Commodities | May 29 2012
– NAB updates commodity price projections
– Short-term outlook for copper remains cautious
– Zinc to remain well supplied in coming months
– Silver prices may be near a bottom
By Chris Shaw
National Australia Bank's latest commodity market update notes base metal prices fell by 6% in April, leaving prices 23% lower than year ago levels. The falls reflect ongoing euro-zone concerns and mixed global economic data, along with increased market volatility. This results in limited investor demand.
The volatility is likely to continue for some time in NAB's view, given ongoing political uncertainties in Europe. But longer-term a soft landing for China and a strengthening US economic recovery should continue to prove supportive to commodity markets.
Across the industrial metals, supply fundamentals for copper remain tight in NAB's view and the market should stay in deficit for at least the next year or two. Longer-term supply and demand are expected to re-balance as copper mine production increases.
Low prices have prompted a scaling back of aluminium production in recent months, NAB noting at current price levels as much as 60% of global aluminium smelters are operating at a loss. More producers are likely to lower capacity in coming months, which implies a more sustainable outlook for supply and demand fundamentals.
Overall, NAB suggests while the outlook for global metals prices remains firm, Euro and Chinese-related concerns offers some downside risk in coming months. On the flip side high operating costs could limit the supply of some metals, so providing some resistance to further price falls.
Following a 7.7% rise in the NAB Base Metals Price Index in the March quarter the bank expects a 6.5% fall in the June quarter. For the full year the bank expects the index will rise by 2.25%, with fundamentals solid enough to sustain elevated prices relative to history.
In the oil market the return to risk-off mode for investors has seen prices fall, with bearish sentiment further fuelled by the unwinding of Iran's risk premium in the bank's view. On the back of recent price moves, NAB has lowered its oil price estimates, though the expectation remains for prices to lift from current levels given relatively tight fundamentals.
Supply-side risks stem from the fact much of the recent lift in global production has come from OPEC, where spare capacity has fallen to only 2.3 million barrels per day. This implies any large non-OPEC outages could have important implications for prices.
The bank's view is prices are a little below what is justified by fundamentals at present, this despite short-term risks skewed to the downside given the current European uncertainty. At present, NAB expects Brent crude prices will end the year around the US$114 per barrel level.
In quarterly average terms NAB is forecasting Brent prices of US$115 per barrel in both June and September and US$114 per barrel in December and through the June quarter of next year. For West Texas Intermediate forecasts stand at US$100 per barrel in June, US$101 in September and US$104 per barrel in December, rising to US$110 per barrel in the June quarter of 2013.
In the natural gas market NAB suggests US prices have bottomed out due to record inventory levels, while prices in the Asia Pacific Basin held up reasonably thanks to high oil prices and strong Japanese import demand.
A sharp increase in US shale production is not likely to impact on Australian LNG projects in coming years, this given most of these committed projects are under long-term contracts. Shorter-term the bank's expectation of a strengthening in oil prices should also support natural gas prices given the linkage between the two markets and the expectation of strong Japanese demand given all of that country's nuclear capacity is now offline.
Prices may remain depressed for a few more months, NAB not expecting prices will increase above US$3/mmbtu until late this year.
Looking at copper more closely, Commonwealth Bank notes the latest International Copper Study Group (ICSG) report indicates copper demand exceeded supply by 81,000 tonnes in February. For CBA this report highlights the metal's ongoing supply concerns, a point reiterated by Codelco announcing a 10% year-on-year fall in copper production in 1Q12.
The cuts to Condelco's numbers reflects declining ore grades, which is a major factor in terms of copper's supply growth issues. A further positive for copper prices according to CBA is news China's state council will continue to fine tune policy to achieve growth targets. The implication is a further easing in monetary policy is on the cards, given HSBC's flash manufacturing PMI for May fell to 48.7 from 49.3 previously.
ANZ notes open interest in Chinese copper futures have risen to 1.5 million tonnes in recent weeks, this coming as something of a surprise given metal stockpiles of 170,000 tonnes in SHFE warehouses and a further 650,000 tonnes in Shanghai bonded stores.
In ANZ's view the data suggest while elevated stockpiles pose something of a risk, this risk may not be as great as first impressions would suggest given bonded stocks appear to be tightly held. The bank suggests a cautious near-term approach to copper is justified given poor market sentiment, but medium-term re-stocking could be robust given stockpiles at consumers are at low levels.
Generally Deutsche Bank is also cautious on industrial metals given heightened global risk aversion levels. To reflect this, the broker has cut its Chinese GDP growth forecast for 2012 by 0.3 percentage points to 8.2%.
For zinc specifically, Deutsche notes prices have fallen close to marginal production in recent weeks, which implies weak refined production growth over the summer months. The latest figures reflect this, as Deutsche estimates refined zinc production fell by 6.3% in year-on-year terms and by 11.5% in month-on-month terms in April.
But if Chinese GDP growth can recover in the second half of the year as policy measures are eased further, the broker sees potential for zinc consumption to be supported. Demand in the second half of this year could be boosted by government policies to provide subsidies for household appliances and automobile sectors in the view of Deutsche.
Looking at Chinese trade data, Barclays Capital notes April zinc concentrate imports declined to their lowest level in more than four years. Barclays attributes this to lower demand from smelters, which in part is a reflection of early maintenance decisions given soft demand and low treatment charges in recent weeks.
As Barclays notes, lower treatment charges have put Chinese smelting margins under pressure, so reducing the incentive to process all available concentrate. The weakness in refined production has impacted on demand for imported concentrate, which Barclays estimates is down by 31% so far this year in year-on-year terms.
Given the zinc market currently shows greater mine supply than metal demand, Barclays suggests whether this concentrate is turned into metal will depend on smelter profitability. If miners will hold concentrate stocks then it will limit the size of any market surplus.
If this is not the case, treatment charges will rise and smelters will increase production to drive a correction in the market. But until global mine production falls short of metal demand for long enough to re-balance the market, zinc will remain well supplied in the view of Barclays.
Looking at the Chinese silver market, Standard Bank notes net imports of the metal fell to 139 million tonnes in April, down from 179 million tonnes in March. This trend is something of a positive in the bank's view, as higher imports would only add to domestic stockpiles.
Stockpiles remain too high, so even a lower level of imports may put downward pressure on silver prices over the next few months before support becomes more evident closer to the final quarter of 2012. Overall, Standard Bank expects China's fabrication demand for silver will grow by 7.5% this year, against 7% growth in mine supply.
With the silver price having dropped to around the US$29 per ounce level Standard Bank's view is most of the price decline in the metal has now taken place, though Standard Bank also believes it remains too early to turn more bullish.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
