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Updated Base Metals Price ForecastSlower start to 2012 before prices regain tractionCommodities Research, 7 December 2011 Bombed out aluminium prices to prevail for a while longer before supply cuts improve balance Copper prices expected to average above USD 8,000/tonne amid continued supply deficit Nickel market continues to struggle with oversupply, but supply risks remain to the downsideTable 1. New base metals price forecast to levels around USD 2,000-2,100 per tonne (ChartUSD/tonne 2011E 2012E 2013E 1). In the current market, aluminium producers areAluminium 2,400 2,375 2,500 feeling the pinch from poor prices and rising costs,Copper 8,850 8,250 8,500 which paves the way for production cuts. Accord-Nickel 22,800 20,000 21,000Source: Nordea Markets ing to industry consultants Harbor Intelligence and Brook Hunt, marginal 1 cash output costs in the aluminium industry are currently estimated betweenTable 2. Old forecast (31 August 2011) USD/tonne 2011E 2012E 2013E USD 2,400-2,500 per tonne. Average cash costs are Aluminium 2,460 2,500 2,600 estimated at around USD 1,950 per tonne for 2011. Copper 9,200 8,500 8,500 China, the largest producer and consumer of alu- Nickel 23,600 21,000 21,000 minium, is among the highest cost producers withSource: Nordea Markets average cash costs currently standing at USD 2,670 per tonne according to Harbor Intelligence. Domes-Our updated economic forecasts for global GDP tic aluminium prices in China are also significantlygrowth of 3.2% (from 3.3%) in 2012E and 3.7% higher than LME prices, but roughly 40% of the(from 3.8%) in 2013E entail a mild recession in the industry is losing money on a cash cost basis, nev-Euro area but with limited spill-over effects to the ertheless.global economy, which will grow slightly belowtrend next year. Our forecast for Chinese GDP Chart 1. Aluminium prices and exchangegrowth is left unchanged at 8.5% and 8.1% for inventories2012E and 2013E, respectively. The first half of 6 Primary aluminium 3,500 mn tonnes USD/tonne2012 is expected to be slightly weaker than antici- 5pated in September and our base metals price fore- 3,000casts have been adjusted to reflect both this sub- 4dued growth outlook and supply-side developments 2,500since then (see tables 1 and 2 above). 3 2,000 2Aluminium prices to rebound from 1,500depressed levels 1The slowdown in economic growth this year has 0 1,000resulted in a worsening of expected fundamentals in Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11the aluminium sector through lower expected future LME inventories SHFE inventories LME Cash price (rhs)economic and thus aluminium demand growth. The Source: Bloomberg, Nordea Marketsprice of aluminium at the London Metals Exchangehas tumbled 24% from its recent peak in April 2011 1 Marginal cash costs are defined as the cash costs of producers at the 90th percentile on the supply curve.1
balanced aluminium market for the next couple of years, with risks to the outlook largely balanced.Robust demand growth to be driven by China Current aluminium prices are considered too lowGlobal end user aluminium demand has stalled, but compared to current operating costs and to our ex-demand for primary aluminium has remained firm. pectations for the global operating rate, whichThe exception is in Europe where physical premi- should remain in the 85-87% range. Prices areums have started to come down from elevated lev- therefore expected to average higher than currentels. We have lowered our aluminium demand forward prices over the next two years. We pencilgrowth forecast for 2012E to 5.7% (7.7%) but leave in average prices of USD 2,375 (USD 2,500) perour 2013E growth forecast unchanged at 6.5%. The tonne and USD 2,500 (USD 2,600) per tonne fordecent demand outlook is underpinned by robust 2012E and 2013E, respectively.demand growth from China of around 10-11%.Demand is expected to be boosted by aluminium Chart 2. Aluminium forecast versus marketprice competitiveness and penetration in the trans- USD/tonne LME Primary Aluminium probability range Based on implied volatilities in the options market 5,000portation sector. Growing urbanisation, income and 4,500market share in automotive, aerospace, electrical, 4,000electronics and solar energy support robust demand 3,500growth in the coming years, albeit at a slower pace 3,000 2,500than previously estimated. 2,500 2,375 2,000Supply under pressure by poor profitability 1,500 1,000Global aluminium output has come under intense 500pressure from poor prices and sticky production 0costs. However, historically high physical premi- Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13ums paid on top of LME prices provide some offset 90% Confidence 95% Confidence LME price Forward market Nordea Forecastfor producers. Output fell to a 6-month low in Oc- Source: Bloomberg, Nordea Marketstober according to official figures from the Interna-tional Aluminium Institute (IAI) as production in Copper prices to reflect continued deficitChina decreased sharply. The pipeline for capacity Copper prices peaked in early February this year atexpansions outside China looks relatively dry and is prices above USD 10,000 per tonne as the funda-heavily dependent on expansions in India where mental outlook pointed to an increasing supplyoutput has disappointed already. Chinese planned deficit. However, lack of seasonal restocking byexpansions are decent, but could be hurt by poor Chinese buyers during the spring, who insteadprofitability and power-related constraints amid turned to drawing on inventories amid historicallyChina’s recurring power shortages. According to high prices, tight credit conditions and a closed “ar-China Electricity Council, the current power short- bitrage window” to import LME based copper, re-age could last until next spring, but may be allevi- sulted in prices trending lower. Meanwhile, globalated by the recently announced hike in power prices economic growth slowed, reducing actual and ex-and cap on coal prices from January. This neverthe- pected copper demand from China and the rest ofless puts upwards pressure on Chinese production the world. LME copper prices tumbled 33% fromcosts by an estimated USD 60 per tonne for smelt- the February peak to the recent low in early Octo-ers without self-generated power. Although current ber (USD 6,785 per tonne), but currently tradeprices incentivise production cuts, especially in around USD 7,800-7,900 per tonne (Chart 3).China, we expect that prices must remain at currentdepressed levels for a while before we see cuts. The industry marginal (90th percentile) cash cost isShutting down and restarting production is costly, estimated by consultants Brook Hunt at USD 4,000high premiums provide offset, costs can come per tonne while the most expensive mine operationsdown further and history has shown that prices require almost USD 8,000 per tonne. Prices abovemust trade at current levels on the cost curve (50th this “threshold” should therefore only be justified inpercentile) for a sustained period before cuts are a market characterised by deficit, ie refined supplymade. falling short of refined usage resulting in stock draws. According to the latest data from the Inter-Bottom line: Capacity is expected to expand at a national Copper Study Group (ICSG), the marketslightly higher pace than demand next year, with was in a production deficit of 161k tonnes (1%) forthe opposite being true for 2013E. We see a largely2
the first eight months of 2011 versus a deficit of per consumption as the power and construction sec-339k tonnes for the same period of 2010. World tors constitute more than half of total consumption.demand grew by 1% during this period, while mine We expect Chinese consumption to grow at aroundproduction continued to underperform relative to 7% p.a. the coming two years and expect consump-capacity with production during the first eight tion per capita to reach levels above those of Eu-months of 2011 practically unchanged from last rope and North America as early as 2013E. Histori-year. Production at three of the four largest produc- cally, world real GDP growth of 1% corresponds toers (Chile, Peru and the United States) fell by an copper consumption growth of 1.2% (see Nordicaggregated 4% despite record high copper prices Metals & Mining, 5 October 2011, Nordea Equity(Chart 4). Research). We expect demand to converge to this historical relationship after a break-out on the up-Chart 3. Copper prices and exchange in- side in 2010 and to the downside in 2011E, imply-ventories ing around 4% y/y global demand growth in both900 Copper 11,000 2012E and 2013E. 000 tonnes USD/tonne800 10,000700 9,000 Supply expansions look comfortable in theory600 8,000 Repeated labour strikes, adverse weather condi-500 7,000 tions, operational problems and lower ore head400 6,000 grades have become the norm rather than the ex-300 5,000 ception for copper supply in recent years. 2011 has200 4,000 been no exception to this “rule” and the ISCG ex- pects a production deficit of about 200k tonnes for100 3,000 2011. The project pipeline looks, on paper, rela- 0 2,000 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 tively comfortable, with expansions at existing LME inventories SHFE inventories mines (brownfield) and new plants (greenfield) Comex inventories LME Cash price (rhs)Source: Bloomberg, Nordea Markets planned to come on stream the coming few years. Copper mine production is highly concentratedChart 4. Chilean copper ore and concen- given that Americas (mainly Chile, Peru and the US) and Asia constitute roughly 75% of global out-trates production continues to disappoint put. Of the 10 largest copper mines in the world, six 6.5 Chile Copper ore and concentrates production are Chilean. Judging by production plans for the 6.0 Chilean mines alone, they would manage to meetmn tonnes, annualised the expected demand increase by themselves. How- 5.5 ever, copper output tends to fall short of guidance levels and we expect history to repeat itself. 5.0 Bottom line: ICSG expects an increase in refined 4.5 copper production of 3.4% in 2012E compared to the producers’ expansion plans of roughly 9% 4.0 growth (1.5m tonnes). We share the view of the Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ICSG and expect a production deficit to emerge 5y range 2011 2010 5 year avg also in 2012E for a third year in a row. We expect aSource: Bloomberg, World Bureau of Metals Statistics, Nordea Mar- nearly balanced market in 2013E. Due to a slightlykets weaker economic development in the start of 2012, we have lowered our average price forecast forDemand to pick up from low 2011-levels 2012E from USD 8,500 per tonne to USD 8,250 perWorld copper refined usage is expected to grow by tonne, but keep our forecast for 2013E at USD1.5-2% y/y this year after 2010’s strong 7.1% y/y 8,500 per tonne.growth. China will continue to be the driver of de-mand growth in the coming years as urbanisationand industrialisation continue. China will have toimport roughly one-fourth of its copper needs,meaning that Chinese stocking cycles will remain akey price driver for the foreseeable future. We alsoexpect China’s current 5-year plan to support cop-3
Chart 5. Copper forecast versus market Slower demand growth in 2012E, but strongerUSD/tonne LME Copper probability range Based on implied volatilities in the options market 2013E20,000 Slower economic growth and industrial production18,000 in the first half of 2012 than previously forecast16,00014,000 will most likely result in lower nickel demand12,000 growth next year. INSG’s late September forecast10,000 8,250 8,500 of 6% demand growth for both 2011E and 2012E is 8,000 considered too optimistic, in our view. We factor in 6,000 demand growth of around 5% this year, falling to 4,000 3% next year before climbing to around 9% in 2,000 2013E. 0 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 90% Confidence Forward market 95% Confidence Nordea Forecast LME price Chart 6. Nickel prices and exchange inven-Source: Bloomberg, Nordea Markets tories 180 Nickel 35,000 000 tonnes USD/tonneNickel prices threatened by supply glut 160 30,000Nickel has been the underperformer among base 140 25,000metals this year on expectations of steady supply 120additions this year and in 2012. Nickel prices 100 20,000peaked in February above USD 29,000 per tonne, 80 15,000but currently trades around USD 18,000 per tonne 60(Chart 6). As stainless steel production accounts for 10,000 40roughly two-thirds of global nickel consumption, 5,000 20the slowdown in stainless steel production in the 0 0second half of the year has put pressure on refined Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11nickel demand. At the same time, China’s nickel LME inventories LME Cash price (rhs)pig iron (NPI) industry, an alternative nickel feed- Source: Bloomberg, Nordea Marketsstock for stainless steel production, churned outrecord-high amounts. Chinese net imports of re- Supply pipeline impressive on paperfined nickel have therefore remained low this year, On paper, the expected nickel supply pipeline lookswhile imports of nickel ore and concentrates to feed overwhelming, but disruptions and delays havethe NPI production have skyrocketed. Recently, been a constant feature for the industry. Productionhowever, these producers are getting squeezed out growth is partly dependent on highly complex pro-of the market as nickel prices have fallen below the jects, which makes delays likely, in our view. Thecost of NPI production, which is estimated by con- International Nickel Study Group (INSG) latest es-sultants Brook Hunt in the range of USD 19,000- timates point to a supply increase of around 9% in20,000 per tonne. Moreover, 90% of global nickel 2012E, which is roughly in line with our own esti-supply operates cash positively at price levels mates. However, this figure does not include anyaround USD 15,000 per tonne. general adjustment factor for possible disruptions, implying that risks to supply are skewed to theDespite the sluggish price development, record- downside.high refined nickel production in September andNPI ramp-up in China, visible exchange inventories Bottom line: Coupled with our demand expecta-of refined nickel have declined steadily by a total of tion, the strong supply pipeline translates into an33% since the start of the year (Chart 6). We expect expected supply surplus the coming two years. Wethat some of the excess material has been shipped therefore expect prices to continue to be determinedinto China and may be stored away in off-market by the costs of the marginal producers. Further-bonded warehouses. Nevertheless, LME nickel more, we pencil in a slightly lower price assump-stocks will begin 2012 at the lowest starting level in tion for 2012E of USD 20,000 per tonne (USDthree years. 21,000 per tonne) due to weaker demand expecta- tions for the start of the year. We nevertheless keep our previous forecast of USD 21,000 per tonne for 2013E.4
Chart 7. Nickel forecast versus market and business and consumer confidence has eroded,USD/tonne LME Nickel probability range Based on implied volatilities in the options market which could pave the way for an upside surprise to economic growth. There is also probably pent-up50,000 metals demand for instance in the United States40,000 where construction activity remains at depressed levels. Stronger monetary and fiscal policy easing30,000 by China would most likely boost metals demand20,000 20,000 21,000 growth from the world’s largest consumer. How- ever, implementation of substantial easing meas-10,000 ures is most likely to be reactive rather than pre- emptive, in our view, if growth should falter more 0 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 than currently anticipated. 90% Confidence 95% Confidence LME price Forward market Nordea ForecastSource: Bloomberg, Nordea MarketsRisks to our outlook Bjørnar TonhaugenForecasting metals prices in the current environ- firstname.lastname@example.org +47 2248 7959ment is very difficult as the macroeconomic uncer-tainty is perceived to be heightened. Industrial met-als demand is highly cyclical and sensitive tochanges in economic growth prospects. The sensi-tivity of demand to GDP growth is highest fornickel and aluminium, and lowest for copper. Nev-ertheless, small changes to the economic outlookcould have relatively large implications for ex-pected metals demand and thereby the expectedmarket balance. Our forecast described above musttherefore be viewed as our “best estimate” corre-sponding to our baseline forecasts for global eco-nomic growth.The largest downside risks to our outlook are pre-dominantly demand-side related. The debt crisis inthe Euro-zone, if not properly contained, may havelarge spill-over effects to the global economymainly through the financial sector. A so-called“hard landing” in the Chinese economy, for exam-ple instigated by a burst of the property and credit“bubble” is another known risk. Chinese residentialfloor space for sale has mushroomed lately as prop-erty demand has fallen markedly. Anecdotal evi-dence points to a liquidity crunch among propertydevelopers. If property prices fall sharply, privateconstruction may be cut back and China’s demandfor raw materials and industrial metals will dropsubstantially.Upside risks to our outlook include stronger eco-nomic growth than envisaged. Expectations are low Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.5