been rising constantly as prices rise Source: Reuters
Zinc Ref Global Production and Demand 14400 14000 13600 13200 12800 12400 Zinc Ref Production and Demand 300 200 100 0 21-100 -200-300 2013 2014 2015 2016e 2017f Global Ref Production Global Ref Demand China, Australia and Peru, major zinc concentrate producing regions Zinc treatment charges (TCs) were down 65% to $30-35 per ton from $90-100% in second half Nearly 80% down from $135-150 per ton at the start of 2016 Refined zinc production growth to be hit in 2017, as smelters might be forced to compromise and reduce their profits.
Zinc Bull trend intact Tightening concentrate supply, mine shutdowns and stronger Chinese buying were the primary drivers Glencore idling 500k tons of capacity, equivalent to 4% of global capacity since Oct. 2015, with no intent of restarting any time soon At current price, demand seems to be waning which can be seen in rising forward premiums, but while supply is restrained, a supply/demand deficit is likely to underpin prices Expect a more toned down bull market well in to 2017, with bouts of profit-taking sell-offs along the way which could take the prices towards $2,400 and $2,250 Any such dips will provide opportunities to ride the next rally towards $2,900 and $3,140.
Nickel
Mined Nickel Production Indonesia 1000 834 Philippines 800 600 316 444 465 400 316 177 130 200 138 0 2013 2014 2015 2016 Jan - Oct Source: INSG, Reuters Philippines, accounting for 23% of global supply. Govt. has cancelled mining projects that are causing environmental harm. 14 of 20 mines facing suspension are nickel producers, accounting for half of Philippines' nickel ore output in 2016. Indonesia has permitted exports of ores such as bauxite and nickel under certain conditions. Philippines banning few mines over pollution concerns and Indonesian government relaxing ban on unprocessed ore exports more so offset
Thousand Tonnes Nickel Global Production and Demand Nickel Global Production and Demand 2050 200 2000 150 1950 1900 100 1850 50 1800 0 1750 1700-50 1650-100 2013 2014 2015 2016e 2017f Global Mine Production Global Demand Balance China s economy is showing signs of sustainable growth more demand for steel and stainless steel The market could tighten 6-9 months down the road, as refineries could be struggling to find ore Source: Reuters, INSG Global production is likely to be subdued, while demand is expected to rise significantly based on higher steel demand. Market balance likely to shift into a deficit as against surplus for the last few years.
Hundreds Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Nickel LME stocks and SHfE stocks Nickel LME stocks and SHfE stocks 4500 4300 4100 3900 3700 3500 LME Nickel Source : Reuters SHFE Nickel Stocks 103000 83000 63000 43000 23000 3000 LME nickel inventories down to two-year low Still more than 3% higher than four years ago even with the recent declines Shanghai nickel inventories have surged three-fold in 2016 Total exchange stocks of nickel stand at around 25% of annual consumption, which should prevent any sharp rise in price
Nickel Investors favorite bet Nickel prices firm over tighter ore supply from Indonesia, Philippines and the rebound in China s stainless steel output Lack of supply responses to ultra-low nickel prices, even when ~70% of production was underwater, only few cuts outside of China In China, low prices and depletion of Indonesian ore stockpiles prompted cuts to nickel pig iron Steel prices rally after being subdued for last 5 years. Cost-push in iron ore and coal prices causing a rise in steel prices, China s imported iron-ore price rose by 100% in 2016 Philippines banning few mines over pollution concerns and Indonesian government relaxing ban on unprocessed ore exports more so offset Prices could be range-bound for some more time before the next bull run Dips towards $9,600 and $9,220 will be opportunities to accumulate for upside potential towards $12,300 and higher.
Lead
Lead Ref. Global Production and Demand Lead Ref Global Production and Demand 11200 120 11100 100 80 11000 60 10900 40 10800 20 0 10700-20 10600-40 2013 2014 2015 2016e 2017f Global Ref Production Global Ref Demand Balance Source: Reuters, ILZSG Refined lead demand is likely to have grown 2.8% in 2016, and expected rise by 1.3% in 2017. Lead mine supply was marginally lower by 0.3%. Rise in China production to be offset by production declines in other major producing countries. Overall, refined lead metal to end in surplus of 42,000 tons in 2016, and surplus falling to 23,000 tons in 2017. Chinese demand will rise by 2.5% in 2016 and by 1.1% in 2017. European demand stayed high in 2016, and is expected to remain flat in 2017. US demand is forecast to rise by 1.9% in 2017.
Hundreds Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 Hundreds Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 LME Lead: Prices Vs Inventories LME Lead: Prices v/s Inventories 2500 2000 1500 1000 2500 2300 2100 1900 1700 1500 LME stocks relatively low at around 194,950 tons, accounting for 1.8% of annual consumption. SHFE stocks at 28,726 tons down 75% over the last 3 years Source: Reuters Stocks SHfE Lead: Prices Vs Inventories 1100 Prices $ (RHS) 23000 There isn t a large stock cushion to feed a supply deficit should one exist. 900 700 500 300 21000 19000 17000 100 15000 Source: Reuters Stocks Prices $ (RHS)
Lead still time to lead Lead ended the year with marginal gains and has grossly underperformed sister metal, zinc Zinc Lead spread was trading at a discount of $145, and ended 2016 at a premium of $550 Higher prices led to some producer selling to lock gains Production cuts, mine closures and robust auto market, especially in China and Europe, as well as strong growth in the industrial battery market and relatively low stocks are likely to support prices Lead may not be the best bet among the metals pack, but it could surprise on the upside with prices rallying towards $2,160 and $2,300, and in the best case, towards $2,600. Dips towards $1,850 and $1,680 will attract buyers.
Aluminium
Thousand Tonnes Aluminium Global Production & Demand Aluminium Global Production and Demand 65000 1200 1000 60000 800 55000 600 400 50000 200 0 45000-200 -400 40000-600 2013 2014 2015 2016e 2017f Global Mine Production Global Demand Balance Source: Reuters Over-supply has been a key structural issue in the aluminum physical market Production has been rising at and avg. of 6% in last five years, and 1% in 2016. Aluminum demand has been robust, with key demand coming from the Chinese automobile sector. With declining production growth, market surpluses to narrow from more than 1 million tons in 2015, to a small deficit in 2016, and deficit widening to more than 350,000 tons in 2017
Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Hundreds Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Inventories and carry spreads LME Aluminium: Prices v/s Inventories 45000 40000 35000 30000 25000 20000 Source: Reuters Aluminium (RHS) Aluminium Cash-3M Spread($) 30 10-10 -30-50 Aluminium 2200 2100 2000 1900 1800 1700 1600 1500 1400 Inventory continue to slide across key exchanges LME warehouse witnessing large deliveries off-late, and the backwardation in prices would continue to attract more deliveries A combination of oversupply, backwardations and higher interest rates could make financing more difficult Source: Reuters Aluminium Cash-3M Spread
Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 LME Aluminium & Richards Bay Steam Coal($) 1800 1700 1600 1500 1400 Source: Reuters LME Aluminium Price and Richards Bay Steam Coal($) Aluminium Price Richards Bay Steam Coal 105 95 85 75 65 55 45 Coal prices have more than doubling since June, and energy and coal accounts for a big portion of aluminum production costs Further upside in coal, crude and coke prices, along with improving global economic picture will lead to price rise
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 Aluminium LME to Shanghai Premium Arbitrage Aluminium LME to Shanghai Premium Arbitrage 250 200 150 100 50 0 Aluminium LME to Shanghai Premium Arbitrage Source: Reuters Imports in 2017 will be driven by the opening of the SHfE-LME arbitrage as well as the spot- LME arbitrage Exports are expected to continue to be supported by a weaker Yuan and strong demand. If no widening of the SHFE-LME or spot-lme arbitrages in 2017, the major drive will come from fabricators in China who use tolling agreements. Fabricators in China are exempt from import and export tax, and receive a full rebate on VAT, if their aluminium products exports volumes match their aluminium imports
Aluminum the dark horse Aluminum ended the year with 12% gains, as market factored in rising costs of production Consumption is likely to outpace supply, the global market balance will remain tight in 2017 Chinese construction sector demand has reportedly increased, with aluminum gaining market share from steel and plastics Operating dynamics changing, as fabricators increasingly storing and taking aluminum in liquid form rather than as ingots China will be the prices driver, if they can match similar growth as in 2016 Could be one of the best bets for 2017 and prices are likely to form a base around $1,550, with upside extending towards $1,950 and $2,070.
Outlook 2017 might still be as volatile a year as 2016, with china continuing to be the risk element New President, new policies and possibility of rate hikes by the US Federal Reserve in 2017 may keep metal prices a bit volatile Trump's planned fiscal stimulus optimism priced in - global economic outlook still uncertain Uncertainty in the form of Chinese credit-fueled stimulus package, banking system crisis in the EU, derailment of Trump s plans promised fiscal stimulus can lead to a cool off in metals Aluminum and nickel are looking best placed for a gradual rise, Zinc and Lead could inch higher with bouts of correction Copper could be subdued for the first half, giving opportunities for bulls to stock up for the second half of 2017