Commodities | Apr 30 2014
-Nickel price surges
-Copper lags
-Platinum price resistance
By Eva Brocklehurst
Nickel prices are up 25% for 2014 so far and, in Macquarie's words, "you ain't seen nothing yet". Yes, the price is probably running ahead of fundamentals but as Macquarie observes, that's how markets work. First signs are underway of a decline in London Metal Exchange (LME) stocks and Chinese stocks are also likely to be falling. The market is moving from a very large surplus to a deficit. Demand, particularly in Europe and the US, has surged this year and as Chinese nickel pig iron producers start to close in coming months, the deficit is expected to widen. Open interest on the LME has risen, and Macquarie notes large speculative long positions are in play. While there's potential for a price correction, the trend is now seen as firmly upward.
The root cause for the surge in nickel prices is the Indonesian ban on nickel ore exports. Exports from Indonesia were over 670,000t last year, of which 620,000t went to China. Around 450,000t was used and replacing this quantity is impossible, according to Macquarie. De-stocking of ore over the next two years will help cushion the fall in Chinese pig iron production but Macquarie expects the falls in 2015 and 2016 will be large.
Morgan Stanley concurs, expecting the ban will result in a structural shift in supply-side dynamics. Both brokers consider the bans are permanent. Morgan Stanley has revised down Indonesia's share of global nickel output to 6% from 30%. The broker does not think China's nickel pig iron production will be affected until 2015, when stocks of nickel are drawn down. Lower nickel pig iron output will have a significant impact on the global refined metal market balance and, Morgan Stanley observes, stainless steel output growth looks healthy in the US, Japan and Europe with promising demand from aerospace and automotive applications.
In contrast, recent price weakness in copper offers a good opportunity for those investors seeking value, in Morgan Stanley's opinion. The analysts are not forecasting a return to 2011 highs but believe global supply/demand balances will stay tight. China's refined copper output is expected to increase by 17% this year, but this is designed to meet demand from a structural change in the semi-fabricated industry, in which significant new wire rod and tube capacity has been commissioned to ensure adequate domestic supply. Absolute copper inventory is high in China but not so much that it can't be absorbed, in Morgan Stanley's view. The analysts have been surprised that copper prices have been left behind by the base metals complex this year, despite more compelling evidence of a recovery in China. Physical availability in that country is tightening. As copper's underperformance is a result of investor concerns about Chinese growth, the analysts believe the metal could be the prime beneficiary if policy makers respond to worsening macro economic data as they are expected to do.
Macquarie has surveyed copper in China and also believes supply is tightening. There's been improvement in the demand for the metal from end users such as power, construction, white goods and transportation entities and this should strengthen in the next few months. Countering this, challenging financing conditions are still pressuring small and medium-sized fabricators and, while the low level of inventories should make smaller fabricators purchase more material, the lack of credit means they have little desire to re-stock. The respondents to Macquarie's survey have become positive in April and the copper smelters are the most bullish. The current tightness of supply in the Chinese physical market is helping boost sentiment.
Deutsche Bank prefers the platinum group metals over gold, with palladium having the most attractive fundamentals. The analysts note the price reaction to a host of positive catalysts for the group has been quite muted. This serves to highlight how well supplied the market is. While the strikes in South Africa will erode stocks of the metals held above ground, the market needs more years of industrial deficit to drive a significant price reaction. At this stage in 2014 there are more upside risks, the added extra being the crisis in Ukraine. Vehicle sale in Europe, US and China have all been robust and in line with forecasts. The South African supply disruptions to both platinum and palladium are expected to put the markets into a much deeper deficit than had been forecast at the beginning of the year. It surprises Deutsche Bank that the PGM group has not registered stronger gains, particularly platinum, which is up 2.9% versus gold at 6.9% and palladium at 11.8%.
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