Edward Meir/INTL FCStone Jan. 2014 Report - BASE

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3-MONTH LME COPPER

We had an upbeat market in copper last month, with prices gaining 4% over the course of the December and hitting a four-month high in the process. However, for 2013 as a whole, copper finished 7.2% lower, roughly in the middle of the LME pack. The December rally was driven in part by the weaker dollar, as well as continued declines in both LME and Shanghai stock holdings. LME inventories shrank by about 60,000 tons in December to end the month at about 366,000, while Shanghai stocks fell by 16,000 tons. With the percentage of cancelled warrants north of 60%, the amount of freely available LME metal is insignificant and explains the persistent backs we have been seeing in the spreads over the course of the month. In addition, physical copper premiums across all geographies remain elevated, but interestingly, we are not seeing any meaningful increase in spot treatment charges, telling us that concentrate supply remains comfortable. Looking ahead, we think copper has had good run over the course of December and will likely roll back some of its recent increases over the course of January and ahead of the Chinese New Year. Moreover, concentrate surpluses should start to flow through the system and alleviate some of the tightness we are seeing on the refined side. In terms of supply/demand balances, the ICSG sees the market in a 387,000 ton surplus in 2014, rising to a whopping 632,000 next year. We see prices trading between $7180-$7420 in January, while for 2014 as a whole, we see a $6600-$7900 trading range.

3-MONTH LME ALUMINIUM

Aluminum prices staged good rallies over the course of December, the first taking prices to just above $1824 in mid-December, while the second sent prices to a six-week high of $1839 late in the month. Both rallies subsequently fizzled, indicative of the inherently weak fundamental nature of a market saddled with chronic surpluses and a huge overhang of metal stored at various warehouses. In the meantime, there is not much we are seeing that would reflect a market on the mend. In this regard, China's production surge continues, with Reuters reporting that November output was up a whopping 15.5% year on year, a pace that is clearly running well ahead of local demand. In an effort to help wean inefficient plants from producing more metal, China’s government has called for tiered power pricing on all aluminum smelters beginning in January, but it is uncertain whether this will be enough to stem the production increases. In the meantime, there has been no meaningful decline in global stock holdings either; the IAI estimates that total stocks were 2.172 million tons in November, up from a revised 2.148 million tons in October and down only slightly from last November’s 2.245 million ton level.  We think prices will likely trade between $1735 (the early December low) and $1825 over the course of January. We are looking for a much sharper break to possibly the $1650 mark at one point during the first half of this year, a level that should induce more serious supply cutbacks, particularly out of China.

3-MONTH LME ZINC

Zinc had a spectacular run over the course of December, tacking on almost $240 a ton over the course of the month and sealing the complex’s ranking as the best performing LME metal in 2013 (down only 1.6%). However, over the last several days, a much weaker tone has set in, with roughly one-third of last month’s gain already rolled back. Similar to copper, zinc’s earlier rally was attributable to falling stock holdings on the LME. Inventories have dropped sharply in December, off by some 70,000 tons, bringing total holdings to an 18-month low. Furthermore, cancelled warrants are running at about 50%, slashing the overall total that is available by half. The fundamentals of the zinc market also look constructive.  In this regard, the ILZSG sees the market to be in excess by only 2,000 tons through last October, casting some doubt on its call for a 120,000 surplus for the full year.  Lastly, and as we noted in last month’s report, some 1.7 mln tons of production (or some 11% of world output) is being taken out of the supply chain over the next two to three years, with the Lisheen, Century, Brunswick, Perseverance and Skorpion mines all scheduled for closure.  In addition, China's MMG said a few weeks ago that its new zinc mine in Australia will miss its start-up date because of technical issues. MMG’s Dugald River facility was supposed to start yielding metal in late 2015 and partially replace lost output from Century, but this will not be happening now. Over the course of January, we see prices trading between $1940-$2100, while our full year trading range stands at $1800-$2300.

3-MONTH LME LEAD

Similar to zinc, lead also had a very impressive rally over the course of December, climbing some $230/ton over the span of the month. However, here too, the complex has given up almost half of its December gain over the course of the last week, as investors have apparently concluded that prices have gotten slightly ahead of themselves. Despite the current weakness, the fundamentals of the market continue to look constructive; LME stocks have fallen by another 15,000 tons over the course of December, while more importantly, lead remains in a rather substantial deficit. In this regard, the ILZSG sees the complex as being in deficit by 50,000 tons over the first ten months of last year, with the stocks/consumption ratio at a tight 3 weeks, among the lowest in the LME group. Looking at 2014, the ILZSG sees lead to be in a 23,000 metric ton deficit. In terms of demand, the global automobile sector looks quite strong and will likely remain that way going into 2014; practically all global automobile markets are growing briskly, with even European sales picking up of late. We see lead trading between $2030–$2165 over the course of January, while for the full year, prices should range between $1950–$2500.

3-MONTH LME NICKEL

Nickel gained about $1000/MT over the course of December before losing about half of this advance this last week. The rally was due to concern about the Indonesian ore ban that kicks in on the 12th and the implications this could have on supply. The ban has yet to be modified, although over the last two weeks, Freeport- and Newmont have both been given the right to resume exports. Despite the exceptions, the government insists that, "mining companies that still don't process and smelt (domestically) will not be allowed to export ore”.  At this stage, this kind of talk is bluster; Indonesia can ill-afford to adopt a hard line given its chronic balance of payments and a weak rupiah, which closed out last year as the second worst emerging market currency. Moreover, the Indonesian Chamber of Commerce warned that rigid adherence to the ban would result in hundreds of thousands of job losses and bankrupt smaller mining companies who cannot afford to build smelters. On the demand side, the Chinese are well stocked on concentrate and can afford to hold back, telling us that “pent-up” demand may not be there even if the ban were lifted. Given these realities, we think the government (and a recalcitrant Parliament) will ultimately agree to a modified ban, in which case ore will start flowing again later in Q1. This will likely not help the bullish case for nickel, as the complex is already saddled with high inventories and faces another large surplus this year. We see prices trading between $13,440-$14,300 over the course of January and see a $12,500-$18,000 range in place for 2014. We think the lower end of this band will be hit in the first half of 2014, setting the stage for badly needed cuts that will then send prices higher going into late 2014 and into 2015.

3-MONTH LME TIN

Tin pushed higher over the first half of December, shrugging off a sharp plunge that set in on the 10th. To a large extent, tin was moving higher in sympathy with nickel, as both metals were perceived to be “Indonesia plays". However, there is a significant difference between the two in that the Indonesians already have achieved in tin what they hope to do for nickel, namely to put in place a smelter-intensive downstream operation where refined exports replace concentrate sales. Over the course of the last week, tin prices broke below the trading range that was in place since mid-September. The weaker tone is likely due to the fact that Indonesian exports are now ramping up, as more players join the fledgling ICDX exchange. As of November, exports were running at about 5,200 tons per month, and although they are still well below year ago levels, their considerably higher than the sub- 1,000 ton level hit at one point last summer. In addition, PT Timah, has lifted a force majeure on shipments this past month and now ex-pects sales of about 24,500 tons this year, rising to 25,000-30,000 tons in 2014. Nevertheless, a return of Indonesia to the market should not alter tin’s fundamental profile much; we are still looking at a deficit setting in for this year, one which ITRI expects to be around 12,000 tons, although we think the shortfall will be considerably lower than that. We should also note that LME tin stocks now stand at about 9700 tons, only 700 tons away from a new record low. Over the course of January, we see prices trading between $20,800-$22,800, while for the year as a whole we expect a $19,000–$26,000 range to prevail.

 

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