Marubeni says LME aluminium prices may rise towards $2,300 a tonne next year

London Metal Exchange (LME) aluminium prices are forecast to rise gradually in the latter half of next year possibly to as high as $2,300 a tonne as smelter shutdowns and output cuts squeeze supply, Japanese trading house Marubeni Corp said.

"We expect the LME prices to move higher next year as the market will remain tight," Norinobu Ozawa, general manager at Marubeni's light metals section, told reporters on Wednesday.

Marubeni, a major aluminium trader in Japan, estimated the global aluminium market will see a deficit of 387,000 tonnes in 2015, against an estimated deficit of 125,000 tonnes this year. It sees the deficit to widen to 872,000 tonnes in 2016.

Many aluminium producers have cut loss-making capacity or shut down completely in response to low LME prices, high energy costs and a flood of new capacity from China.

"Given the slack LME prices, high-cost producers will be forced to reduce or end production next year," Ozawa said.

LME aluminium prices, which have gained about 4 percent this year, traded at around $1,875 a tonne on Wednesday.

Marubeni forecast that they would be between $1,900-2,300 in the third and fourth quarters next year, moving up from an expected $1,800-2,200 range in the first quarter.

Global aluminium demand is expected to grow by over 5 percent in 2015 and 2016, led by a solid recovery in the U.S. economy and steady growth in emerging countries, Marubeni said.

The trading firm also forecast that the squeeze on supply would lead to higher premiums in Japan next year, predicting the range between $400-480.

Japan is Asia's top aluminium importer and the premiums it pays set the benchmark for the region. This year, Major Japan Port (MJP) premiums have risen 64 percent to record $420.

Earlier this month, major aluminium producers asked Japanese buyers to pay record premiums of $435-$440 per tonne for January-March deliveries, up as much as 4.8 percent from the previous quarter. But no agreements have been made as buyers demand lower prices.

Global aluminium premiums are expected to reach fresh record highs by mid-2015 on a supply deficit in the United States and Europe, according to a Reuters survey. 

Natural Gas Suggests $33 Oil

In the last couple of months, the sharp reversion in oil prices has certainly caught the world’s attention.  While the majority of economists and analysts continue to expect incorrectly that falling oil prices are a positive input to economic growth, the reality is that it is not.  The negative impact to economic growth from the decline in oil prices are quite considerable when you consider that almost 40% of all the jobs created since 2009 have been in energy related industries. 

Furthermore, many of those jobs are in the highest wage paying areas of the country that leads to more consumption and further job growth in other areas of the economy.  In fact, for each job created in the energy sector there are nearly three jobs created elsewhere in the economy.

“What we have here is a failure to communicate.” - Cool Hand Luke, 1967

As I discussed at length previously, the current problem in the energy price is a realization of a supply / demand imbalance.

"First, the development of the‘shale oil’ production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below."

"The obvious ramification is a ‘supply glut’which leads to a collapse in oil prices. The collapse in prices leads to production‘shut-ins,’loss of revenue, employee reductions, and many other negative economic consequences for a city dependent on the production of oil.”

$33 Oil – A Return To Normalcy

While the economists and analysts are hopeful for a sharp recovery in oil prices, the current decline in oil prices is nothing more than a return to historical normalcy.  Let me explain.

If you ask virtually any oil and gas professional, that has been around the industry longer than the graduating class of 2000, they will tell you that the historical relationship between oil and gas prices is roughly $8.  The chart below shows the highly correlated history of oil and gas prices until 2008.

Not surprisingly, the divergence between oil and gas prices came to fruition in conjunction with the massive interventions by the Federal Reserve, which lowered borrowing costs enough to sufficiently provide for funding of higher cost shale exploration.  As Yves Smith recently stated:

“The oil and gas sector is capital intensive. Drillers have borrowed phenomenal amounts of money, which was nearly free and grew on trees, to acquire leases and drill wells and install processing equipment and infrastructure.Even as debt was piling up,the terrific decline rates of fracked wells forced drillers to drill new wells just keep up with dropping production from old wells, and drill even more wells to show some kind of growth.One heck of a treadmill. Funded in part by junk debt.

Junk bond issuance has been soaring as the Fed repressed interest rates and caused yield-hungry investors to close their eyes and take on risks, any risks, just to get a teeny-weeny bit of extra yield. Demand for junk debt soared and pushed down yields further. And even within this rip-roaring market for junk bonds, according toBloomberg,the proportion issued by oil and gas companies jumped from 9.7% at the end of 2007 to 15% now, an all-time record.”

With an excess supply now realized, particularly as global demand continues to wane, oil prices are now returning back towards their historical long-term relationship. 

If we assume that natural gas, which has been trading around $4 per BTU, has already returned a more normalized supply/demand range this would imply that oil prices have further to fall. The chart below is an extrapolation of the current West Texas Intermediate Crude price forecasted into 2016 on a monthly basis.  It would currently require a decline in oil prices to $33 per barrel to return the WTIC/NatGas ratio back to its historic spread of $8.

As T. Boone Pickens notes in his interview, the main supply / demand divergence is in the process of returning back towards equilibrium particularly in light of the deflationary forces that exist on the global landscape. While it is certainly feasible that we could see a sharp “snap back” rally from the recent plunge in oil prices, it is likely an opportunity to reduce energy exposure in portfolios before the next leg lower.

Just as a reminder, the last time oil prices fell 50% from their peak was in 1985-86.  Oil prices then stayed at those levels until the turn of the century.  The rebalancing of supply and demand could leave oil prices at lower levels for much longer than the majority of analysts currently believe. Considering that oil production related states have done the majority of the work related to the current domestic economic recovery, such an outcome could derail the hopes for a continued economic revival.

NatGas Crashes Most In 10 Months As Polar Vortex Arrival Delayed

Natural Gas prices are down over 11.5% in the last 2 days, falling to their lowest price since January 2013, as a familiar tale of excess production in the face of ebbing demand looms large. As WSJ reports, BNP Paribas' Teri Viswanath notes "the delayed return of cold weather has simply curbed all buying interest," and this was exaggerated by technical selling as the market broke previous support around 3.50. Ironically, given its detrimental impact on GDP, Macquarie points out, "it is increasingly apparent to us that weather will need to bail the market out again this winter - otherwise prices could see material downside during the spring and summer months."

Moar tax-cuts, more discretionary spending!! oh and less employment, capex, and EPS for Oil & Gas stocks...

As The Wall Street Journal reports,

Natural-gas futures slid to their lowest prices this year and entered a bear market Friday, as investors come to grips with surging production that is beginning to push the U.S. toward potential oversupply.

...

“The delayed return of cold weather has simply curbed all buying interest,” said Teri Viswanath, natural-gas strategist at BNP Paribas in New York. “Unseasonably warm weather that persisted through the month of December now necessitates extreme weather conditions to avoid a (gas supply) surplus.”

Analysts said Friday’s selling was partly driven by technically driven trading as the market broke through levels where it previously rebounded.

...

Though the U.S. has begun to draw on natural-gas stockpiles for fall and winter heating needs, continued booming production from U.S. shale fields is helping to replenish supplies. As a result, withdrawals from storage have been smaller than average, and the U.S. has begun to erase a supply deficit that has persisted most of this year, after outsize demand from the severe winter last season dragged stockpiles to an 11-year low.

...

“It is increasingly apparent to us that weather will need to bail the market out again this winter—otherwise prices could see material downside during the spring and summer months,” Macquarie Bank said in a research note. “At this point, winter weather will determine just how low prices can go.”

Zinc, nickel Scotiabank’s top picks for investors

“Base metals were a ‘bright’ spot in 2014—largely ignored by equity markets and are among our ‘picks’ for investors in 2015,” observed Scotiabank economist Patricia Mohr in the latest edition of the Scotiabank Commodity Price Index published Thursday.

“LME nickel and zinc ranked No. 3 and 5 within the ‘Top Five’ best-performing commodities of 2014,” she said, “with price gains of 19.8% and 11.6% respectively in the year through December 15, 2014.”

“However, a focus by investors on copper, widely expected to edge down in 2015 alongside ongoing mine expansion, seems to have taken the shine away from these metals in the equity markets,” Mohr suggested.

Meanwhile spot uranium prices bottomed in June, she noted, “given Japanese approval of two nuclear reactor restarts, posting a 7.2% y/y gain. …After a recent election win, Japan’s Prime Minister is expected to push for additional reactor restarts to boost a sagging Japanese economy.”

“The base term, contract price for uranium has increased from US$45 to US$49, a positive sign for a gradual recovery in coming years,” Mohr advised. “Cameco’s Cigar Lake mine in Saskatchewan continues to ramp up towards 18 million pounds by 2018.”

“To build shareholder value in a lackluster economy, mining companies will focus on ‘divesting non-core assets’ and ‘spinning-off undervalued operations’ (e.g. Sudbury nickel),” Mohr predicted.

‘Picks’ for 2015

Mohr forecasts average prices of $1,267/oz gold, $1.25/lb zinc, $9/lb nickel, $3/lb copper, and $42/lb uranium in 2015.

Zinc and nickel are Mohr’s top picks for investors in 2015.

In her analysis, Mohr said zinc prices strengthened in the second half of this year, averaging US$1.03/lb, “with investors and commodity funds expecting zinc concentrates to move into a supply-side deficit by 2016 alongside significant depletion. Century—the world’s third-biggest zinc mine—is expected to close in 2015:Q3 and Lisheen in Eire by late 2015 or early 2016.”

“Prices remain resilient at US$0.96 in mid-December (9 US cents higher than a year ago), despite further signs that China’s economy is slowing,” she noted.

“In the first sign of a response by mining companies to the coming shortfall in zinc, Vedanta has announced its intention to proceed with developing the Gamsberg zinc mine in South Africa (250,000 t/a by 2018),” observed Mohr. “We expect interest in ‘junior mining projects’ in zinc to intensify within several years.”

“Nickel prices should also outperform in 2015, benefitting the Sudbury Basin, Thompson Manitoba, northern Quebec (Raglan) and Labrador (Voisey’s Bay),” Mohr advised. “Prices will climb from this year’s US$7.67 average to at least US$9.00 in 2015 (+17.3%) and US$11.50 per pound in 2016.”

“This largely reflects the impact of Indonesia’s ban on the export of all ‘unprocessed’ nickel-containing ore on January 12, 2014, in a bid to encourage foreign buyers to update ore in Indonesia,” she said.

‘Nickel prices are expected to soar once NPI (Nickel Pig Iron) plants in China have used up their inventory on hand—forcing Chinese stainless steel producers to turn to more costly imports of FeNi and nickel cathode,” Mohr predicted.

“The global supply & demand balance for nickel is expected to turn from ‘surplus’ to ‘deficit’ by 2015:Q2, even assuming a slower pace of stainless steel production gains in China (5.5% in 2015, after a 10% gain in 2014),” she suggested.

Meanwhile, palladium was the strongest of the precious metals in 2014 with a 12.2% y/y gain as strong demand for catalytic converters for small-engine gasoline-drive cars and supply constraints boosted prices, Mohr noted.

Nevertheless, the Scotiabank Commodity Price Metal & Mineral Index posted the worst year-over-year decline of any sub-component in 2014 with the decline centered in ferrous metals, especially iron ore and coal, she advised.

What are the factors behind sharp rise in LME Nickel inventories?

Inventories in the LME nickel have kept growing, climbing above 400,000 tons recently. 

The launch of a probe into financial irregularities at China’s Port of Qingdao in June brought nickel inventories at Asia-registered LME warehouses up 94,000 tonnes during June-November, 3-fold higher than the growth of 29,000 tons during January-May, according to SMM data.

Hence, the impact from Qingdao’s metal fraud is believed to be one of major reasons behind high LME nickel inventories, prompting a shift from China’s bonded zones to LME Asian warehouses.

Nickel inventories also grew at LME European warehouses, meanwhile. From June to November, stocks added 27,000 tonnes, compared with a drop of 5,000 tonnes from January to May.

This suggests that waning global consumption, resulting from concurrent economic weakness, is also blamed for continuous increases in LME nickel inventories. 

INFOGRAPHIC: what's ahead in 2015 – a survey of Wall Street's top analysts

The folks on Wall Street remain optimistic that the party will keep on going. Hopefully nobody takes away the punch bowl.

Ten of the top analysts from the mainstays of Wall Street made predictions to Barron’s in an annual December survey. Their expectations for 2015? The S&P 500 will continue to soar (+10% was the mean prediction), the American economy will continue to gain traction (+3.0% GDP growth), and the top performing sectors will be Technology and Financials.

The worst performing sector will be Utilities, which has been the best performing sector of 2014 so far.

While we were not surprised that top analysts chose their own sector (Financials) as a top performer, we were surprised that not a single analyst expects a pullback in 2015. In the same sense, the vast range of GDP expectation variability is between the bounds of 2.8% and 3.5% growth.

Keep the Kool-Aid flowing, and drink it all up before it sits out in the sun too long.

For the full survey, check out Barron’s article here on it.

Rising production data a last straw for Lead

Lead market experienced sharp declines, with the February-lead on Shanghai Futures Exchange losing 7.74% yesterday and down by its daily limit at the open today.

What’s behind the collapse in lead prices?

“The increasing output data should be the last straw for lead prices,” an analyst from Shanghai CIFCO Futures told SMM in a recent interview.

“Lead prices have been falling this month, and the report that China’s refined lead climbed to a five-month high of 381,941 tons stoked fears for a severe glut in the market, resulting in a slump in prices,” the analyst explained.

Analyst from Ruida Futures also pointed out that noticeable rises in both lead concentrate and refined lead production in November definitely added to a drag on prices which had already been pressured by waning consumption and weak macroeconomic conditions.