The very uneven performance of metal prices seen this year is likely to continue in 2015. However, a common price driver will be the economic development in China, the main consumer of metals. Due to the current low prices of many metals, production is unlikely to increase next year to the extent that many market participants expect, so that some metal markets should be noticeably tight. Commerzbank expects metal prices to rise moderately in 2015.
The bank’s analysts expect this year’s trends to continue at macro level in 2015. The global economy is likely to grow only marginally faster at 3.2%. The US economy should remain buoyant, achieving growth of 2.9%. The euro zone is expected to expand by only 0.8%, the same rate as this year. On the other hand, China’s economy to grow by “only” 6.5%. This is essentially due to the ailing property sector, which is pulling down the whole economy. But if the Chinese economy appears to be suffering too much, the government and central bank will probably respond with further countermeasures to provide stimulus. In November the central bank made a surprise cut in interest rates to counter further cooling of the Chinese economy. This caused a short-term spike in base metal prices. Another factor affecting prices on base metal markets was and remains the US dollar. It has recently risen against the euro to its highest level since August 2012, and countered rising metal prices since the middle of the year. Since the Fed is expected to hike interest rates in the coming year, the US dollar is likely to continue rising towards 1.15 EUR-USD. The US currency will therefore tend to remain a negative factor for metal prices.
In addition, numerous geopolitical crises increased risk aversion among market participants and were reflected in falling equity markets in the meantime. At the same time, institutional investors sold cyclical commodities, including base metals. As can be seen from the statistics of the CFTC and LME on the positioning of speculative financial investors on the COMEX in New York or the LME in London, this investor group took a very negative view on metal price performance at times, thereby steepening the decline. This pessimism has eased only a little, though the headwind from this quarter might not be as strong next year. In the past, extreme positions in one direction have often led to powerful rebounds. If the mood of speculative financial investors were to turn completely positive, this could give prices significant uplift at least in the short term.
Next year again, metal prices will be impacted both positively and negatively by a variety of external factors.
Copper
Contrary to the expectations of many market participants at the beginning of the year, the global copper market was distinctly tight for long periods of 2014. Supply failed to keep pace with demand, mainly because of apparently robust demand from China in the first half of the year and operational problems in mine production. Only in the last few months has the situation eased somewhat (due for example to the resumption of exports of copper concentrates from Indonesia). According to data of the International Copper Study Group (ICSG), in the first eight months of the year the global copper market showed a seasonally adjusted supply deficit of 485,000 tons. For 2014 as a whole, the ICSG expects a deficit of 307,000 tons. This would be the fifth year in succession where supply fails to meet demand. Next year the picture should change, resulting in a supply surplus of 393,000 tons. While the supply continues to grow – ICSG expects a rise of +4% – global demand will hardly increase at all, rising by around 1%. Commerzbank is more sceptical regarding the anticipated expansion of supply. For one thing, the Chilean copper industry is about to embark on a new round of wage negotiations, which may affect production in the event of strikes. In a large Peruvian copper mine (Antamina), work has already stopped temporarily in a dispute over wages. Similar problems are looming at the Grasberg mine in Indonesia, the world’s third largest copper mine. Unions are demanding radical management changes, after several accidents occurred at the mine this year with fatal consequences.
Expected weaker economic growth in China is likely to be reflected in lower import momentum. In the second half of 2014, according to data from the Chinese customs authority, copper imports are projected to reach 2.2 million tons – almost 13% below the level of the first half of the year. This may be due in part to the scandal surrounding credit-financed copper stocks in Qingdao in April. A significant resurgence of imports is also unlikely in view of China’s domestic copper production, which reached a record high of 734,000 tons in October, according to data of the National Bureau of Statistics. In the first ten months of the year, Chinese copper production stood at 6.4 million tons, 11% higher than the same period last year.
Although the decline in copper stocks in LME warehouses (from mid-2013 to August 2014 inventories fell by 80% or nearly 540,000 tons) has come to a halt, at around 160,000 tons, stocks are only just above the 6-year low recorded in August. Copper stocks in SHFE warehouses are also at a low ebb, standing at just under 90,000 tons. In September, the forward demand cover of exchange-registered copper stocks (LME, SHFE, COMEX) was only a few days. Unforeseen production losses or a sudden increase in demand could therefore lead to a critical situation in the copper market.
The bank’s analysts believe that many market participants are over-optimistic regarding the global copper supply in the next year. Instead, there is potential for renewed disappointment. This should give support to the copper price. By the end of 2015, the bank expects to see copper trading at USD 7,200 per ton.
Aluminum
Aluminum has risen by 14% so far this year, due to its apparent tightness in the global aluminum market. According to data of the World Bureau of Metal Statistics, a supply deficit of 521,000 tons existed from January to September. This is surprising given the high rates of production and ample stocks. The International Aluminum Institute reported that global aluminum production rose in October by 3.4% compared with the previous year, reaching a record high of 4.477 million tons. Once again China was a major contributor, producing 2.084 million tons of aluminum, or 6.8% more than a year ago. According to estimates of the research institute SMM, 2 million tons of new production capacity will come on stream in China this year.
In view of increased prices and high physical premiums, many smelters that were shut down between June 2013 and June 2014 will be reactivated. SMM therefore expects Chinese production to rise by 500,000 tons in the fourth quarter alone, representing a quarter-on-quarter increase of 7%. Next year too, production is likely to be expanded further. The drop in coal prices and continuing subsidies mean that especially the smelters’ energy costs will be reduced.
Overproduction in China is reflected in high exports of aluminum and aluminum products. Net exports of aluminum reached a record high of 341,000 tons in September. In the first ten months of the year, net exports stood at 2.65 million tons, 17% higher than in the same period last year. Net exports thus expanded almost twice as fast as domestic production. China is therefore contributing to the expansion of supply on the world market. Unless production is significantly reduced, this trend will continue into next year.
However, the tightness in the market is due not so much to real physical demand, but rather to continuing financial transactions. Extremely low interest rates and the meanwhile relatively steep forward curve have made financial transactions attractive. Of the 4.35 million tons of aluminum in LME warehouses, 54% are currently earmarked for shipment, mainly due to these financial transactions. This volume is not available to the market, resulting in an artificial tightness, reflected amongst other things in long waiting times for delivery of the material. At the end of October the waiting time in Detroit – America’s largest storage location for aluminum – was 671 days. In its European counterpart of Vlissingen, the waiting time was 637 days. The terms of the financial transactions are expected to significantly deteriorate, so that at least part of the currently tied-up supply will be freed and become available to the market. This will come about as a result of the expected rise in US interest rates and the significant flattening of the forward curve that has already taken place. The introduction of new warehouse rules at the LME, which will come into force on 1 February unless stopped again by the courts, is also likely to play a role. Every day from then on, warehouses must load-out more material than they load-in if the waiting time for delivery is at least 50 days.
The unwinding of financial transactions should also lead to falling physical premiums. In Europe and the USA these are more than USD 500 per ton, which must be added to the LME price to get a realistic picture of the costs. However, we do not expect premiums to halve to the level seen at the end of 2013 before the last rapid rise began. This would also require significantly weaker demand, which we do not expect.
In the current market environment, prices above USD 2,000 per ton are considered to be unjustified. Supply is considered ample and will be further increased next year owing to higher Chinese exports and the unwinding of financial transactions. By the end of 2015, the bank expects aluminum to reach USD 1,900 per ton.
Nickel:
Nickel has recorded the most spectacular price performance of all the base metals this year. It soared by more than 50% and in May reached its highest level for more than two years at USD 21,600 per ton. After a significant correction in the autumn, the price has recently climbed again. In the absence of serious setbacks before the end of the year, nickel will have outperformed all other base metals during 2014.
Nickel received a substantial boost in the spring, when it became clear that Indonesia was serious about the mineral ore export ban introduced in January, and was not going to backtrack as some market observers expected. Until the export ban was introduced, Indonesia was the world’s largest nickel ore exporter and a major supplier for the Chinese market in particular. As a result, China had to look for alternative suppliers, which it found in the Philippines.
However, Philippine nickel ore is of lower quality, so that this did not entirely make up for the loss of Indonesian ore. Furthermore, in early September a Senator brought a bill before the country’s parliament to ban mineral ore exports following Indonesia’s example. This made the nickel market increasingly nervous for a time. However, the short to medium-term supply risks arising from this initiative are very small. After all, it could take as long as seven years before the law comes into effect.
The nickel ore supplied to China is used there to produce so-called nickel pig iron (NPI). This year, according to data of the state research institute Antaike, NPI producers in China have increased their output to 450,000 tons, compared with 330,000 tons last year. NPI thus accounts for almost a quarter of worldwide nickel production. According to estimates of SMM, most Chinese NPI producers are unprofitable at nickel prices below USD 16,000 per ton. Given the export ban of nickel ores from Indonesia and since prices are insufficient to cover costs, Antaike expects NPI production to fall by 100,000 tons in 2015.
On the other hand, global nickel demand is likely to go on rising. According to data of the MEPS research institute which specializes in the analysis of the steel markets, global stainless steel production will reach a new record high of 41 million tons already this year, driven by China. This would represent an increase of 7.8% over the previous year. Production should continue to expand in 2015, ensuring continuing robust demand for nickel. The stainless steel industry is by far the largest consumer of nickel. A look at the stocks shows however that higher nickel demand can normally be met without difficulty. The LME system alone holds nearly 400,000 tons of nickel, of which only 25% are required for delivery. The remainder is at the market’s disposal.
Rising stock levels may be a reason why the International Nickel Study Group (INSG) did not further revise its market balance forecast during its autumn conference. For this year, in view of the Indonesian export ban and technical problems in mines elsewhere, the INSG expects only a marginal supply surplus of 10,000 tons (in the first nine months, supply exceeded demand by 31,400 tons). Next year, the nickel market should move into a supply deficit for the first time in five years (20,000 tons). The INSG thus remains much more optimistic than many other market observers.
The bank’s analysts consider the prospect of a tighter market situation should provide support for the nickel price. In November, a representative of the Indonesian government reiterated that the country would maintain its export ban. However, since stockpiles remain substantial, any major price jumps are not expected. By the end of 2015, nickel should trade at around USD 18,000 per ton.
The very uneven performance of metal prices seen this year is likely to continue in 2015. However, a common price driver will be the economic development in China, the main consumer of metals. Due to the current low prices of many metals, production is unlikely to increase next year to the extent that many market participants expect, so that some metal markets should be noticeably tight. Commerzbank expects metal prices to rise moderately in 2015.
