The following is an excerpt from monthly market overview for April 2014, written by Edward Meir, Indepent Commodity Consultant with INTL FCStone Inc.
Copper crashed in March, with prices falling by roughly $760/ton from the $7085 high to the intraday low of $6321 before a decent bounce set in over the last week. A slew of worse-than-expected Chinese macroeconomic indicators has been the main reason behind the weakness, coupled with the fact that February refined copper imports dropped some 30% from January's record levels. In addition, Chinese copper premiums remain weak, while Shanghai inventories have climbed to nine-month highs. Moreover, investors were shaken by reports of sizable corporate defaults, this time by companies “close to home” such as a real estate developer and a steel mill. Finally, the fact that the Chinese government did not take any action to make anyone whole in the aftermath of these defaults was a clear signal to investors that they were on their own. The fear now is that stockpiles of commodities, which are typically used to raise financing such as copper and iron ore, may be liquidated further in order to raise cash. Although still unsubstantiated, there are reports some 700,000 tons of copper are being financed and held “off exchange”, but we think that fears of mass liquidation at this stage are overblown. Prices rebounded lately on talk that the Chinese government may order stimulus spending in order to stabilize growth, but we don’t think this is necessarily going to do much other than lead to a short-term and a likely ill-fated bounce. In April, we see prices trading between $6400-$6850.
Aluminum did not do much over the course of March, ending the month slightly higher. Underlining the grim state of affairs, China's Chalco warned that at current prices, around half of China's aluminum producers are losing money. In fact, Chinese smelters are shutting capacity, but the cutbacks are being offset by more efficient operators and new startups. Chalco expects Chinese output to rise 7.6% this year to 26.8 million tons, but we would not be surprised to see the actual number come in slightly less than that by the time the year is over. We say this in view of the fact that the government seems to be serious about weeding out excess capacity across a number of industries. Additionally, aluminum prices in Shanghai sank to a record low last month, but importantly, did not bring out any kind of government buying for the stockpile, an indication that the authorities may want to let industry fend for itself. In the meantime, we are seeing continued cutbacks in non-Chinese production, including a 147,000 ton decrease put through by Alcoa-Brazil last week, lending more credence to the view that the ex-Chinese balance is now moving towards a greater deficit. (The IAI has February global output ex-China at 1.87 million tons, down from 2.05 million tons in January). For the month ahead, we see prices trading between $1720-$1840. However, we are much more upbeat on prices for later this year, as we think investors will have to start to discount a tighter market going into 2015 as cutbacks –even from China – start to accelerate. Financial problems at Rusal are also something to watch and could be a short-term bullish wild card.
Zinc sold off over the course of March, with the complex losing about $200/MT at one point, although critically, key double-bottom support at $1940 held. On the LME side, stocks actually increased over the course of the month, as did holdings in Shanghai, with both these variables contributing to the negative tone as well. In addition, further selling came our way during the middle of the month on reports that a large accumulation of unreported zinc inventories (said to total as much as 500,000 tons) could potentially be delivered against a large short position. We were skeptical about the story at the time and at the end, the delivery never materialized. On the fundamental side, the zinc balance continues to show signs of tightening. In its latest report, the ILZSG said that zinc was in deficit by 60,000 in January, a number that matched 2013’s entire shortfall. In addition there was a large uptake of zinc imports judging from the latest January/February Chinese trade figures, but given the slowing economy, we don’t know how much of this is being siphoned off into financing deals. Over the course of the month, we see zinc trading between $1915-$2060, but like aluminum, we are friendlier to the metal heading into year-end, as investors come around to discounting the prospect of a growing deficit in 2015.
Similar to other metals, lead finished lower over the course of March, hitting nine-month lows at one point before recovering a touch going into month end. We continue to be rather surprised by lead’s relative poor performance and attribute March’s decline to the blowback from lower copper prices . In addition, LME stocks are not falling as hard as they once were, likely another reason for the sluggish tone. In the meantime, the ILZSG reported last month that lead was in deficit by 31,000 tons in January, almost equivalent to the entire shortfall seen last year, but this failed to generate much upside excitement. In addition, lead’s ending stock ratio is now at 2.8, among the lowest in the LME group. We still like the prospects for lead going forward given that many of the variables we have highlighted in our previous commentary, including a structural deficit aggravated by mine closures and mounting environmental costs are still in place. One way to perhaps trade the complex is to go long lead and short zinc; the differential between the two got to a low of $31 at one point last month, down from $247 in November. It is now around $118 but we suspect it may have more room to expand given that the two are not entirely unrelated in terms of supply. In April, we see lead trading between $2020-$2170.
Nickel continued worked sharply higher this past month, gaining a whopping $2,000 a ton at one point, as Indonesian concerns and worries about possible sanctions against Russian metal boosted prices. However, a correction of sorts has set in of late, with prices retracing from the $16,400 intraday high reached in March. We suspect that the current selloff will prove to be short-lived, as the underlying picture still looks constructive. For one thing, Indonesian legislative elections that take place on April 9th may not result in any immediate change in policy with respect to the ban and so we may have to wait until the presidential elections are over in July before we see any change. In addition, CRU estimates that Chinese port stockpiles of nickel ore are down by some 4 million tons since the ban went into effect, paring China’s overall port holdings by some 20% and telling us that the restrictions are clearly starting to have some effect. CRU also calculates that for every week the ban is in place, an additional 750,000 tons of inventory is displaced. But whatever happens going forward, we should note that the rally in nickel this year is an artificially-induced move and as such, it has the potential to collapse under its own weight. The more relevant question is when; we think it will be later rather than sooner and accordingly, we expect to see a $15,400-$16,400 range prevailing at least through April.
Tin prices were range-bound over the course of March, trading within a $1000/ton band and closing the month pretty much flat. The market’s weaker spell occurred early on in March, just about the time when the Indonesians announced that refined tin shipments increased to 6,000 tons in February, up 30% from January. However, given the inconsistency in the data (exports have bounced around from 4,600 tons to 13,560 tons over the past three months) investors chose not to sell aggressively into the February number, as we suspect they remained uneasy about the supply pipeline going forward. For their part, the Indonesians are talking the market up; PT Timah says that it sees exports down some 35% this year on account of trading rules that make purchases contingent on trading in the domestic exchange. More broadly, PT Timah expects the global tin deficit to grow to 20,000 tons this year, almost double the 12,000 shortfall put out by ITRI and well ahead of the 3,000 ton January consensus figure issued by Reuters. Like nickel, we expect tin prices to work lower once the Indonesian restrictions become more flexible and supply starts to flow more freely, but unlike nickel, we think the Indonesians may see their tin program enjoy more long-term success. Over the course of April, we expect prices to trade between $22,400-$23,400.