-Demand for commodities likely slow to recover
-DB not yet bullish on copper
-Outlook for alumina prices mixed
-Oil rally as the north warms up
-Steel capacity resistant
By Eva Brocklehurst
Final Demand
Weakness in global demand for commodities is not showing any sign of abating. China, as the primary source of demand growth, remains at the heart of the issue. ICBC Standard Bank does not expect a strong pick up in growth will eventuate.
While further stimulus via infrastructure investment may come about this year it is not expected to change the demand environment. On the other hand, ICBC does not expect demand to actually contract for basic materials, just that growth will be slower and inventory cycles longer.
The fact that the pace of the price response differs among commodities means there are opportunities. ICBC expects metals, with the lowest stock to consumption ratios and the steepest cost curves, will be the first to turn around.
On this basis, ICBC is most positive about copper, followed by zinc. At the other end of the scale are aluminium and palladium. Gold is in the middle.
Copper
Deutsche Bank believes it is too early to become bullish on copper. Major Chilean producer, Antofagasta's 2016 production guidance was around 75,000 tonnes less than the broker expected, albeit a rebound from 2015.
Deutsche Bank already accounts for 1mt in disruptions to copper supply. The broker cautiously factors in a global recovery in demand of 2.5% for 2016 versus 1.8% in 2015, still forecasting a surplus for the sixth year in a row.
Nevertheless, Deutsche Bank awaits further production cuts or a significant improvement in the industrial indicators in China before becoming more positive. The weak oil price has been a drag on the metals complex and, in the broker's view, the longer prices stay at US$30/bbl, the more the metals will price this in.
Alumina
The alumina price has slowly risen from a trough of US$197/tonne. Cuts to production in China have been large, Credit Suisse observes. Still, the broker believes it is too soon to be expecting a rally.
Rio Tinto ((RIO)) appears to be protected via long-term contracts but new participants are not considered so fortunate. The broker notes Australian Bauxite ((ABX)) has 40,000t sitting at port in Tasmania for its maiden shipment but cannot find a buyer.
Meanwhile, Platts reports the Chinese have vast quantities of cheap Malaysian material sitting at Chinese ports.
Morgan Stanley suspects prices for alumina have overshot on the downside, especially relative to the linkage rate with the LME aluminium price. The linkage fell as low as 13.2% in December last year after peaking at 19.8% in the September quarter.
The main driver of weaker alumina prices is the response by aluminium smelters, which have cut capacity more substantially than alumina refiners.
The broker considers the alumina/aluminium linkage rate is unsustainably low. If prices do not improve soon Morgan Stanley expects more widespread capacity cuts. China's export surge may also have slowed.
Morgan Stanley forecasts the spot alumina price to rise to US$230-240/t by mid year, implying a linkage rate to aluminium around 15%.
Oil
History suggests oil may rally. Morgans attributes this to the time of the year, as the northern hemisphere warms up and snow clears. Clearer roads means more drivers on them. The seasonal index of Brent rises to 97 (97% of the annual average price) in February from a seasonal low of 92 in January. It continues to rise, with a shallow dip in May, to an annual peak in July just under 108.
West Texas Intermediate is similar, except its peak is in June and its low is in December. The seasonal rise is caused by an increased demand by refiners for feedstock so they can build up stocks ahead of the increase in driving in the northern spring/summer.
After the punishment oil has received recently Morgans suspects this seasonal rally may provide some relief.
Steel
Production cuts to steel have not translated into permanent reductions to capacity. Macquarie believes this is the problem for steel margins globally and there is no easy fix. Global crude steel production fell 3.0% in 2015, falling in all countries besides India and the first annual decline since 2009. Production is now back at the level of December 2012.
Macquarie believes consumption fell more than 3.0% year on year and global capacity utilisation is now under 75%. This is too low for steel mills to have any pricing power, the broker maintains.
A key contributor to the declines in production, ex China, where run rates are back at August 2010 levels, is Southeast Asia, where Macquarie observes apparent steel consumption was down 15% in the December quarter. These trends suggest to the broker that the peak in steel usage globally has already passed.
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