Commodities | May 03 2012
– CESCO conference highlights mixed views on copper
– Alumina and aluminium prices expected to remain under pressure
– Few short-term catalysts for lead and zinc
– Thermal coal market outlook unclear
By Chris Shaw
Following the recent CESCO conference, Macquarie has a structurally more comfortable view on the copper market for the remainder of 2012 which reflects greater confidence in Chinese demand and more cautious expectations for mine supply growth.
In Macquarie's view the copper stock build in China has run its course, meaning refined copper inventory should decline over the next quarter. While coming months could deliver some potentially negative news flow and so limit price upside, the broker suggests there is clear evidence of an improvement in the Chinese economy and Chinese copper demand from the start of the second quarter.
This pick up should reduce inventory overhang in the next month or two, thus adding to the likelihood China increases copper purchases again in the second half of this year.
Barclays has also updated its conclusions from the CESCO conference, starting with the expectation the near-term fundamental outlook is for soft Chinese demand. This implies lower levels of imports into that market, which presents some downside risk to prices in the June quarter. Supporting this is the fact Chinese spot buying is almost non-existent at present.
Helping offset this is stronger demand from the US and Europe and increased spot sales to those regions. On the supply side, expectations continue to be revised lower given ongoing issues at a number of mines while capital costs at copper projects continue to increase.
Deutsche Bank's view was copper market sentiment at the conference was mixed and industry participants showed little conviction either way in terms of future price prospects. Deutsche notes the market remains broadly comfortable with respect to the sustainability of Chinese demand, while a current LME backwardation squeeze is expected to last until July.
In the view of Deutsche the market is likely to see solid cuts to supply expectations for 2012 from Chile, which would take supply-demand balances more into deficit. This trend could be extended into next year according to the broker, which would make a potential market surplus in 2013 less assured.
Post the conference, Deutsche remains mildly constructive on copper for the remainder of 2012, even allowing for some modest downward price pressure in coming weeks. Deutsche forecasts an average copper price for 2012 of US$8,600 per tonne.
In the view of Goldman Sachs there were four key themes to emerge from the CESCO conference, these relating to copper consumption prospects, China's inventories of the metal, supply disruptions and the concentrates market.
With respect to consumption, Goldman Sachs notes industry feedback suggests copper consumption this year will grow at sub-trend rates, with Chinese growth of around 4-5%. The broker is a little more positive, forecasting 5.2% consumption growth in China along with gradually improving off-take in the US.
The recent build in Chinese copper inventories is no surprise in the view of Goldman Sachs, as it follows high import volumes in the final quarter of last year and first quarter of this year. This inventory has created a short-term market imbalance as it has tightened Western physical copper markets, something which is expected to result in some re-exports of copper from China.
Goldman Sachs continues to expect China's net copper imports will fall significantly in the June quarter, which is likely to exert some downward pressure on prices in coming weeks. Import volumes should then climb again in the second half of this year.
Production disruptions have continued into 2012 but as these to date have been largely in line with expectations. Goldman Sachs doesn't see a need at present to adjust supply expectations. Falling grades continue to tighten the concentrates market but mine production growth should provide some relief for smelters in the broker's view.
In terms of price forecasts, Goldman Sachs expects average prices of US$8,378 per tonne this year, US$7,496 per tonne in 2013 and US$7,606 per tonne in 2014.
Still on base metals, Commonwealth Bank notes cheap thermal coal in China's Xinjiang province continues to underpin the migration of China's aluminium capacity westwards and down the cost curve. To reflect this CBA has lowered its aluminium price expectations by 1-17% through FY15, while the bank's real long-run price forecast has been cut by 8% to US112c per pound.
There are also changes to the bank's alumina price expectations, as China is considered likely to arbitrage this margin given it is now roughly self-sufficient in alumina. Forecasts have been reduced by 1-15% through FY15.
One key to the market will be Indonesia, as Commonwealth Bank suggests China is worried about potential Indonesian bauxite export bans, causing a stockpiling of bauxite and a search for new sources of supply. Bauxite producers in China have also ramped up production. If the proposed Indonesian bans take effect, the expectation is China's bauxite imports will grow more slowly and be replaced with Indonesian alumina imports.
The International Lead and Zinc Study Group's latest forecasts imply surpluses for both metals this year that are larger than previously expected. Macquarie notes the update factors in recent mixed data in terms of zinc demand and ongoing strength in the supply side of the market. Medium to longer-term Macquarie continues to see a potentially promising zinc market outlook given expected mine closures and declines, but short-term there appears little price upside.
The lead market outlook is similar, with mixed demand side data and signs of rising production in recent months. Lead continues to look better balanced than zinc at present and continues to be less reliant on warehousing and financing activities to shield prices and premiums from fundamental downward pressures in Macquarie's view.
Turning to the coal market, Morgan Stanley notes the met coal market has tightened given recovering global steel production and ongoing supply disruptions. Exports from major producers such as Australia, the US, Canada and China were 20% lower in March than last December.
Morgan Stanley expects this trend should continue as labour disruptions are expected to have an ongoing impact on the supply side of the market. This should support prices, the broker noting met coal prices have increased to US$214 per tonne from US$200 per tonne in mid-March.
At the same time thermal coal prices remain under pressure as weakness in the US pushes excess tonnes into the export market. The price weakness has seen some opportunistic buying from the Chinese and Morgan Stanley sees this as providing an outlook for some some surplus tonnes.
In the view of Barclays Capital this additional Chinese buying is unlikely to arrest the drop in coal prices just yet, as it is partly explained by an arbitrage window for most imported coals. As well, Barclays notes there are signs of some downside for Chinese domestic thermal coal prices given declining freight rates and a tick-up in domestic stocks.
Looking at the thermal coal market in general, Macquarie notes while price indices have fallen sharply in recent weeks other key pricing points have been less volatile. Chinese prices have remained relatively steady, while Indian demand has also been solid thanks to a weaker currency. For Macquarie, this suggests limited downside risk to prices from current levels.
Citi is less sure, pointing out the combination of a still fragile macro environment and a glut of US and Colombian supply hitting the market implies the downward trend is far from over. Given Chinese and Indian buyers appear reluctant to chase the market at present and with Chinese data indicating April power demand will be weak, Citi sees cope for coal prices to remain under pressure in coming weeks.
