Supply and demand key to base metals success: Adam Low

Adam Low of Raymond James believes that the outlook is excellent for zinc, good for copper and neutral for iron ore. In this interview with The Gold Report, he argues that it comes down to supply and demand. Copper supply may soon lag demand, and zinc demand, which is increasing steadily, will soon face a 10% decline in supply. 

The Gold Report: Your 2014 prognosis for industrial metals is largely positive, correct?

Adam Low: Yes, although our view is not universal. We are most positive on copper and zinc, somewhat less enthusiastic about nickel. We're fairly neutral on iron ore, although we do expect a bit of softening in iron ore prices.

TGR: Why do you like zinc?

AL: We are starting to see fundamental changes occurring in the market. This is a supply story. Zinc has been an unloved metal for decades. As a result, there has been very little investment, which means that six major mines in operation for decades have or will soon end production.

The first two, in Canada, closed in 2013. The next major shut down, scheduled for mid-2015, is MMG Inc.'s (1208:HK) Century mine in Australia, the world's second-largest zinc mine.

TGR: How much global supply will be lost as a result?

AL: About 10%.

TGR: So prices will rise?

AL: Yes. Visible inventories on the London Metals Exchange, as well as on the Shanghai Futures Exchange, are down about 30% over the last year. And zinc demand is increasing steadily. There are some suggestions that we have a small zinc deficit already.

TGR: What are the supply and demand fundamentals in copper?

AL: I'd characterize the copper market as being infected with "short-termism." Mine supply grew quite spectacularly in 2013: between 6% and 7%. How sustainable is that growth? In a couple of years, we could easily have the same problem we had a decade ago, when mine supply lagged behind demand.

TGR: Why would this happen?

AL: One-third of global copper supply comes from Chile. This country is increasingly constrained by power and water supplies; labor rates are rising as well. Chile's state-owned copper enterprise, the Corporación Nacional del Cobre de Chile (CODELCO), produces about one-tenth of global copper, and it requires something on the order of $20–27 billion ($20–27B) in reinvestment over the next five or six years in order to maintain both current production and grow its production base. That will be quite difficult.

TGR: Why are you less enthusiastic about nickel?

AL: In the long term, we remain skeptical about that market. Indonesia, one of the world's largest nickel miners, has implemented a ban on exports of raw ore, which curtailed a major source of global supply. Nevertheless, nickel has abundant visible inventories. It also has growing supply from long-beleaguered laterite projects now finally coming to fruition: Ambatovy, Koniambo and Onça Puma.

TGR: Why are iron ore prices softening?

AL: We expect supply growth from mines to outweigh demand growth, particularly as major mines start up in Australia and Brazil. At current prices, the industry is making phenomenal margins, more than 100%. At lower prices, companies at the high end of the cost curve will struggle, but the others should continue to do very well.

TGR: To what extent are higher base metal prices dependent on positive global economic news?

AL: Growth is a key factor. The U.S. economy appears to have improved, although I'm a little bit skeptical about just how robust or sustainable this growth is, especially now that the Federal Reserve has decided to reduce its bond buying.

TGR: How do you view the short-term economic prospects of China and Europe?

AL: In Europe, the latest purchasing manufacturers' index is at its best since 2011. We are beginning to see some resurgence from some of the weakest economies, such as Greece. And Germany still looks good. Even so, I don't think we can count on Europe being the key driver for world economic growth quite yet.

TGR: And China?

AL: China is still growing and from a larger base. So while its relative growth may be less impressive than it was, its absolute growth is still quite extraordinary. Any industrialized Western nation would be incredibly envious of "only" 6–7% GDP growth per year.

TGR: There is a growing concern that the equities markets are overheated, particularly with the Fed tapering quantitative easing. If there is a significant correction, will base metals equities follow suit, or could we see instead a flight to safety in metals?

AL: If there is a significant correction, we could see base metals equities follow suit, even though they didn't enjoy the upside the rest of the market did. In the longer term, the widening gap between the growing demand and the dwindling supply of many base metals should spark a resurgence of investor interest in this sector.

TGR: Will base metals equities continue to lag prices in 2014?

AL: This trend should begin to correct. Base metals prices have been quite steady over the last year despite headlines that have generated fear and volatility. This steady price environment should provide investors with greater comfort about metals prices, which should, in turn, lead to greater confidence in investing in the equities.

LME Copper price levels may reflect growing mine supply, production growth, global inventory.

Copper inventory levels on the London Metal Exchange fell below 300,000 metric tons last week, the first time since December 2012, and canceled warrants remain close to highs of 60%, but this stock tightness does not seem to be reflected in prices, said Citi Bank.

According to Citi, LME three-month prices are trading at around $7,200 a metric ton, versus mid-December 2012 prices of over $8,050.

“Given that today’s macro environment is slightly more positive than late 2012, with clear signs of developed world recovery, although China hard landing concerns still persist, we believe current LME price levels reflect growing mine supply, expected refined production growth, and more importantly global inventory. Indeed, the LME price level is not reflecting the LME stock position, but appears to be making implicit assumptions about copper inventory elsewhere,” said David Wilson, analyst at Citi, via Kitco News.

Hedge funds add 30% to bullish bets in Gold.

The gold price ended Friday with a third week in a row of gains after bullish positions held by large investors soared again.

By the close of regular trade on the Comex division of the New York Mercantile Exchange, gold futures for April delivery – the most active contract – hit $1,323.60 an ounce, up $6.70 from Thursday's close.

There appears to be a definite shift in sentiment this year after 2013's dismal performance with the smart money only now catching up with gold's almost 10% rise this year.

Long positions – bets that the price will go up – held by so-called managed money increased by 8% to 140,840 lots in the week to February 18 according to Commodity Futures Trading Commission data released after the close of business on Friday.

At the same time short positions were cut by 10,603 to just under 50,000, which translates on a net basis hedge funds holding 31% more bullish positions: net longs of 90,942 lots or 9.1 million ounces.

Net longs jumped 17% in the week to February 11, CFTC data showed. Net longs fell to a paltry 26,700 lots in early December when shorts held by large investors peaked at more than 80,000 lots.

That was the highest number of short positions since 2007, back when gold changed hands for $700 an ounce.

Shanghai Stocks Continued Downward Trend

At a time when many of the world's major stock indices are showing signs of topping, the Shanghai Composite Index is poised to continue the decline it began in 2009. Although there is probably a long-term buying opportunity on the horizon, in the near term we expect opportunities for two or more short trades. In this article, we describe our primary scenario for that index, showing possible price targets and a rough time frame for a decline. Readers interested in the alternate scenario, which is more bearish.

The spectacular crash in the Shanghai index in 2007 and 2008 coincided with the decline in stock indices worldwide, and Shanghai also participated in the global stock rally from late 2008. However, while many other indices continued to advance after that time, Shanghai has taken a sideways-down path to visit prices not far from its 2008 low.

We don't believe the decline is over. Traders working on a time frame of a few weeks may still find short trades from a continued series of lower highs, especially using the channel trendlines as a guide. Investors with a long-term perspective should watch for a buying opportunity sometime in late 2014 or 2015.

We admit it was difficult to assign an Elliott wave count to the decline from 2009. There have been several overlapping moves, and many of the sub-moves have corrective patterns. The whole decline is best seen as a large, downward diagonal C-wave. The factor that crystallized the count for us was the index's good behavior within the modified Schiff channel shown on the weekly chart below.

From the current price area, we expect the index to trace out a final three-wave move downward into support. If it stays within the channel, then 1,536 is an attractive target. However, 1,342 and 1,099 are also viable. In any case, if this scenario comes to pass, price probably will remain above the index's 2005 low of 998.23.

Another thing to watch for confirmation of this scenario is the index's behavior in the near-term with respect to the midline of the channel. Price should be entering the down-phase of the 44-week empirical cycle. The primary scenario would be called into question if price rises very far above the midline, and certainly if it exceeds the prior high labeled as "a" of "(iv)". At that point, the alternate scenario would probably move to the fore, and we might also consider that a cycle inversion had occurred.

India may slash gold import tax to 6% before end of Feb

A new report citing a senior government official says India may cut its gold import duty to between 6% and 8% before the end of February.

India's finance ministry, fighting a crippling current account deficit and a weakening currency pushed up gold import duties tenfold – from 1% at the start of 2012 to 10% today.

WSJ.com reports the government is now considering reducing the import tax "as the current-account deficit is estimated to have fallen by almost half to around $45 billion this financial year ending March 31 from $88 billion last year.

Other measures including excise duties at 9% and new rules such as strictly cash only for imports, a rule that calls for the re-export of 20% of all imports, transaction taxes and even bans on gold-backed exchange traded fund investments have all stymied India's gold industry.

But the government import restrictions have led to a scarcity of physical gold inside the country which increased smuggling activity and sent premiums paid over the London price to rocket to as much as $130 an ounce during the gold festivals and wedding season.

Despite the curbs Indian consumption still rose by more than 100 tonnes to 975 tonnes last year while according to some estimates "unofficial imports" almost doubled.

The gold trade employ three million Indians and according to polls India's ruling Congress party is facing defeat at June's general elections.

Rusal reports record low aluminum output in 2013

World’s largest aluminum company-Rusal reported a drastic drop in its aluminum output during 2013. The company’s aluminum production touched record lows during the year. The total yearly aluminum production amounted to 3.86 million mt. Further, Rusal sees the output to drop further to 3.5 million mt during 2014.

The aluminum output during 2013 declined by nearly 8% over the year, when compared with the total output of 4.17 million mt in 2012. According to Oleg Deripaska, CEO, Rusal, the company has been successful in implementing the production-cut plans as scheduled. He further stated that the reduced operational levels are expected to be sustained throughout 2014 as well.

Rusal's total aluminum production capacity is 4.5 million mt/year across 14 plants worldwide. Of these 14 aluminum smelters, 12 have cut output year on year in 2013 anywhere from 5% to 90%. The exceptions were the Bratsk and Krasnoyarsk smelters in Siberia, the two largest production units with a capacity of 1 million mt/year each. These two smelters posted 0.2-0.7% output increases in 2013.

Rusal forecasts global aluminum consumption growth of 6% in 2014 over 2013. According to the company, China and other Asian economies are expected to grow strongly and the developed markets including the US and Europe should continue to show a healthy growth. Also, ex-China aluminium market deficit will grow from 570 thousand tonnes in 2013 to about 1.4 million tonnes in 2014.

"Polar Vortex" Shock

The "polar vortex" shock has arrived, only this time it is not in the form of another 12 inches of overnight snow accumulation but in the shape of household utility bills. A reader was kind enough to send us his just received ConEd bill for the month ended Februery 10. The result speaks for itself. It also speaks for where so much of US household disposable income will go in first quarter. 

And unfrotunately it will get worse before it gets better. On the back of a rapid decline in the "glut" of low cost natural gas (as stockpiles are drawn down to the lowest level since 2004) and the shift in forecast (that the freezing weather could last well into March), Natural gas futures are soaring (up over 10% today). This is the highest front-month futures contract price since December 2008 as "the possibility of periodic shortages now looms."