The document provides an outlook and analysis of base metal prices for the coming month, including copper, aluminum, nickel, lead and zinc. It expects copper and aluminum prices to rise due to strong demand from China and a tightening supply. Nickel prices are also forecasted to increase on the back of rising global demand. Lead prices are predicted to decline due to surplus production. Zinc prices are estimated to trade higher due to a global deficit in supply.

1. Base Metals Monthly
18th January 2017

2. Base Metals Monthly18th January 2017
Outlook
Base Metals: For the coming month, we expect base metal prices to trade on a positive side after
the Organization of Petroleum Exporting Countries are taking steps in-line with its promise to cut the
production by 1.2 million barrels a day. Since crude oil is a crucial component of input cost for metals, the
upside in oil prices will reflect in metals as well. Further, Chinese economy growing and manufacturing
activity across the globe on an optimistic side will keep the prices in positive territory. However, estimates
of a gradual hike in the interest rates by the US Federal Reserve will cap sharp gains in the prices.
Copper: Copper prices are expected to trade higher in the coming month as imports in China have
grown sharply in spite of depreciation in the Yuan. Further, greater infrastructure spending in China is
likely to keep demand robust for the metal. Moreover, expansion in China’s manufacturing and services
activity will lead to positive movement in the currency. However, the sharp upside will be capped due to a
stronger dollar and rise in LME stocks by around 32 percent on yearly basis. We expect MCX Copper prices
in the range of Rs.375/kg to Rs.430/kg.
Aluminum: We expect Aluminum prices to trade higher for the month as positive momentum in crude
oil prices will help upside in Aluminum prices. Another factor supporting the prices would be indications
that the Aluminum market will be tight going forward as some big aluminum producers have shut their
aluminum smelting units to seek a premium of $95- $110 per ton. We expect MCX Aluminum prices in the
range of Rs.115/kg to Rs.128.50/kg.
Nickel: We expect Nickel prices to trade higher on account of estimates of an increase in demand for
the commodity. Further, the rise in demand for the commodity from China along with increasing usage in
aerospace industry and in the battery sector will keep the prices in positive territory. We expect MCX
Nickel prices in the range of Rs.637/kg to Rs.741/kg.
Lead: For the month, lead prices are estimated to decline due to surplus production in the current year
and estimates of surplus production in coming months. According to International Lead and Zinc Study
Group (ILZSG) report, lead inventory is expected to rise in the near future thereby will keep the pressure
on the prices. We expect MCX Lead prices in the range of Rs.142/kg to Rs.170/kg.
Zinc: In the coming month, we expect zinc prices to trade on a positive side as a result of the global
deficit in the commodity. Further, drop in inventories of the commodity will lead to upside movement in
the zinc prices. Additionally, rising demand and fall in mine output will keep the prices in positive territory.
Moreover, cut in the production from giant mining companies will continue with positive movement in
the prices. We expect MCX Zinc prices in the range of Rs.167/kg to Rs.199/kg.

3. LME Copper prices plunged around 5 percent in
Dec’16 and 1.7 percent on Shanghai. On the
domestic bourses, prices dropped in tandem with
international markets by around 4.8 percent in the
previous month. However, on a yearly basis, the
red metal gained around 18 percent.
During the first half of 2016, Brexit referendum
was the most crucial event that global markets
were cautious and anticipated a REMAIN vote
victory. But to everyone’s surprise, LEAVE vote
received more support and the entire financial
markets came under pressure.
However, post the shock, copper still stayed strong
and in fact continuously gained for 5 days in a row
post the unexpected results.
The above factor reflects the importance which the
metal attaches to China, which was widely
expected to cut PBoC’s reserve requirement ratio
(RRR) several times or lower interest rates in order
to allay global markets.
Since China accounts for about 50 percent of
global copper consumption, the unfolding of
economic events in China has an immense bearing
on the metal prices.
While Chinese manufacturing and services activity
remained in expansion mode for most of 2016, the
worrying fact remained the sluggish economic
situation with respect to GDP, industrial production
and retail sales.
Coming to trade condition which was also not
favorable as Chinese imports till Nov’16 dropped
by 17 percent when compared to the entire
period in 2015.
Import figures reported a sharp improvement in
Nov’16 when compared to Oct’16 which was
seen not only in Copper but also other major
commodities. The reason for such improvement
due to boost by government infrastructure
building spree and housing rally.
A sharp weakening in the Yuan since its inclusion
in the SDR basket in Oct’16, too could not
discourage the imports much.
For the year of 2016, LME stocks have seen a
roller coaster ride with stocks declining by 22
percent in the first half and from there on gaining
to a whopping 66 percent in the second half
ending the year with a gain of 32 percent.
Interestingly, the very same LME warehouses
(Singapore, two South Korean ports of Busan and
Gwangyang and Kaoshiung in Taiwan) that led to
decline in the earlier half, contributed to record
additions in the second half, adding to
speculations that market moving stocks are
coming in from China given its vicinity from the
above mentioned warehouses.
A closer look at the LME Inventory shows the
cancelled warrants ratio which stood at 16
percent as on 31st Dec’15 jumped to 39 percent
on 30th Dec’16.
The surge in inventory was mostly at the South
East Asian warehouses indicating that more
stocks are to be taken out from warehouses,
mostly into China.
Peru’s copper mine production grew by more
than 34 percent to an estimated 2.2 million
tonnes in 2016, probably replacing China as the
biggest producer, second only to Chile.
Chinese mined Copper production likely to fall to
1.42 million tonnes. The reason for such a surge
in Peru’s Copper production is new mines and
expansion of existing ones.
Base Metals Monthly18th January 2017
Source: Bloomberg
-4.97%
-1.71%
-4.80%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
LMECopper SHFECopper MCX Copper
Copper Performance in Dec'16 (%)

4. LME Aluminum prices continued to remain under
pressure for second consecutive month in Dec’16.
Moreover, SHFE Aluminum prices plunged by more
than 3.3 percent during the same period. However,
on the domestic bourses downside pressure on the
commodity was less witnessed due to depreciation
in the Indian Rupee.
Aluminum had the best time in 2016, since 2009 as
the commodity gained by more than 12 percent.
The metal started the year around $1500/t mark,
made high of $1789/t in Nov’16 mainly supported
by crude oil price rally and commitment of
increased infrastructure spending by US President-
elect Donald Trump. However, during the
beginning of 2016, the light metal was dragged
down to $1449/t by falling oil prices, in turn pulling
down the production costs. This left various
smelters in the US and Europe with no other
option but to close down the smelters, rather than
continue unviable refining projects.
The biggest target was Alcoa’s Warrick Operations
smelter in Evansville, Indiana, which got closed by
the first quarter of 2016. The 269,000 tonne-per-
year smelter was just another addition to a string
of U.S. smelter curtailments as producers struggle
with tumbling prices. Warrick was the largest
operating aluminum smelter in the US, and its
closure left Alcoa with just one active smelter, the
130,000 tonne-per-year Massena West.
Further, Rio Tinto sold Lochaber, an aluminum
smelter in Scotland to industrial group Liberty.
However, the impact was not seen on the big
level since it is the smallest of nine smelters Rio
owns worldwide, and has an annual production
capacity of mere 47,000 tonnes of aluminum.
Smelter closures in the North America (US &
Canada) bought the Primary Aluminum
Production to a near 4 million metric tonnes
(mmt) in 2016 compared to a whopping 32 mmt
in China.
The turnaround in the Aluminum story came after
the news of probable crude oil output cuts to
contain the global supply slut.
Major volatility was seen in Sep’16 when the
Organization of the Petroleum Exporting
Countries agreed to cut output by 0.7 million
barrels per day (bpd) which was its first planned
output cut in almost a decade.
Crude oil prices surged as much as 50 percent
during 2016, which passed on some gains to the
light metal.
Base Metals Monthly18th January 2017
Source: Bloomberg
Source: Bloomberg
-2.25%
-3.32%
-0.94%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
LMEAluminum SHFEAluminum MCX Aluminum
Aluminum Performance in Dec'16 (%)
-10.93%
-8.60%
-9.59%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
LMENickel SHFENickel MCXNickel
NickelPerformanceinDec'16(%)

5. LME Nickel and MCX Nickel prices plunged by more
than 10 percent and around 9.6 percent
respectively in Dec’16. Further, the silvery white
metal declined sharply around 8.6 percent on the
Shanghai futures in the month of December.
As per the latest International Nickel Study Group
(INSG) report, it is estimated that nickel usage will
continue to grow in both 2016 and 2017 due to the
increase in production of the austenitic stainless
steel grades in all major markets despite
challenging economic environment across the
globe.
Zinc, the silvery white metal, was the star
performer for the year 2016, beating the entire
commodities spectrum. The metal widely used
for Steel and Iron has given a spectacular
performance in 2016, gaining a whopping 60 and
63 percent on LME and MCX respectively, pushing
average Zinc prices up to $2100.8/t in 2016 from
$1939.34/t in 2015.
Glencore's announcement in Oct’15 that it will
cut 500,000 tonnes of annual zinc production,
equivalent to around 4 percent of global supply.
Owing to this, Glencore’s first half year
production in 2016 declined 31 percent to
506,000 tonnes.
Moreover, Horsehead Holding Corp, which is the
largest U.S. zinc producer, which has been
operating for around 150 years, filed for
bankruptcy on 2nd Feb’16 due to slump in metals
prices and a shortage of cash. The metal, which
was shining brightly, got a boost in Nov’16 after
Glencore’s Black Star mine in the Australian state
of Queensland was shut down.
The Swiss mining giant stated that the mine
began production in 2004 and has already
outlived its eight-year operational life. The Black
Star mine had produced around 40 million tonnes
of ore and 1.75 million tonnes of contained zinc
since opening in 2004. Following this
announcement, the metal shot to nine-year high
levels and touched around $2985/t.
China was not far behind either and ten largest
Chinese zinc smelters in Nov’15 said they would
cut refined zinc output by a combined 500,000
tonnes in 2016, equaling about 3.5% of global
production. However, the cuts never materialized
but so far China’s refined zinc output in Jan-Nov
’16 was in fact 1.2 percent higher year-on-year
and 3 percent up in 2016. Talking about imports,
Chinese imports of zinc contained in zinc
concentrates dropped by 44.5 percent to 631,000
mt in January-October, but the country's net
imports of refined zinc metal increased by 26
percent to 359,000 mt.
Base Metals Monthly18th January 2017
Source: Bloomberg
-14.74%
-18.17%
-15.42%
-20.0%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
LMELead SHFELead MCXLead
Lead Performancein Dec'16(%)
-4.66%
-9.45%
-5.76%
-10.00%
-9.00%
-8.00%
-7.00%
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
LMEZinc SHFEZinc MCXZinc
Zinc Performancein Dec'16(%)

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Base Metals Monthly18th January 2017
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Anish Vyas
Digitally signed by Anish Vyas
DN: cn=Anish Vyas, o=Choice Merchandise
Broking Pvt. Ltd, ou=Sr. Research Associate,
email=anish.vyas@choiceindia.com, c=IN
Date: 2017.01.18 11:54:45 +05'30'