Industrial Metals Monitor

Industrial Metals Monitor
Base metals prices numb for now
Group Economics
Casper Burgering
[email protected]
February 2015
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Base metals prices driven down by lower oil prices, worries over demand and Greek crisis...
… given the fundamental stance and outlook, prices should improve in 2015 from current levels
… while global steel prices will remain under downward pressure from global overcapacity
Figure 1: Growth prospects 2015-2016
Source: Thomson Reuters Datastream, ABN AMRO
Figure 2: Ferrous metal prices (index)
Source: Thomson Reuters Datastream
Figure 3: Base metals prices (index)
Growth variations: strong US, modest EU, weakening China
We are confident that the global economy will perform well this year. We
expect the slowdown of the Chinese economy to remain gradual in 2015-16.
Although weak Chinese economic data confirms that the Chinese economy
is softening, special and seasonal factors – due to the upcoming Chinese
New Year – have to be taken into account. We think that authorities will take
appropriate measure if needed in order to prevent a stronger slowdown. In
the meantime, sentiment in Europe and the US is improving. The fall in oil
prices, the weaker euro and lower banking tarriffs bode well for furture
growth. In addition, the upcoming ECB’s QE programme starting in March
will improve financial conditions further. Therefore, our economic growth
outlook for this year has been revised upwards. Our view on the US economy remains positive going forward and is expected to grow by 3.8% in 2015.
Low ferrous demand vs. high supply equals lower prices
The global steel market is still in a state of depression. 2015 is only 2 months
old and prices across the globe dropped already significantly. In China, HRC
steel price dropped strongest by almost 18% until now, while in Europe steel
prices softened by ‘only’ 4% on average. In the US, CIS and Latin America
HRC prices also declined at a rate of 10-12% from 1 January until now. Many
mills were forced to lower their prices due to falling raw material prices, such
as iron ore and coking coal. Given the weak sentiment in steel markets
globally and the expectation of even softer prices in ferrous markets, fresh
purchases by steel end users are scarce. Over the last couple of months, iron
ore price softened on weak demand and abundant supply. The recent fall in
costs for miners – such as falling oil price and lower freight rates – also
added to the softening this year. Good news for individual companies, but
bad news for the sector. More high cost producers were able to keep on
producing and maintain competitiveness even at these low prices. However,
in this environment capacity cuts are postponed and oversupply lingers on.
Base metals prices driven down on non-fundamentals
Base metals prices have been struggling coming into 2015. Prices for copper
dropped by 10%, while nickel and zinc lost between 4-6%. Aluminium prices
decreased in the range of 1-2%. Prices were dragged down by weakening oil
prices and the strengthening of the US dollar (USD). Lower oil prices reduces
the cost base and ultimately leads to lower prices for energy intensive
markets. The USD also played its part. Because base metals are traded in
USD on the world market, a stronger dollar depresses demand as this
translates into higher costs in the buyer’s currency. At this stage, good macro
numbers from the global economy (especially from the US and Europe) are
not kicking in on general sentiment in base metal markets. China’ s relative
weak economic performance and thus slower demand for industrial metals is
the main concern for stakeholders.
Source: Thomson Reuters Datastream
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Industrial Metals Monitor - Base metals prices numb for now - February 2015
Figure 4: China steel trade and oversupply
Chinese steel oversupply pushed into international markets
Source: IISI, Thomson Reuters Datastream
The health of the steel sector has worsened in most regions. The drivers for
the weak conditions differ, however, per region. In Latin America, steel
purchases are still relatively weak, due to declining domestic end user
demand (especially automotive demand). Steel from Latin American mills is
therefore pushed externally, in some instances to the US. As a result, steel
mills in the US have to compete with those external (mostly low cost)
suppliers, who also benefit from the strength of the USD. In China, seasonal
factors play their part. The upcoming February New Year holiday is always a
trigger for easing steel buying activity and decreasing steel output. In any
case, oversupply in China is to stay this year. The excess steel will find its
way externally and deteriorates conditions in (already oversupplied)
international markets. For this year we think that global steel prices will
remain under downward pressure from global overcapacity.
Figure 5: Chinese iron ore import and origin
Slower demand growth for steelmaking raw materials
Source: Thomson Reuters Datastream
Figure 6: China Aluminium & Copper trade data
Source: Thomson Reuters Datastream
Figure 7: Nickel and Zinc balance until 2016
Conditions have changed in a relative short period of time for steel making
raw materials markets, both positively and negatively. On the positive side,
lower oil prices have reduced costs structures for many miners, making them
competitive again, even in the current low price environment. On the other
hand, the slowdown of the Chinese economy has reduced steel demand
growth projections and this will also affect demand for steel making raw
materials. Import demand from China weakened unexpectedly in January
and with the upcoming spring festival in China, import buying activity will
again stay weak. Appetite for steelmaking raw materials by Chinese steel
mills is low and we have to be patient for a revival in buying activity after the
spring festival. But even when demand picks up by then, persistant
oversupply will continue to depress the market. And therefore we expect
prices for both iron ore and coking coal to stay flat until the end of February.
China trade data on aluminium and copper to watch closely
The burden of overcapacity also clouds the aluminium market. Especially
conditions in China must be monitored closely this year. Exports of aluminium
from China already increased significantly during 2014 and a further increase
of aluminium exports during 2015, could depress global market conditions
even more. Excess material will be pushed into international markets against
highly competitive prices. In any case, the stage is set: low energy costs and
sticky aluminium prices are an incentive for Chinese high cost producers to
keep producing. Governmental regulations could bring some relieve,
however, at the moment new capacity expansions will be curbed, start-ups of
Chinese facilities outside China are encouraged and mergers between power
plants and smelters are favoured. In the copper market, volatility is mostly
determined by changes in non-fundamentals. Sentiment will be strongly
influenced by economic woes around Greece, developments in Ukraine and
the direction of the oil price. We think oversupply (if any!) is low compared to
demand levels in 2015. For this year we keep our eye on Chinese import
demand levels after the spring festival. In the meantime, we expect price
support due to positive macro economic developments globally.
Fundamentally no reason for lower nickel and zinc prices
Source: Metal Bulletin
Propects for both nickel and zinc markets are positive this year and
especially for 2016. The supply-side will be the main driver in both markets.
LME inventories for nickel seem te be peaking, while zinc stocks have
already decreased strongly. In China, stocks of Nickel Pig Iron (NPI) are
depleting and could signal renewed buying interest going forward. Also
relative low availability of material, should be an incentive for prices. In zinc,
fundamentals are also set to tighten with the closure of a big mine in Australia
in H2 this year. While the current stock levels at the LME and other stockists
could provide some relieve at first, lower availability will be translated into
prices sooner or later.
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Industrial Metals Monitor - Base metals prices numb for now - February 2015
ABN AMRO Group Economics
Casper Burgering
Senior sector economist – Manufacturing Sector & Industrial Metals
Phone: +31 20 383 26 93
[email protected]
All publications of ABN AMRO on macro-economics and sector developments can be found on: insights.abnamro.nl/en. Follow
Group Economics on Twitter: https://twitter.com/sectoreconomen
Disclaimer
Last editing of this publication on 19 February 2015.
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