Quarterly Metals Report January 2015 Analysis & forecasts for Base & Precious Metals, Iron Ore & Steel Contents Summary 1 Market Overview 2 Aluminium 5 Copper 7 Lead 9 Nickel 11 Tin 13 Zinc 15 Steel & Iron Ore 17 Gold 19 Silver 21 PGMs 21 Appendices 23 Disclaimer 30 Compiled and Published by Sucden Financial Limited on 20 January 2015 Metals Comments/Analysis: William Adams, Head of Research, FastMarkets.com Steve Hardcastle, Head of Client Services, Sucden Financial Limited www.sucdenfinancial.com/metals Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority. MARKETING COMMUNICATION
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Quarterly Metals Report January 2015 Analysis & forecasts for Base &
Precious Metals, Iron Ore & Steel
Contents
Summary 1
Market Overview 2
Aluminium 5
Copper 7
Lead 9
Nickel 11
Tin 13
Zinc 15
Steel & Iron Ore 17
Gold 19
Silver 21
PGMs 21
Appendices 23
Disclaimer 30
Compiled and Published by Sucden Financial Limited on 20 January 2015
Metals Comments/Analysis:
William Adams, Head of Research, FastMarkets.com
Steve Hardcastle, Head of Client Services, Sucden Financial Limited
www.sucdenfinancial.com/metals
Sucden Financial Limited is authorised and regulated by the
Financial Conduct Authority.
MARKETING COMMUNICATION
Quarterly Metals Report
Summary
January 2015
Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority.
The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy. This report is not subject to any prohibition on dealing ahead of the dissemination of investment research. Accordingly the information may have been acted upon by us for our own purposes and has not been procured for the exclusive benefit of customers. Sucden Financial believes that the information contained within this report is already in the public domain. Private customers should not invest in these products unless they are satisfied that the products are suitable for them and they have sought professional advice.
Marketing Communication
Summary
Aluminium - Weaker crude oil prices will reduce the energy input costs for production, boosting the supply outlook as
marginal costs come down. Given the current lacklustre demand outlook prices are expected to remain rangebound as the new
LME load-out rates see warehouse queue lengths increase once more. Prices are expected to range between $1,765 and
$1,890 in the first quarter.
Copper - Lower crude prices have also added significant downward pressure on copper. While a previous forecast of the red
metal was for a surplus in 2015, this now comes into question. Depending on how the situation unfolds in the eurozone and if
China can maintain growth above 7%, we could see support around $5,300-5,500 with spikes lower on speculative shorts and
conversely spikes higher on short covering. In the first quarter we would look for a $5,500-6,200 range.
Lead - We maintain our bullish fundamental outlook for lead in the medium term despite its recent slide lower. Industrial usage
remains resilient and with global growth momentum slowly grinding higher the metal, which looks oversold in the short term,
could quickly spring back to the upside with a possible target of $2,100 in Q1 2015.
Nickel - After spiking higher in H2 2014, well ahead of the fundamentals, prices have found support around 2013’s base level.
The market is well supplied with exports of ore from the Philippines which when blended with Indonesian stockpiles enable NPI
producers to continue operations. Given NPI stockpiles in China are still around 7m tonnes, protracted gains could be limited in
excess of $17,200/tonne.
Tin - Prices have weakened substantially in recent months as Chinese buyers, in response to Indonesian attempts to firm up
market fundamentals have resorted to low grades from Myanmar. Chinese domestic production continues to rise which
struggles to justify a bullish outlook for tin. As a result we expect rangebound trading between $18,000-$20,500/tonne in Q1
2015.
Zinc - Having ran ahead of the fundamentals at the start of H2 2014, prices have come down considerably as supply remains
plentiful. Supply tightness isn’t expected until the second half of the year. Any material declines in LME stocks could act as a
precursor to a reversal higher with an upside target of $2,375/tonne, but not before potentially testing support towards
$2,050/tonne on any deterioration in the global macro outlook.
Iron Ore and Steel - Falling crude prices have significantly reduced freight rates, bringing Brazilian material back into
contention with Aussie fines for Chinese buyers. Spikes above $70/tonne for benchmark material have been short lived and with
the finished steel market well supplied we expect prices to remain under pressure throughout the first quarter of the year.
Gold - Dollar strength acts as a cautionary note to higher gold prices, with prices also subdued throughout Q4 2014 as
investors demanded higher yielding assets. Physical demand seems to offer firm support for the yellow metal around current
levels and with demand expected to remain firm. As we approach Chinese New year we could see prices test levels towards
$1,300/oz.
Silver - A combination of weaker oil prices and a stronger dollar saw prices trade under pressure over the past few months.
Global investment demand as well as physical buying from Asia is set to improve throughout the year with $18/oz a possible
upside target. However, rallies could struggle to gain a footing on producer related selling.
PGMs - Palladium looks set outperform platinum over 2015. The growth in global vehicle sales and renewed ETF interest look
likely to fuel demand, with the dollar strength and commodity weakness acting as a drag.
Quarterly Metals Report
Market Overview
January 2015
2
Marketing Communication
Market Overview
Outlook weak but stimulus may provide support – Last year started on an optimistic note, with expectations for
a recovery in Europe, stable growth in China and escape velocity to be reached in the US. The latter was achieved but Europe’s
recovery has stalled and credit tightness in China has slowed its growth further. The danger now is that low growth – or even
recession in Europe – will continue to act as a drag on China while Europe demands fewer exports. Key will be whether slower
growth outside the US acts as a drag to an otherwise impressive economic recovery. Either way, while much of the global
economy is in the doldrums, the US Federal Reserve may feel it’s in no hurry to risk its recovery by tightening monetary policy.
This less-than-bullish economic backdrop does not bode well for demand for industrial metals; still, a silver lining for the metals
may be a weaker dollar should the delay in tightening monetary policy mean the greenback has run ahead of the fundamentals.
Lower oil prices should eventually feed through to boosting global
GDP as well.
China, expect stability – China’s economy is slowing, – third-
quarter GDP fell to 7.3 percent from 7.8 percent in the corresponding
quarter of 2013. Its manufacturing PMIs were last at 50.1 (official) and
49.6 (HSBC) while its CPI was 1.5 percent compared with a 2013
average of 2.6 percent. This weakness is likely to prompt more
stimulus measures over and above the fast-tracking of $1 trillion of
infrastructure projects, which the metals markets have largely ignored.
More targeted stimulus/help is expected should growth continue to
slow. Given the power the Chinese authorities have and the fact they
still control many aspects of the financial system, it should be
assumed that they are massaging the economy in the direction they
want given the complicated wish list that includes creating
pollution and avoiding the misallocation of resources, to name a few.
Above all, we expect China will do what is necessary to keep growth
around seven percent, so we would expect more stimulus packages
and rate cuts to keep the economy on track.
ECB likely to act – With Europe facing deflation and its
economy flat, the ECB must take action, but regional political
differences are hampering progress here. So while there has been
much talk that the ECB will do what is necessary, the plan of attack
seems stuck on the drawing board. To make matters more urgent,
Greece is also once again in the spotlight – it faces a new election
that could lead to an anti-bailout government being elected. If so,
the euro area could be plunged into crisis again. Whether the EU
can muddle along as it has in recent years without resorting to full
quantitative easing is doubtful, which suggests some form of
Quarterly Metals Report
Market Overview
January 2015
3
Marketing Communication
stimulus will unfold. The return of the habit of ‘kicking the can down the road’ could easily provide markets with a confidence
boost. With EU GDP growth last at 0.2 percent, its manufacturing PMI at 50.6 and the EU flash CPI down 0.2 percent in
December, the current outlook in the EU is depressing, which increases the likelihood that stimulus measures will be called
upon. What impact these have on metal demand remains to be seen.
US strength continues for now – Third-quarter US GDP surprised on the upside at five percent and its manufacturing
PMI was last at 53.9 (it has admittedly eased from 59 in October but some negative impact from a slower global economy
should be expected given the strength of the dollar and weaker growth in other regions). The national unemployment rate has
also dropped to 5.6 percent, with the economy adding 2.99 million jobs in 2014 – all of which suggest the US economy is robust,
although one weak aspect of the December jobs report was that wages have barely kept ahead of inflation during the five-year
recovery. We wait to see whether the stronger dollar and weakness elsewhere produces too great a headwind for the US
economy.
Emerging markets at risk from stronger dollar and weaker China and Europe – Emerging market
currencies have been trending lower against the dollar, with the rupee reaching 64 from around 59 in June; the real has followed
suit, weakening to 2.75 from 2.20 over the same period; while the rouble has been hammered by sanctions and the plunge in oil
– it was last at 63 from around 35 in the first half of last year. The fall in the currencies, especially in Russia, is likely to
encourage producers to increase revenue by maximising output but the weaker currencies will put pressure on these countries’
dollar-denominated debt and will increase the cost of imports, all of which will probably be a drag on world growth. So the metals
will suffer a double whammy of weaker demand and more supply from emerging markets, we feel.
Qingdao aftermath – The Qingdao port scandal combined with credit tightness in China are likely to have prompted
considerable destocking last year, which has no doubt weighed on metals prices. Looking forward, although metal financing in
China may be difficult and costly, the practice is unlikely to be abandoned so we would expect some kind of recovery this year
as new practices are adopted. In addition, destocking cannot go on indefinitely so apparent demand may well pick up once the
destocking ends and is replaced by hand-to-mouth buying or, indeed, restocking/bargain hunting given the lower prices.
Dollar strength – The dollar took off in July last year,
with the dollar index rising to 92.53 in early 2015. The euro,
conversely, has fallen to a low of 1.1727, its lowest since
2005. This suggests that ‘kicking the can down the road’
indeed merely bought the eurozone some time but the
underlying problems have not gone away. Still, while the euro
has inherent weakness caused by a lack of growth, deflation
and slow progress on structural reforms, the dollar may have
run ahead of itself – it looks overbought on the charts. We
would therefore not be surprised by some consolidation in
the dollar and a rebound in some currencies, while the euro
follows its own fate. On its own, the stronger dollar will have
acted as a headwind for metal demand. If it spends time consolidating while awaiting the Fed's move on interest rates, any
pullback in the dollar may well help underpin the metals.
Quarterly Metals Report
Market Overview
January 2015
4
Marketing Communication
Geopolitical risk – Last year the markets were
witness to much geopolitical unrest but the impact on
the markets was fairly minimal and when it was seen it
was short-lived. This suggests a high degree of
complacency, which is always a danger, but this is how
the markets now seem to handle such issues. With the
rouble and oil prices plunging, with emerging market
currencies weakening and with a risk that Greece
could vote to leave the euro, the world faces
considerable geopolitical risks that do not seem to be
priced into markets, especially equities. If any of these
events triggers a reduction in risk, industrial metals prices could be dragged down further. Still, if it raises demand for safe
havens, the bullion markets might well benefit, especially if they have put in bases.
Overall – The global economic outlook deteriorated in the second half of 2014 and has not improved yet. The chart opposite
shows downward-trending metal prices, with copper, tin and lead all below their respective levels at the start of 2014, while
nickel, zinc and aluminium have held up better. The latter three are waiting for supply issues to tighten the fundamentals, while a
move towards a supply surplus has hit copper and an increase in Chinese production has weakened tin. Quite why lead has
underperformed is harder to fathom.
Precious metals met with further weakness last year; there were bouts of strength but prices have generally consolidated at
lower levels (the exception is palladium). We expect bases are now in place across the precious metals complex; while the
PGMs look well placed to recover, users may not be in any hurry to restock given the economic climate. As for bullion, the focus
has now shifted away from institutional interest, which is bearish given the redemptions in the ETFs, to physical demand from
China and India, which is expected to continue to rebound after the disruptions in 2013 and 2014. Since we feel the dollar may
have run ahead of the fundamentals and given all the geopolitical risks, we are mildly bullish for the precious metals complex.
Equity markets remain at surprisingly high levels, supported by ultra-low interest rates while the ‘punch bowl’ shifts from the US
to Japan, China and possibly Europe. Low oil prices should produce cost savings that may boost household spending but, with
the Dow up 180 percent since the 2009 low and up 27 percent on its 2007 peak, the rally looks overextended. A correction
would probably dampen sentiment across the board, with the possible exception of gold.
With metal prices trending lower, we are looking for support to be found before too long. Some metals have stronger
fundamentals than others – notably nickel, lead and zinc – but given how dominant the downwards trend are and the subdued
economic outlook, it may take considerable base-building before confidence returns.
Quarterly Metals Report
Aluminium
January 2015
5
Marketing Communication
Aluminium – Oil sell-off boosts supply prospects
Overall trend – Aluminium prices rallied to a high of $2,119 per tonne early in September from a low of $1,671.25 in
February before dropping back to $1,778, thereby retracing 76 percent of the gains. Prices are now around the upper levels of
the former sideways range that formed the 2013-2014 base. In our July report last year we thought the rally was premature and
that prices were running ahead of the fundamentals - as well as being counter-productive because higher prices were
encouraging idle capacity to be restarted. Lower energy prices (oil and coal) seem to be driving the deeper pullback, lowering
producers’ costs of output, which is providing an incentive to raise production, as the latest International Aluminium Institute (IAI)
data shows.
Production climbs, helped by lower energy prices – Global aluminium output in November averaged 151,700
tonnes per day (tpd) compared with 146,100 tpd in October and an average of 142,100 tpd in November 2013. In the first 11
months of 2014, production averaged 144,920 tpd, which means output in November on an annualised basis was running some
2.5 million tonnes above the average in the first 11 months of the year. Looking forward, producers now face some
crosscurrents - some will be able to take advantage of lower energy prices to reactivate idle capacity but lower LME aluminium
prices will start to squeeze operating margins at others. So in the short term lower oil prices are likely to remain a bearish
influence, especially if it encourages more exports of Chinese aluminium semis. But if lower benchmark prices start to prompt
talk of more output cuts, bargain-hunting may well reappear. As always with aluminium, the demand profile is second to none,
so at the first sign of supply restraint consumers and investors are likely to return as buyers. This in turn could trigger short-
covering and restocking and another upward run in prices.
New LME rules may have little impact on availability – If the new LME warehousing rules are implemented this
year, leading to a faster outflow of metal, it does not necessarily mean availability will increase - the metal leaving warehouse
Global supply/demand balance in refined aluminium (in millions of tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Production 44.7 47.8 50.8 53.8 56.5
Consumption 42.8 47.4 50.4 53.6 56.5
Balance +1.9 +0.4 +0.4 +0.2 0
Price $2,400 $2,000 $1,860 $1,900 $1,950
Summary
Aluminium prices have reversed
much of the gains of the second and
third quarters last year that were
prompted by the delay to the new
LME load-out rates, which in turn
saw LME warehouse queues grow
again. High ‘all-in’ prices and, more
recently, weaker energy prices have
encouraged producers to step up
output – the fact this has coincided
with a deterioration in the economic
outlook for the global economy ex-
US has dampened sentiment, which
is leading to the current price
correction. Since oil prices may well
remain low for a few quarters and
the new LME load-out rates could
increase availability, we expect
prices to remain rangebound.
Source IAI, WBMS, FastMarkets forecasts
Quarterly Metals Report
Aluminium
January 2015
6
Marketing Communication
could simply just go into off-market financing deals. We do not think there will be much pick-up in availability in the market until
interest rates rise to a level that makes financing metal economically unviable. Given concerns over slower global growth, the
US Federal Reserve may indeed delay any rate rises or the rate rises may have a negligible impact on the financing model. The
aluminium industry may therefore have more time to reduce the stock overhang but to do so it will need to limit production
increases - this will require keeping ‘all-in’ aluminium prices sufficiently low.
Demand growth remains robust – Aluminium continues to enjoy strong demand growth, especially for auto-sheet.
With China’s growth slowing and with Europe trying to fight deflation, there are high expectations for more stimulus measures,
which seem likely. In addition, lower oil prices should provide a worldwide boost to household and business spending, which
should help to counter some of the other negative factors affecting growth such as tight credit in China. We still expect relatively
strong growth overall while aluminium gains market share from copper and galvanised steel.
Prices likely to remain rangebound – With the aluminium market expected to be roughly balanced in 2014 and 2015,
the default forecast would be for firmer prices but high stocks. More metal leaking from China and tentative global economic
growth are likely to keep prices rangebound. Physical premiums may also be near to peaking either because more Chinese
metal is exported or as tightness in the spreads attracts metal out of financing deals. Prices are expected to range between
$1,765 and $1,890 in the first quarter.
The dip in the forward spreads in which 3-15 months dropped to single figures and c-3s moved into backwardation shows how the market tightened in November – such shifts make financing difficult.
LME stocks continue to fall at a regular pace. With the forward spreads back in contango, much of the outflow is expected to go into off-warrant financing deals. Stocks are still high.
Cancelled warrants are easing again ahead of LME rule changes. The tightness in November also led to some cancelled warrants being rewarranted.
Physical premiums in the US remain elevated - the drop in LME prices is likely to prompt a pick-up in physical demand, which may boost premiums further in the short term.
Quarterly Metals Report
Copper
January 2015
7
Marketing Communication
Copper – Down trend dominates
Overall trend – The economic slowdown in China and Europe and a larger supply surplus this year are the main driving
forces behind lower copper prices. Given recent currency turmoil and the rallying US dollar, growth in other emerging markets
may slip, all of which suggests there is little to be bullish about. Still, the outlook could change if China were to step in with a
game-changing stimulus package but that seems unlikely - the 2008 package created its own problems, which the government
seems keen not to replicate. While the latest one-trillion-dollar fast-tracking of infrastructure projects made in early January had
little immediate impact on the market, such initiatives will clearly provide some support to demand. With prices still above the
marginal costs of production, which we put closer to $5,500, prices may well move lower but we would expect scale-down
buying in the $5,300-5,500 range. Still, lower oil prices and weaker commodity currencies will lower the marginal costs levels so
support levels may shift lower too. Even so, the projected surplus is not that large, especially given that supply disruptions are
an ever-present feature in the copper market and that China - as a net buyer - may well be prepared to increase its strategic
purchases, all the more so if prices approach the marginal costs of production.
China remains key – With China accounting for 45 percent of global consumption, changing trends there will be all-
important. One key area where demand is likely to be hit hard is the housing sector - not only will falling property prices deter
housing starts but potential buyers may be reluctant to buy until prices bottom out, which could have a negative impact on
demand for white goods and appliances. The situation will, however, breed pent-up demand to be met at a later date.
Conversely, government infrastructure spending after the recent approval for rail, airport and port projects as well as the
continuing investment in the state power grid are all potentially big consumers of copper wire. The tighter credit environment in
China has also led to a degree of destocking in 2014 so there is potential for apparent demand to pick-up if - as is likely - Beijing
eases monetary policy.
Global supply/demand balance in refined copper (in millions of tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Production 19.6 20.13 21.06 22 22.75
Consumption 19.7 20.39 21.33 21.9 22.55
Balance -0.1 -0.26 -0.27 0.1 0.2
Price $8,810 $7,946 $7,250 $6,860 $6,300
CHART WITH TITLE & SOURCE
Summary
Copper prices are trending lower.
Having moved below numerous lows
established between 2011 and 2014,
the chance that prices fall back to test
support in the $5,300-$5,500 area has
already happened. With a supply
surplus looming, which the ICSG
forecast at 393,000 tonnes this year,
the fundamentals are mildly bearish.
Much will ultimately depend on whether
China manages to keep growth above
seven percent, whether the ECB can
reignite growth and whether the US can
avoid being dragged down by the
weakness elsewhere. As well, we feel
stocks are not very high and China’s
structural supply deficit will mean it
becomes a scale-down buyer,
supporting the price. Source: ICSG, FastMarkets forecasts
Quarterly Metals Report
Copper
January 2015
8
Marketing Communication
The copper market ex-China – International Copper Study Group (ICSG) forecasts are for copper demand to have
grown 3.5 percent in 2014 and our forecast is for growth outside China of around 1.5 percent in 2015, fuelled by strong growth
in the US, but offset by subdued growth in Europe and negative growth Russia. With growth in China and emerging markets
slowing and Europe flirting with recession, there is a big question mark over how ring-fenced the US economy will be as its
export market slows and as low oil prices lead to retrenchment in the shale oil and gas industry, which has been a driving force
in US manufacturing in recent year.
Funds hold bearish stance in the US and getting less bullish on the LME – The managed funds trading
on Comex turned net short again in mid-August - the position is now net short 35,053 contracts, which is the highest level we
have on record since 2011. This makes the market vulnerable to short-covering that could either provide support to prices or
else drive a short-covering rally. On the LME, money managers are net long 25,258 lots, down from 33,434 lots in September
and 48,460 lots in July when the data series began. The drop in the net long position has come about on fairly even amounts of
long liquidation and fresh short selling, according to LME data. Given the weakness in commodity prices generally, it is
surprising that the LME fund position has not reflected the US fund position more.
Looking weak for now – Fundamentally, technically and economically, it looks as there may be more room on the
downside for copper prices but, with the marginal costs of production not too far below current prices and with potential for
stimulus packages in China and Europe, we would expect range-trading to continue at $5,800-6,800 this year, with the upper
prices levels likely to be seen during short-covering rallies. In the first quarter we would look for a $5,500-6,200 range.
LME stocks are edging higher while the backwardation attracts metal into LME-registered warehouses. Stocks are not high, accounting for around 0.8 percent of annual consumption. The low level of cancelled warrants also suggests the market is well supplied.
The forward curve is in backwardation, although between five and 10 years out the curve is flat at around $145/t back. The presence of the backwardation may well be deterring shorts on the LME. One entity holds 50-79% of LME warrants.
The funds' net position is getting shorter and the gross short position is near its high, while the gross long is in low ground. The peaks in the gross short position tend not to last too long – this may mean short-covering lies ahead.
China’s copper imports have recovered in recent months, maybe because having deferred shipments earlier in the year because of the negative arbitrage it had to import more under term contracts as the year came to a close.
Quarterly Metals Report
Lead
January 2015
9
Marketing Communication
Lead– Looking for catalyst to trigger upside price reversal
Overall trend - The lead market probably ended 2014 relatively balanced after recording a 15,000-tonne surplus in the first 10
months of the year. If it moves into a deficit this year as expected, tighter supply should provide greater upside price potential.
While lead therefore looks under-priced, we believe it probably needs a catalyst to inject upside momentum and trigger a
renewed rally - it got ahead of its fundamentals after rallying strongly last year after the market latched on that several large
zinc/lead mines would reach the end of their productive lives in 2015.
Automobile demand – Auto demand remains strong in the US and China, driving lead consumption through OEM (original
equipment lead-acid) battery demand. US auto sales in December at 16.9 million units on an annualised basis were up 4.9
percent while Chinese vehicle sales in 2014 rose 6.9 percent to 23.5 million units. We expect this trend to continue - rising
economic momentum should fuel consumer confidence, unlocking delayed demand. While European auto sales of 11.6 million
units in January-November were up 5.7 percent, sales have started to wane of late as economic momentum in the eurozone
continues to falter. With the bloc believed to be sliding into a deflationary spiral, this is unlikely to change in the near term.
Automobile market – New emission regulations have led to the use of stop/start batteries in the US and EU, which should lift
consumption via the requirement of bigger batteries and more frequent replacements. Beijing’s continued crackdown on air
pollution should also provide a further boost as older models that do not meet new regulations are replaced; however, this may
be countered in part by a policy to reduce vehicle registrations in major cities. With the oil price having fallen significantly
recently, reducing fuel and therefore travel costs, we would expect increased demand for vehicles to provide a further boost to
lead consumption.
Global supply/demand balance in refined lead (in thousands of tonnes)
2010 2011 2012 2013 2014 (e) 2015 (f)
Production 9,850 10,598 10,541 11,224 11,550 11,850
Secondary market – Lead’s secondary market is second to none - most lead is recycled - but it remains a price sensitive
market. Due to the recent run of low prices, scrap supply is tight, putting pressure on secondary producers. But with available
supply set to tighten further due to reduced mine supply later in 2015 and with scrap shortages likely to continue while prices
remain low, price gains seem likely before too long, which should start to bring scrap metal back to the market. The maturing e-
bike market is also likely to bolster secondary supply further as lead-acid batteries are replaced by lithium-ion batteries.
Zinc has been trading at a premium to lead since June when both were driven higher by speculation of future tightness. Both sold off after getting ahead of their fundamentals but the influence of lead’s considerable secondary market is evident in the size of its drop compared to zinc. Still, given mine closures and a possible deficit this year, upside price potential remains.
The cash/future prices, which have been falling since the July high when lead got ahead of is fundamentals, are continuing lower after a brief rise into the end of 2014. Still, the contango remains supported, indicating that perceived future tightness from reduced supply continues to spur future buying.
LME lead stocks at 220,775 tonnes are below the December peak of 229,075 tonnes and up 30,400 tonnes from the June low. Stocks were initially bolstered by the Qingdao probe tightening credit conditions, dampening financing demand. This led to off-warrant metal that would normally be financed in China moving to LME-listed warehouses to certify ownership, highlighting the risk of further metal moving from East to West, bolstering supply ex-China and putting LME prices under downside pressure.
Lead stocks have suffered increased volatility of late and prices seem to be trading inversely to LME stocks, which is not surprising given LME lead stocks are relatively low. But with supply tightness forecast for next year due to several large zinc/lead mine closures, we expect stock drawdowns to start to bolster prices as the supply tightness moves the market into a deficit.
Quarterly Metals Report
Nickel
January 2015
11
Marketing Communication
Nickel – Waiting for deficit to arrive
Overall trend – After last year’s false start in which nickel ran up to $21,625 per tonne from around $13,300, prices have
pulled back aggressively to a low of $14,625. This took prices back to the upper levels of the base that was established in the
second half of 2013. We would expect this base to provide strong support - the fundamentals are set to improve this year,
although with more than 400,000 tonnes of nickel in LME-bonded warehouses there will be no shortage per se although the
metal in warehouse will not necessarily be for sale at current price levels. Still, there are no dominant holders of the warrants.
Given the sharp rally and the slump in prices, we would imagine the investment community and consumers will be nervous
about positioning themselves too early so we would not be surprised by a gradual price recovery initially that could gain
momentum as confidence returns.
2015 – the shift to supply deficit delayed – The ramp-up of nickel ore exports from the Philippines was the main
reason why Chinese NPI production has been able to remain as high as it has. By blending Philippine ore with stockpiled
Indonesian ore, rotary kiln electric furnace (RKEF) producers have not depleted their stockpiled high-grade Indonesian ore as
fast as originally thought. But the Philippine ore is not a full substitute - RKEF facilities still need to mix it with Indonesian
stockpiles that are running down (see chart on next page). There are two takeaways from this – first, it seems likely that NPI
production in China will slow more markedly later in the year; but second, the Chinese have proved very entrepreneurial in
finding cheap nickel units – as they proved in 2006 and 2007 when NPI started to feature as a main source of nickel supply and
once again after the Indonesian ore ban. Perhaps the next surprise will come from how fast NPI facilities in Indonesia are
commissioned - the current consensus is that the ramp-up in production will be slow.
Rise in LME stocks weigh on sentiment – Combined with the continued high level of NPI production in China, the
59-percent rise in LME stocks to 415,000 tonnes has been another factor that turned sentiment bearish from extremely bullish in
the first half of 2014. The stock rise, however, is not fundamentally driven but is related to invisible off-market inventories
Global supply/demand balance in refined nickel (in thousands of tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Production 1,640 1,785 1,970 1,970 1,930
Consumption 1,625 1,681 1,790 1,940 1,980
Balance +15 +104 +180 +30 -50
Price $22,853 $17,535 $15,004 $16,867 $18,750
Source: INSG, FastMarkets forecasts
Summary
Nickel definitely ran ahead of the
fundamentals in the first part of 2014
and is now paying the price. The
combination of a surge in exports of
Philippine ore, the blending of this with
Indonesian stockpiled ore - enabling
NPI producers to keep operating- and
a 154,000- tonne increase in LME
stocks have all dampened sentiment,
as has the delayed arrival of the much-
anticipated supply tightness. With
Indonesian ore stockpiles in China still
around 7 million tonnes, the long-
awaited drop in NPI production is
unlikely until the second quarter of this
year. At this point LME stocks might
start to be needed to balance the
market.
Quarterly Metals Report
Nickel
January 2015
12
Marketing Communication
becoming visible as they are moved to LME warehouses. The reason for the move is due to the difficulty traders have had in
financing the metal in China following the Qingdao fraud scandal. The presence of so much metal in warehouse - representing
some 21 percent of annual nickel consumption at current levels - should allay fears that a switch to a supply deficit will lead to
runaway prices on the upside. With a supply deficit of some 50,000 tonnes expected this year, there is plenty of cover in LME
stocks.
Demand weak on destocking – Stainless steel production was strong in China in the first half but operating rates have
since declined - the export market is not as strong as it was and the country faces some anti-dumping accusations. This, in
addition to weaker nickel prices, has led to destocking. Restocking, however, is likely to follow initially should nickel prices start
to recover, but since NPI prices climbed in China last year there was some evidence that austenitic ratios have fallen. On
balance, although slower economic growth globally might dampen stainless steel demand this year, we still feel the overall
outlook for stainless steel consumption will prove robust - it is a metal with a great demand profile and one that continues to gain
market share. Restocking cycles also have a habit of being particularly bullish for nickel prices.
Demand – Having seen prices correct sharply in the second half of 2014 and in early January, we feel the market is well
placed to start drifting higher in anticipation of firmer fundamentals later in the year. There is no shortage of nickel units so
runaway prices are not justified but because nickel has a history of volatility there is no room for complacency. We would look
for prices to trade in the $14,500-17,200 range in the first quarter.
Although nickel ore stocks at Chinese ports are still high, the gradual drawdown of Indonesian ores is what is likely to determine when NPI production in China starts to fall more sharply.
With backwardations reverting to contangos, the forwards appear to have been lent – this suggests either a pick-up in forward buying or that it may have come about because metal is being put into financing deals.
The stock overhang has dampened sentiment significantly and the high level of stocks should prevent another episode of runaway prices as was the case in the first half of 2014.
LME stocks are exceptionally high and do not appear to be held in tight hands, which should mean the stock can be used to offset several years of supply deficit.
Quarterly Metals Report
Tin
January 2015
13
Marketing Communication
Tin – Indonesian plans thwarted by China
Overall trend – The broad sideways price oscillation in tin between $17,000 and $25,000 continues as it has since the
second half of 2011, supported by numerous Indonesian attempts to restrict supply when prices are low and capped by a pick-
up in supply from swing suppliers such as China when prices approach higher levels. At this time last year it looked as though
the latest Indonesia policy might succeed in regulating supply enough to see prices break higher but that has not been the case.
We expect prices to hold in the $18,000-$20,500 range in the first quarter.
China rocks the boat – Chinese demand for imported refined tin has dropped largely because it has increasingly
harnessed a new source of mine supply – something the tin industry had struggled to do until Myanmar started to open up in
2011. China’s imports of tin ore and low-grade concentrates from Myanmar soared 88 percent the first 11 months of 2014. This
extra supply has more than offset the restricted outflow of refined metal from Indonesia.
Indonesian exports fall – Indonesian exports totalled 75,925 tonnes in 2014, the lowest for eight years and down from
91,613 tonnes in 2013. The fact that this drop in exports has not underpinned prices is quiet surprising although it seems that
China’s ability to source tin from Myanmar has meant it has not had to tap the international market for as much metal. In turn,
this has meant there has been less demand for Indonesian tin so the market has been able to cope with the drop in Indonesian
exports. Although Indonesia exports have slowed, production has not. PT Timah mine production increased 32 percent in the
first three quarters of 2014 period and refined production climbed 16 percent but sales were up only three percent, while stocks
of tin in all forms were 18,359 tonnes – the highest in five years. This suggests Indonesia is storing up problems for itself. With
exports still flowing out from Indonesia despite low prices, it looks as though the country has lost its battle to regulate global tin
prices. Tin prices averaged $20,000 in December, which was $175 above the LME average cash price. Once again it appears
that by trying to regulate the market Indonesia has damaged it, especially for its producers.
Global supply/demand balance in refined tin (in thousands of tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Production 360 335 337 352 364
Consumption 365 341 341 347 357
Balance -5 -6 -4 5 7
Price $26,000 $21,114 $22,000 $21,893 $20,500
Summary
Tin prices have fallen 23.1 percent
to $18,345 per tonne from the
peak of $23,849 late in April. The
extent of the weakness has been
surprising given Indonesia’s
attempts to regulate supply but its
efforts have been scuppered by
China’s increased use of low-
grade ores from Myanmar. From
being a net importer of tin in recent
years, China is now once again
self-sufficient, which has alleviated
the potential tightness in the world
outside China. With Chinese
production rising sharply, the
outlook for tin is not a bullish as it
was this time last year. Expect
rangebound trading.
Source: WBMS, FastMarkets forecasts
Quarterly Metals Report
Tin
January 2015
14
Marketing Communication
Chinese tin production climbs – China has lifted refined tin production by increasing its imports of ore and
concentrates from Myanmar, which totalled 153,229 tonnes on a gross weight basis in the first 11 months of 2014, a rise of 88
percent. There would be some 26,000 tonnes of contained tin in that gross weight, the International Tin Research Institute (ITRI)
estimates. Given that the tin industry has long struggled to lift tin mine supply, this increase is significant. Chinese refined tin
production climbed 21 percent to 167,795 tonnes in January-November, the China Non-ferrous Metal Industry Association
(CNIA) reported, which is an extra 29,000 tonnes of tin supply – this more than offsets the 15,688 tonnes of supply lost from
lower Indonesian exports.
Demand outlook – Demand for tin is expected to remain steady but slower growth in China and Europe, as well the
continual process of miniaturisation in the electronics industry, could prove a headwind for solder demand because it means
less solder per item. This is countering the overall growth in the electronics industry.
Semiconductor sales remain upbeat – Sales of semiconductors (a proxy for demand for electronics/solder) climbed
10 percent in January-November from the same period in 2013, according to the World Semiconductor Trade Statistics (WSTS).
This bodes well for tin demand, albeit with the above caveat.
LME stocks rise despite the fall in Indonesian exports – LME tin stocks ended 2014 at 12,135 tonnes, up from
9,660 tonnes at the end of 2013, a rise of 26 percent. Of that LME inventory, 96 percent is in Asian warehouses and four
percent is in Rotterdam - there is none in the US. We expect the market to keep a close eye on LME stocks because the inverse
relationship between the price and stocks seems to be alive.
The surprising feature of the forward spreads is how close the forward price is to the cash prices. This suggests that, despite relatively low prices, there has been little interest in locking in forward prices.
Tin stocks oscillated between 8,065 tonnes and 13,485 tonnes in 2014. Surprisingly, the drop below 9,000 tonnes in October did not prompt much of a rally in prices, which suggests sentiment is quiet bearish.
Global semiconductor sales were climbing steadily earlier in 2014 but the rate of growth has now slowed on a month-on-month basis. This might provide a headwind for tin demand.
The fact that ICDX prices followed LME prices lower below $20,000 is a sign that the latest Indonesian system to regulate prices is not working.
Quarterly Metals Report
Zinc
January 2015
15
Marketing Communication
Zinc – Waiting for supply tightness
Overall trend – Prices have been trading lower in a downward channel since late August, falling to a low of $2,107.50 from a
high of $2,416 last summer. Prices are still comfortably above the 2011-2013 lows that ranged between $1,718.50 and
$1,811.75 so in some ways the pullback in recent quarters appears to be a bull-flag while prices bide their time until the
fundamentals actually start to tighten. In the short term, this may mean there is room for prices to weaken further but we would
expect solid support in the $2,050-2,100 region, with resistance above $2,375 in the first half of the year.
Supply tightness on the way, but not yet – The market is focused on the likelihood that supply will tighten
considerably at the tail end of this year once the giant Century mine in Australia - with capacity of some 500,000 tonne per year
- reaches the end of its life. In the near term, with spot treatment charges rising in 2014, there does not appear to be a shortage
of mine output - a host of small or medium-sized increases are cumulatively likely to lead to a meaningful increase that should
raise mine output by around 500,000 tonnes this year. The International Lead and Zinc Study Group (ILZSG) forecasts a
470,000-tonne increase in mine output and a 430,000-tonne increase in refined output so the loss of 500,000 tonnes from
Century - as well as losses from smaller operations - will be felt most in 2016 rather than this year.
Stronger demand for galvanised steel in China – The latest ILZSG data shows a supply deficit of 277,000 tonnes
in the January-October period compared with a 53,000-tonne deficit in the equivalent 2013 period. Refined supply climbed 3.8
percent or some 406,000 tonnes while usage was 630,000 tonnes higher, with a 548,000-tonne increase in Chinese demand
accounting for the increase. Although the Chinese property market has slowed, demand for galvanised steel is rising strongly,
with output up 15 percent in the first 10 months of 2014. With the government recently fast-tracking $1 trillion of infrastructure
projects, demand for galvanised steel and other metals is likely to remain well supported.
Global supply/demand balance in refined Zinc (in thousands of tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Production 13,080 12,593 12,900 13,500 14,000
Consumption 12,706 12,342 12,890 13,600 14,150
Balance +374 +251 +10 -100 -150
Price $2,191 $1,948 $1,915 $2,165 $2,300
Summary
Since the double top over the summer
months, zinc prices have gradually
retreated. Given the run up in prices to
$2,416 per tonne in July last year and
the fact that supply is not expected to
tighten until the second half of 2015, it
is fair to say prices ran ahead of the
fundamentals. With the global
economic outlook deteriorating in the
second half of 2014, the correction in
zinc has continued but before too long
the market will no doubt focus on the
supply deficit again - the rate of
declines in LME stocks might well
determine when the market turns
bullish again. We would expect it to
start later in the first quarter.
Source: ILZSG, FastMarkets forecasts
Quarterly Metals Report
Zinc
January 2015
16
Marketing Communication
Auto sales growth slows in China and Europe – Zinc has three main uses in the auto industry: galvanised steel is
used to make car bodies and panels, die-cast alloys are used to make parts and zinc oxides are used to vulcanise the rubber in
car tires - the transport industry accounts for around a quarter of zinc consumption. While the US auto industry continues to
grow strongly - sales rose 5.9 percent in 2014 - there are worrying signs about slower growth in Europe and China. In
November, auto sales in Europe were up just 1.4 percent on October and although year-to-November sales were up 5.7 percent
compared with the same period in 2013, recent data may highlight a slowdown. The same is true in China where sales were up
3.9 percent in November compared with October after growth rates of 11.2 percent in the first half of the year. A slowdown in
these regions could be another factor that offsets slower supply growth.
LME stocks fall but it's probably just metal being relocated – LME zinc stocks peaked in December 2012 at
1.235 million tonnes and were last at 680,850 tonnes, off 44 percent from the peak. It is unclear how much has actually left
warehouses to be consumed and how much has merely been relocated to off-warrant financing deals or shipped to China to act
as collateral. ILZSG data shows the market was in a supply surplus between 2009 and 2012 and our data shows the market
was balanced in 2013 and is likely to be in a 100,000-tonne deficit in 2014, which suggests that a good deal of the stock
drawdown in recent years has not been consumed. This could help cushion the impact of supply deficits in the years ahead
although those holding stocks are likely to release it only if prices, premiums or spreads justify it.
The forward spreads shows that the price weakness is now seeing the spreads lent, which suggests forward buying. Note that 3-15 months is trading above further forward months, supporting the likelihood of tightness in 2016,
Although LME stocks are trending lower, there have been odd bouts of large increases. This tends to suggest there is metal sitting off-warrant that can be put on warrant when backwardations allow.
Cancelled warrants are climbing again after dipping to a low of 84,575 tonnes in mid-December. The widening contangos may indicate increased demand to put metal into financing deals again.
Physical premiums for metal in warehouse reflect regional availability and demand. Premiums have changed little in recent months - the bulk of stocks remain in the US at 93 percent. Stock falls have been seen in all regions, with the bulk - 65,100 tonnes - in the US since September.
Quarterly Metals Report
Steel & Iron Ore
January 2015
17
Marketing Communication
Steel & Iron Ore - Oversupplied
Overall trend – Iron ore prices had a torrid time in 2014 in what appeared a race to the bottom by the major producers looking
to sell production from their capacity expansions. Since their aim seems to be to gain market share from domestic Chinese
producers and other smaller seaborne suppliers, it is unlikely that iron ore prices will enjoy much on the upside other than during
short-lived bouts of short-covering in the face of seasonal weather-related supply disruptions, which are normal at this time of
year. To force higher-cost of producers out of the market suggest prices will have to stay down for a considerable period. Steel
prices are also likely to trend lower as input costs fall and domestic producers face competition from imports.
Iron ore – Prices shot above $180 per tonne in 2011 from around $36 in 2007 on the combination of 1) rampant demand from
China after the massive stimulus injections during the financial crisis; 2) disruptions to supply from India’s banning of some
exports; and 3) delays to bringing on Brazilian new capacity. While this provided a huge incentive for Australian producers to
ramp up capacity, the timing of the increase has coincided with slower global growth, especially in China. Having invested
heavily in new production, the iron ore majors have little option than to strike out to gain market share, which they are now
doing. The result is that iron ore has moved into a significant supply surplus; since the latest capacity additions are low-cost,
prices plunged to a low of $66.84 in December. Even with marginal costs for Chinese domestic producers falling because of the
drop in oil prices, energy costs are around 35 percent of costs of production for iron ore. This has forced many Chinese
producers to cut output because they are still at the high end of the cost curve; more cuts are likely, although other seaborne
suppliers are being forced out of the market too. Until balance is restored, iron ore prices are likely to remain depressed around
$70 but are likely to rebound later in the year as more strategic buying is carried out, mainly by China. Expect a range of $67-
$73 in the first quarter.
Chinese iron ore required to balance the market (in millions of tonnes)
2013 2014 (e) 2015 (f)
Chinese demand 1138 1180 1194
Ex-China seaborne demand 422 430 451
Total demand 1560 1610 1645
Seaborne supply 1196 1343 1470
Demand for Chinese domestic iron ore 364 267 175
Source: FastMarkets
Summary
With iron ore prices slipping back below
$70 per tonne in mid-January after a
New Year rally fizzled out, it looks as
though prices will struggle on the
upside. What's more, it seems the main
producers also want this outcome while
they try to gain market share by forcing
higher-cost producers out of the market.
Cheaper oil prices will further lower
shipping costs for the seaborne market,
helping them in that respect. With
steelmakers' input costs (iron ore and
energy) falling, it is difficult to see
anything other than a well-supplied steel
market, with producers looking to boost
revenues by raising exports – all of
which is likely to weigh on prices.
Quarterly Metals Report
Steel & Iron Ore
January 2015
18
Marketing Communication
Steel industry faces pricing pressure – With lower iron ore and oil prices, steelmakers are under pressure from
customers to cut prices, especially while other countries try to muscle in. Russia and China have been particularly active in the
export market - the former has benefitted from the slump in the rouble and the latter has the advantage of being the recipient of
cheap iron ore. As producers push their export potential, more anti-dumping duties are being applied, especially to Russia.
HRC prices slide – US HRC reference prices fell to $668 per tonne in December from around $723 in late September; the
spread with Chinese export material is holding around $220. In northern Europe, HRC reference prices are also falling, reaching
five-year lows around €404 per tonne in December, down from around €423 late in September. Chinese export reference prices
to Asia were around $445 per tonne in late December, down from $481 in late September. In Europe, imports gathered pace in
2014, with flat steel imports up 17.6 percent in the first ten months on the same period in 2014, while production increased 2.7
percent over the first 11 months.
China and Russia look to the export market – With domestic demand weak in China, producers have looked to the
export market - exports rose 47 percent to 83.62 million tonnes in January-November from a year earlier. Given regional price
differences, this is not surprising and is only likely to be slowed by anti-dumping duties. Russia likewise has stepped up exports
as its competitiveness has increased thanks to the drop in the rouble.
Supply outweighs demand – Given the market set-up, with oversupply in iron ore and oil, steel prices seem likely to remain
under downward pressure, while iron ore prices, having already fallen significantly, are likely to remain in the low ground.
HRC steel prices in North America have managed to hold above prices in other regions, helped by good domestic demand, but the higher price is attracting imports. Overall, oversupply and cheaper raw material costs are keeping downward pressure on prices globally.
Steel prices are facing perfect combination of events that has boosted competition among regional producers, with some benefitting from lower iron ore prices, others from currency weakness and all from lower energy prices.
The forward curve for iron ore swaps is sloping downward, suggesting the market expects the supply surplus to weigh on prices while excess, higher-cost capacity is gradually closed.
Global steel output in the first 11 months of the year was up 3.1 percent on the same period of 2013. Even with steel prices falling, output is still rising, with growth seen each month so far this year compared with the same month of last year.
Quarterly Metals Report
Gold
January 2015
19
Marketing Communication
Gold – Forming a base as selling abates
Overall trend – Gold extended to a four-and-a-half year low of $1,131.60 per ounce early in November after breaking key
double-bottom chart support at $1,180. The metal is working higher early in 2015, having put a base in place, but there is
notable overhead resistance. Meanwhile, forward rates tightened again in November when price weakness drew strong demand
from the physical community. In the first quarter we are looking for a range between $1,170 and $1,280.
Fund activity - Net length among Comex speculators proved somewhat mixed over final quarter of the year. Gross longs
reached their highest since March 2013 when gold tested above $1,250 on October 21. Open long exposure would hold around
180,800 contracts during the rest of the period, with short exposure again driving net flows. After an initial bout of short-covering
late in October, gross short exposure increased to some 121,225 contracts when speculators sold into the November low of
$1,131.60. The NLFP increased to 115,837 contracts by the end of December after speculators reduced their short exposure in
late November and early December.
ETF investment activity – ETF investment exposure remained on a downwards bias across the quarter, led primarily by
liquidation from the US-listed SPDR fund while institutional investors sought higher-yielding assets. Net holdings in the funds we
monitor ended December at 1,606 tonnes, falling 152 tonnes across 2014 to their lowest since March 2009. Still, we feel the
price pressure this poses will be lower in 2015, with deflationary pressures potentially drawing in new demand.
Physical demand – Anecdotal evidence suggests physical demand was strong during the fourth quarter, reflecting
seasonal demand - Diwali fell on October 23 and the Golden Week holiday in China was in early October. Christmas-related
stocking by manufacturers in Turkey was also notable. Demand was further bolstered by the relaxing of import policy by the
Global supply/demand balance gold (tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Supply 3994.0 4454.9 4254.0 4200 4100
Demand 4067.1 4594.7 4080.0 4300 4350
Stock flow -73.1 -139.8 174.0 -100 -250
Price $/oz 1,572 1,669 1,411 1,266 1,200
Source: FastMarkets, WGC, Thomson Reuters GFMS
Summary
Gold remained under pressure in the
final quarter of 2014 on dollar strength
and growing demand for higher-
yielding risk assets. Technical selling
was also a feature after gold breached
double bottom chart support around
$1,180. The price weakness
stimulated physical demand as gold
entered its seasonal peak demand
period. Demand is expected to remain
strong early this year while Chinese
demand is boosted by New Year-
related purchases. Further asset
diversification among emerging market
central banks has also been evident,
absorbing continued liquidation from
western institutional investors, also a
trend we expect to continue in 2015.
Quarterly Metals Report
Gold
January 2015
20
Marketing Communication
Indian government, which surprisingly dropped the rule requiring 20 percent of gold imports into the country to be re-exported.
Strong demand is expected in the first quarter of 2015 given several auspicious dates on the Hindu calendar as well as Chinese
New Year on February 19.
Central banks – Central banks remain net buyers of gold in 2014, a trend we expect to continue. Net holdings increased
223 tonnes in the first 10 months of last year, according to the latest figures from the WGC, primarily as emerging markets
diversified their reserve portfolios. Speculation of possible sales by Russia - its holdings increased 134 tonne last year -
emerged during the fourth quarter while the central bank sought to stem the rapid depreciation of the rouble. We feel the threat
to gold holdings is minimal, with recent volatility potentially prompting further diversification into gold by the central bank.
The historical inverse correlation between gold and the dollar was re-established across the second half of 2014. Stronger economic activity in the US and the prospect of higher interest rates pose a threat to gold in 2015, although we feel the correlation will weaken amid physical demand and diversification.
Demand from the physical sector surged in the latter part of 2014, reflecting seasonal demand as well as the relaxation of import policy in India. Seasonal buying will continue to feature in the first quarter of this year, although we feel the surge in imports reflect an element of wholesale stockpiling.
Gold ETF holdings trended lower while investors continued to seek higher-yielding assets. ETFs will remain a supply source in 2015, we feel, albeit at more modest levels, while deflationary pressures may draw some fresh demand from Europe.
Open long exposure among Comex speculators remained stable again, with the price weakness below $1,200 failing to shake their confidence. Price fluctuations were again led by short positioning, which stands at the mid-point of its recent range.
Quarterly Metals Report
Silver
January 2015
21
Marketing Communication
Silver – Stabilising at lower levels
Overall trend – Silver attempted to establish a base around $17 per ounce at the start of the fourth quarter before
succumbing to further price pressure amid dollar strength and falling oil prices. The metal reached a five-year low of $14.65 on
December 1st before stabilising at $15.50-16.50 over the rest of the month, supported by steady investment demand and
speculative short covering. Average prices should be nearer $17.50 in 2015 from around $19.08 last year, with rallies to be
capped by producer hedging, particularly given the price weakness in co/by-products such as copper and lead. We expect
investment and industrial related demand to continue to provide strong underlying demand.
Net ETF exposure to silver remained stable across 2014 as a whole. Retail investment demand appeared strong as well, with Eagle coin sales by the US Mint reaching a record 1,366 tonnes.
Having been quite polarised across October and into November, the NLFP finished the quarter some 4.5 times higher amid a reduction in open shorts. Short exposure will continue to drive short-term price sentiment.
Global supply/demand balance in refined silver (in tonnes)
2011 2012 2013 2014 (e) 2015 (f)
Supply 32,291 31,303 31,166 32,065 31,850
Demand 32,926 33,396 33,822 31,875 32,455
Balance -635 -2,093 -2,656 190 -605
Price $/oz 35.12 31.15 23.79 19.08 17.50
Source: FastMarkets, Thomson Reuters GFMS
Summary
Price weakness continued into the final
quarter of 2014 as dollar strength and
weak oil prices triggered selling
pressure across the metals spectrum.
Silver hit a five-year low under $15 on
December 1st although this prompted
speculative short covering; prices
subsequently stabilised. Retail
investment demand would continue to
feature, as reflected by record Eagle
coin sales by the US Mint. Demand in
Asia remains strong with India reporting
record imports. These trends will
continue in 2015 although we feel
rallies will struggle amid producer
related selling.
Quarterly Metals Report
PGMs
January 2015
22
Marketing Communication
PGMs – Fundamental tightness to persist
Overall trend – Platinum closed the fourth quarter 7.2 percent lower, reflecting lacklustre investment interest from European
and US ETF investors and muted Chinese jewellery demand. Palladium found strong support from South African investors when
prices were below $750 per ounce and set about establishing a base around $800 by the end of December, closing the year
with a solid 11.2-percent gain. We feel platinum will trade in a $1,150-1,450 range in 2015 and palladium in a firmer $750-920
range.
Supply shortfall – Both platinum and palladium recorded substantial deficits of more than 1 million ounces in 2014 due to
supply-side issues. We expect stronger supply this year thanks to higher mine output and further growth in autocatalyst
recycling but we feel the supply side will remain vulnerable to disruptions. A review of operation by Amplats and Implats could
see some high-cost mine operations in South African shuttered, while we maintain our view Russian state palladium stocks are
near depletion given the slow pace of exports, as the chart below indicates. As a whole, we feel both metals will remain in
structural deficits in 2015, continuing to draw on above-ground stock, albeit at more modest levels than in 2014.
Platinum holdings levelled off across the fourth quarter as fresh demand from South Africa negated liquidation from Europe and the US. South African demand for palladium remains strong, albeit more price sensitive.
The continued expansion in the global vehicle fleet will continue to fuel demand for PGMs, particularly as tighter emission controls prompt higher metal loadings. But we feel palladium will benefit more relative to platinum given falling sales of diesel-powered cars despite lower fuel prices
Summary
The 2014 trends will persist - palladium is set to further outperform platinum in 2015. Increasing growth in global vehicle
sales and renewed ETF investment demand will continue to fuel demand while dollar strength and wider commodity price
weakness will act as price drags. Supply disruptions could again feature.
Zinc imports have been high in the year to date but have been falling in more recent months. Also of note is that exports have picked up since July, which suggests metal has been relocated following the Qingdao Port fraud scandal.
The fall in zinc stocks on the LME means stocks as a percentage of annual consumption have started to fall, which is a step in the right direction – that is if the metal has been consumed and is not just being held off warrant, which may well be the case.
Contact Details
29
Marketing Communication
London Sucden Financial Limited Plantation Place South 60 Great Tower Street London EC3R 5AZ Tel: +44 (0) 20 3207 5000 Fax: +44 (0) 20 3207 5010 Email: [email protected] www.sucdenfinancial.com
Hong Kong Sucden Financial (HK) Limited Unit 1001, 10/F. Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Tel: 852 3665 6000 Fax: 852 3665 6010 Email: [email protected] www.sucdenfinancial.hk