Commodities | Feb 02 2012
– JP Morgan updates its metal price estimates
– Copper heading for a surplus
– Upside apparent in platinum
– Soft landing in Chinese property market appears likely
By Chris Shaw
Base metal pries have risen 10-15% in year-to-date terms so far in 2012, a price increase JP Morgan cautions is simply not sustainable given the near-term consumption outlook. Chinese imports of metals are likely to be modest though the March quarter and only pick up gradually in the June quarter of this year.
When combined with the lack of any other significant demand spark in the global economy, JP Morgan suggests there is limited scope for significant upside for industrial metal prices over the near to medium-term.
To reflect such an outlook JP Morgan has lowered its price forecasts for the industrial metals for both 2012 and 2013, though changes have been modest. This reflects the fact inventories of the metals are weak, cost pressures are mildly price supportive and prices need to be at levels to offer an incentive for new supply in the medium-term.
In terms of the price outlook, JP Morgan expects a period of sideways performance and then a slow increase in the industrial metals, while remaining more upbeat on the precious metal price outlook.
While copper has been one of the metals to enjoy a strong rally in the early weeks of this year, Goldman Sachs remains of the view 2012 will be a year of below trend growth in real copper consumption. When combined with the fact supply growth is likely to accelerate both this year and next, the copper market is forecast to move from a deficit this year to a moderate surplus in both 2013 and 2014. Such a view is in line with that of JP Morgan.
Looking back, Goldman Sachs estimates the copper market was in deficit of around 255,000 tonnes last year, though this wasn't enough to stop prices falling on investor risk aversion given the ongoing European debt crisis.
But stronger Chinese imports of the metal in the final stages of last year have seen the price of the metal rebound, with Goldman Sachs expecting in 2012 China will deliver similar real consumption growth of around 5.5%. This is a level similar to that seen in 2011 but is well down on the 13% growth achieved between 1998 and 2007.
This means copper mine supply growth will be important in setting prices for the metal, with Macquarie expecting 2012 will be the strongest year of growth in mine supply for the past eight years. Much of this will come from the Escondida and Grasberg mines, where industrial disputes impacted on output last year.
While many investors are looking closely at the risks to copper demand from China in particular, Macquarie expects over the course of the year this focus will swing to copper mine supply, especially given the recent history of lower grades and labour disputes impacting on output.
The other factor likely to impact on copper market sentiment according to Goldman Sachs is Chinese trade behaviour, as a month of higher imports will give the impression of strong consumption and vice versa. This is likely to cause prices to remain volatile over the course of the year.
The strong import data from China in December sets the stage for further price gains in copper in the first few quarters of this year, before the swing into a market surplus begins to weigh on prices. In forecast terms Goldman Sachs expects average LME cash prices of US380c per pound this year, falling to US340c per pound in 2013. This equates to around US$8,375 per tonne and US$7,490 per tonne respectively.
JP Morgan's copper price forecasts stand at US$8,594 per tonne for 2012 and US$8,625 per tonne in 2013, down from previous forecasts of US$8,750 and US$9,000 per tonne respectively.
In aluminium, JP Morgan sees China as the key from a demand perspective, especially given it was largely responsible for last year's build up in products and fabricated products in markets such as Europe and South America. The metal should be in surplus this year of around 500,000 tonnes, meaning LME stocks are unlikely to decline materially.
This sees price expectations lowered to US$2,319 per tonne in 2012 and US$2,488 per tonne in 2013, down 7% and 6% respectively from previous forecasts. Medium-term JP Morgan expects prices will trend higher in line with costs.
In nickel a more significant surplus is likely thanks to a surge in production, the good news being because nickel pig iron is such a large part of the cost curve the production costs involved should help put a floor under the conventional nickel market.
Overall, JP Morgan fails to find a reason to be overly positive on the nickel price outlook, which implies prices are likely to remain relatively range bound in the year ahead. Forecasts stand at US$19,313 per tonne this year and US$18,750 per tonne in 2013, down 9% and 18% from previous forecasts.
In contrast, tin is expected to be in deficit again this year, while JP Morgan expects prices will remain beholden to producer cartel behaviour. The offsetting factor is lacklustre demand growth relative to the other industrial metals, which is expected to prove enough to also keep tin prices in a relatively tight trading range.
JP Morgan's forecasts are for prices of US$23,625 per tonne this year and US$26,250 per tonne next year, these estimates being unchanged from the broker's previous update last October. For lead the large surpluses seen previously are expected to fade, though the market should remain in modest over-supply. Forecasts stand at US$2,250 per tonne and US$2,438 per tonne for 2012 and 2013, little changed from the broker's previous estimates.
Zinc inventory levels in 2012 are expected to reach a peak, though on a more positive note JP Morgan suggests the build in above ground inventory is slowing relative to the consumption base. Medium-term a lack of new supply should see the market move into large deficits by the middle of this decade, which is a positive for long-term incentive price estimates.
Prior to this JP Morgan is forecasting prices this year and next of US$2,113 per tonne and US$2,300 per tonne respectively, which are also little changed from last October.
In the precious metals, liquidity and currency debasement remain the key thematic drivers in the view of JP Morgan. On gold the broker remains bullish given the various factors driving the market at present remain bullish. These include central bank flows remaining price supportive, a stalling in scrap supply and still strong demand.
This should prove to be enough for gold to push through the US$1,800 per ounce level this year, JP Morgan's forecasts standing at US$1,844 per ounce for 2012 and US$1,831 per ounce for 2013.
While platinum prices also slumped in the final quarter of last year prices have, like many of the other metals, recovered strongly in recent weeks. The difference according to RBS is at current levels a number of platinum producers are likely to be cash negative at current prices.
As RBS points out, Thomson Reuters GFMS notes the average “all-in” cost for South African producers in 2011 was around US$1,600 per ounce. Cash costs are lower, which is allowing miners to continue operating despite the losses on an “all-in” basis.
Given where prices stand, RBS suggests the lack of profitability in the industry is likely to reduce investment in new mines. This will constrain future supply growth, so potentially leading to supply shortages that drive future prices higher.
For RBS this suggests there is still much upside on offer in platinum prices. Relative to current levels of around US$1,620 per ounce the broker is targeting US$1,800 per ounce by the final quarter of this year. Given this view, the suggestion is any dips should be used as buying opportunities.
A major contributor to commodity sentiment is the Chinese property sector, this given the importance of the sector in terms of metal usage and demand. RBS suggests concerns over the bursting of any bubble in the sector are likely to fade this year, particularly because national housing affordability again appears reasonable.
While tier-1 city prices remain elevated, RBS expects a breather as Beijing attempts to avoid any over-correction and resulting undesirable spill-over effect stemming from price levels that cannot be justified by local income levels.
This breather is likely to take the form of improved access to mortgage and development loans and would be part of a longer-term plan aimed at delivering a soft landing for tier-1 city property prices. RBS estimates it may take another three years to restore a more appropriate balance between income levels and house prices in tier-1 cities.