Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Iron Ore market, analysis on changes to iron ore prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report. To downlaods the Iron Ore and Steel only section of the report, click here: Steel and Iron Ore 23.04.13,Quarterly_Metals Report

Iron Ore Price Analysis Q1 2013

Iron ore prices rebounded sharply in the fourth quarter 2012 and the rally continued during most of the first quarter. Having dropped to a low of $87 per tonne for 62% Fe CFR China in September, prices reached a high of $158 in mid-February. Destocking in China triggered the sell-off in mid-2012 – steelmakers’ margins were squeezed. This sent prices into oversold territory but the speed and extent of the decline then prompted steel mills, especially larger ones, to restock.

The run higher in iron ore prices since January has also been fuelled by seasonal issues – iron ore shipments and production tend to suffer in the first quarter from adverse weather conditions, such as low temperatures in China and storms that affect iron ore shipments from Australia. In addition, an export ban in India has created additional tightness.

Spot iron ore prices had fallen back to around $137 by the end of March; the outlook is for prices to consolidate at lower levels now. Faced with high steel stocks and sluggish demand, the steel industry is now likely to reduce output to run down stocks.

At the same time as expecting subdued steel production, iron ore supply from Australia is set to increase as new capacity comes on stream. Rio Tinto is increasing Pilbara production from 230 million tonnes per year to 290 million tonnes by the end of 2013 and 370 million tonnes by mid-2015.

Fortescue Metals Group is ramping up production from 100 million tonnes per year at the end of 2012 to 155 million tonnes by the end of 2013 and BHP Billiton is also likely to see its strong run rate continue – all of which has boosted the country’s production and exports – exports are now running at twice the rate they were in 2008.

In December, Australia’s exports hit a record annualised rate of 592 million tonnes before dropping back to 494 million tonnes in February, as adverse weather and higher prices impacted exports.

Brazil’s exports also hit a record level of an annualised 364 million tonnes per year in December before falling back to 275 million tonnes in February. That said, the majority of growth in seaborne iron ore shipments in recent years has come from Australia – exports from Brazil have been fairly stagnant while the country has struggled to bring new projects on stream and falling ore grades have affected iron content.

Interestingly, Brazil and Australia used to supply roughly the same tonnage of iron ore to the seaborne market in 2007 but Brazil’s were 40 percent lower than Australia’s basis December’s record exports.

India’s exports of iron ore have been annihilated in recent years to an annualised rate of 8 million tonnes per year in the second half of last year, from 81 million tonnes in 2011 and a peak of 119 million tonnes in 2009. Government intervention has forced some miners to cut output if they are believed to be operating without legal permits and the government also seems to be reacting to pressure groups that want to keep iron ore production for domestic steel mills.

By reducing exports, more ore is available to domestic mills and possibly at lower prices, while at the same time supply to the international market is cut, thereby making international steel mills less competitive. All in all, given the vested interests and resource nationalism issues, it seems highly unlikely that iron ore exports from India will resume any time soon

We generally feel that the global supply of iron ore is more than adequate but China remains the major swing factor in the market. In 2012, it is estimated that iron ore supply to the seaborne market reached 1.130 billion tonnes, which is expected to grow five percent to 1.185 billion tonnes this year.

Iron Ore Demand

Demand for seaborne iron ore from countries other than China is expected at be around 420 million tonnes, which means that 765 million tonnes is likely to make its way to China. Given that China is expected to require 1.140 billion tonnes of iron ore this year, it could need to source 375 million tonnes domestically, up from an estimated 300 million tonnes in 2012. Given that iron ore inventories at Chinese ports have been falling, demand should stay sturdy.

Overall, we see the global economy shifting up a gear from the soft patch of 2012; there is also the potential for a rebound in steel production to keep iron ore prices steady. Since we do not envisage a return to strong growth or concerted global growth, iron ore is likely to be in good supply and even in a supply surplus this year. Capacity expansions in Australia and Brazil have enabled seaborne exports to rise around 28 percent since 2009 and more expansions are on the way.

Iron Ore Supply

Seaborne supply makes up the difference between Chinese demand for iron ore and what domestic producers can supply. What is noticeable in the chart opposite is that Australia is responsible for the majority of growth in seaborne supply, while Brazil’s exports have only edged higher in recent years and India’s have slumped.

Brazil’s exports have suffered because expansions have been delayed. India’s supply of seaborne iron ore has been throttled by a series of regional bans and tax increases, with domestic steelmakers lobbying to restrict exports so they have sufficient feed for domestic production.

With exports from India on the slide, other countries are stepping up their exports of iron ore. South Africa, Peru, Sierra Leone and Liberia have all increased exports in recent years, as have numerous other small producers. In 1995-2003, there were around 25 countries supplying iron ore to China but this total has climbed more recently to around 55 countries. The non-major exporters now collectively export the same amount as Brazil does.

Iron Ore Outlook

The outlook for iron ore has weakened after the run-up in the first quarter. Supply is expected to grow at a steady pace and high levels of steel inventory are likely to delay any ramp-up in steel production. The forward curve on iron ore swaps is downward sloping from a spot price of around $137 to $120 by end of the year – we would be inclined to feel that spot prices are likely to follow the road map portrayed by the forward curve.

With supply generally expected to be more than sufficient over the next few years, China’s domestic supply should remain price-elastic. This should generally keep a floor under prices as well as capping prices on the upside – other than for short spells when supply is disrupted or when there is restocking.

Overall, we would look for prices to trade in a $110-150 range during the second quarter but would expect prices to spend most of the time in the $125-145 range.

Appendix

Source: World Steel Association

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Steel Price Analysis Q1 2013

In line with the disappointing economic recovery in China and continuing gloom in Europe, the steel industry remains oversupplied, with the threat of imports squeezing domestic producers around the world excluding those in China.

China ramped up production in January and February – crude steel output was up 11.4 percent, year-on-year, while for 2012 as a whole, production was up 3.6 percent at 708.8 million tonnes, according to data from the World Steel Association.

Higher output in China, however, was in contrast to other regions where output fell. Global steel production in the first two months of the year was 253 million tonnes, up 3.4 percent on the 244.7 million tonnes produced in the same period in 2012, of which output ex-China fell 3.4 percent to 127.6 million tonnes from 132 million tonnes.

The ramp-up in China seems to have been a false start – it has merely expanded stockpiles, especially for long products, which supports the view that the construction industry has yet to recover despite all last year’s infrastructure spending announcements.

The combination of weak demand and high inventories may well lead to lower capacity utilisation rates, which in turn may well weigh on demand for iron ore.

The ramp up in production earlier in the year squeezed producers’ margins – higher output led to a pick-up in iron ore prices while higher steel output and low off-take put downward pressure on steel prices. As margins are squeezed, we would expect higher-cost producers to cut output, which in turn should help prevent the oversupply situation from escalating.

Looking forward, much will now depend on whether the anticipated recovery in China, aided by last year’s infrastructure announcements, now feeds through into actual demand for steel. Over the past six months or so, we have not been surprised that the infrastructure spending has taken time to show up – we thought it likely that the handover of political power in China would produce a ‘lame-duck’ period. The new leaders are at the helm, the Lunar New Year holiday has passed and we are in the second quarter – so if growth is going to be seen, now is the time to see it.

Judging by the manufacturing PMI numbers for March, economic activity is picking up, China’s official PMI reading climbed to 50.9 from 50.1 in February, while the HSBC reading came in at 51.6 after 51.7. Between November 2011 and October 2012 the readings were below the 50 divide, so it has been above 50 at least since November, which bodes well for pick-up in the pace of recovery.

One continuing issue facing China, and by extension the global steel market, is that new capacity continues to be built in China. Chinese steel production is expected to reach 737 million tonnes this year, a rise of 2.9 percent, but total capacity is likely to rise to 980 million tonnes by the end of 2013 from 920 million tonnes at the end of 2012. This means capacity utilisation is expected to fall to 75 percent from 78 percent in 2012.

Market insiders expect Chinese demand for crude steel to rise four percent to 698 million tonnes, although we feel apparent demand could rise considerably more than that if the recovery gets going and if consumers feel the need to restock, having destocked in 2012.

The recovery in the US is also expected to continue although it remains fragile, with the March ISM PMI number dropping to 51.3 from 54.2 in February. But what is noteworthy is the extent to which US steel mills have cut output. In the first three months of the year, output totalled 23.6 million tonnes, down 7.7 percent from 25.6 million tonnes in the same period in 2012, according to data from the American Iron and Steel Institute.

During the first quarter, capacity utilisation was 75.7 percent compared to 79.3 percent in the same period in 2012. With production falling and capacity utilisation rates also falling, US steel mills seem proactive, allowing the market to destock, which should put it in a good position to benefit from a pick-up in demand. By cutting output, producers should also have more influence on pricing, although the potential for imports should keep the market in check.

Economies in Europe continue to suffer, as seen by March’s PMI manufacturing data for the EU, which remains well below the 50 level. The PMI dropped into contraction mode in August 2011 and has remained there since. The lowest PMI reading was in July last year at 44.0 and it was last at 46.8.

Despite uncertainty over Cyprus and Italy, where there is no government in power, it looks as if the rate of deterioration is slowing but the outlook is far from bright. In the first two months of the year, EU-27 crude steel production was 27.1 million tonnes, down 4.2 percent from 28.3 million tonnes in the same period in 2012. For 2012 as a whole, output was 169.2 million tonnes, down 4.7 percent.

Having been in destocking mode for some time, we feel that EU steel consumption could start to level out – even a move from destocking to hand-to-mouth buying is likely to give apparent demand a boost.

The situation in most steel-producing regions tends to be same in that slow demand and oversupply are forcing producers to reduce capacity utilisation. In Russia, domestic steel demand has fallen because of economic decline. And while input prices have risen, producers’ margins are being squeezed, which should lead to more supply rationalisation. By and large, the global steel industry is braced for another difficult year in 2013, although the situation may not turn out to be as hard as the current outlook suggests.

Given that steel is such a basic building block and the global economy has relied on strong growth in China over the past decade, the slowdown in the growth rate there indicates how weak the global economy has been. The fact that growth continues in the other BRIC countries and that a considerable amount of the slowdown in apparent steel demand is due to destocking, we feel 2013 will be a better year for steel production.

Steel billet prices on the LME are marooned around contract lows while the contract is in the process of being refocused on Europe and the Eastern Mediterranean.

In 2012, LME steel billet traded 144,724 lots, down 34 percent from 2011. LME steel billet prices are quoted well below other benchmark prices – the locations where the bulk of LME billets are in warehouse, mainly Detroit and Antwerp, have large levels of cancelled warrants and therefore large exit queues. So on-warrant LME steel is not readily obtainable and therefore trades at a discount.

LME steel billet was quoted at $200-$250 at the end of March, whereas billet is around $565 per tonne ex-works in Turkey. LME steel billet may, however, prove an attractive long-term buy.

Steel Outlook

Our outlook is for steel prices to become more rangebound as 2013 unfolds mainly because of the move from destocking to hand-to-mouth buying, with the potential for some restocking in some regions, notably China and the US. We feel China’s recovery is likely to gather upward momentum; with China accounting for around 47 percent of global steel output, this could prove all-important.

We are also bullish for a steady recovery in the US although we are aware that US producers will face competition from imports if prices run ahead of the fundamentals. Still, on a global level, low capacity utilisation rates will mean producers are well placed to boost production should demand warrant it. In addition, with iron ore prices set to remain weak, steel producers’ margins should improve.

On balance, we would expect stronger steel prices later in the year as demand and users look to hold more stock.

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Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Silver market, analysis on changes to silver prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report. To download the Zinc only section of the report click here:Zinc 23.04.13,Quarterly_Metals Report

Zinc Price Analysis Q1 2013

Our outlook for zinc remains little changed although prices may become more volatile in the short-to-medium term. The drop in price since the February peak and the emerging downward trend, if it continues towards last summer’s lows, could well prompt production cuts, which in turn could give prices a reason to rebound.

Overall, the outlook for global demand is expected to pick up as 2013 progresses. Supply and demand are expected to be roughly balanced but the presence of large stockpiles of concentrates, refined metal and a surplus of refining capacity should mean there is no shortage of metal. Smelters will be well placed to respond with higher output should demand expand at a faster pace. This suggests that zinc prices will remain rangebound, moving in line with changes in underlying market sentiment.

Zinc Surplus in 2012

In 2012, the zinc market had a supply surplus of 265,000 tonnes, according to the ILZSG, after a surplus of 366,000 tonnes in 2011. It was also the sixth successive year that the market was in surplus. Total inventories, as reported by the LME, the Shanghai Futures Exchange, China’s State Reserve Bureau (SRB) and held by producers, consumers and merchants increased 426,000 tonnes in 2012 to 2,195,000 tonnes. All in all, total reported stocks account for some 18 percent of annual metal consumption, which is a considerable cushion against any supply disruption.

Despite ILZSG data showing a surplus last year, it points to a drop in Chinese metal consumption of some 3.2 percent. Given the country’s GDP growth last year was 7.8 percent, we assume the fall in apparent zinc consumption meant there was a considerable amount of destocking in the country.

Chinese zinc consumption in 2011 was 5.48 million tonnes; if we assume growth in real zinc consumption – as opposed to apparent consumption, which does not take into account stock changes – of around five percent, that would boost actual global zinc consumption by around 275,000 tonnes, which would mean the zinc market was nearer to balance last year.

The increase in reported stocks would then be explained by a drawdown in unreported stocks, mainly in China and as off-warrant metal in the West was attracted to LME-listed warehouses as metal went into financing deals.

How 2013 pans out is therefore likely to be dependent on how low prices fall and to what extent production cuts are seen, as was the case in China last year – refined output fell 7.5 percent – and the strength of demand growth in China, the US and emerging markets.

Zinc Demand Outlook

The outlook for zinc consumption is generally positive for the US, China and Asia in general. In the previous quarterly report, we expected demand to stabilise in Europe and apparent consumption to show some uptick as destocking ended. But given the deteriorating manufacturing PMI numbers this year, continuing austerity and much uncertainty as to whether the EU/ECB’s restructuring programme will remain on track, we fear that demand for zinc in Europe will fall again this year.

Generally, it is difficult not to be bullish for demand growth for zinc in China and other emerging economies because galvanised steel is so widely needed by the infrastructure, construction and automotive industries, with the building industry also a large user of brass for fittings and fixtures.

Last year’s large infrastructure spending announcements in China should feed through to stronger demand for commodities this year. It also seems likely that the government will continue to push for further urbanisation and more social housing, all of which should boost consumption of zinc.

China’s urbanisation rate was at around 50 percent in 2012 and is expected to rise to 60 percent by 2020, which will mean current migrant workers will become permanent urban dwellers and more migrant works will be sucked into the cities. They will require more housing, more transport and more efficient mass transit systems such as underground trains.

Given that China’s zinc stockpiles, mainly unreported stock held at smelters and consumers, were drawn down last year, it looks as though zinc’s real and apparent demand could recover quite smartly this year. After the destocking in 2009, Chinese apparent consumption leapt 16 percent in 2010 due to massive stimulus spending to alleviate the effects of the financial crisis in the West.

But China also announced further stimulus spending last year, the benefits of which are yet to be seen, so we feel that the boost still lies ahead. Overall, we would not be surprised if apparent demand (actual and restocking) in China rises eight percent this year.

US demand dropped 3.2 percent in 2012 to 899,000 tonnes, according to the ILZSG, which again does not tally with the recovery in housing, the manufacturing PMI and strong auto sales, which suggests the US also experienced destocking last year.

Since the recovery is expected to continue this year, with a higher level of auto sales and with activity in the housing and construction industries also expected to gather momentum, we remain bullish for US zinc demand.

Indeed, it should benefit from a pick-up in apparent demand when destocking ends, a recovery in actual demand when the recovery expands and if consumers might feel the need to restock – possibly towards the end of the year – because of the likelihood of tighter supply in 2014.

In the US, construction and infrastructure spending accounts for 44 percent of zinc’s end-use demand and the transport industry accounts for 34 percent. The prospects for stronger growth in these industries bodes well for US zinc consumption.

Unfortunately, the regional bullish outlook cannot be carried over to Europe. The region is mired by austerity, auto sales are dire and unemployment is so high that the housing industry, including spending on household white goods, is firmly in the doldrums. While earlier we had hopes that the region would stabilise this year, with the move from destocking to hand-to-mouth buying boosting apparent demand, we are not sure even that will be seen in 2013.

European passenger car sales in the EU fell 8.2 percent in 2012 on 2011, according to the ACEA. The weaker trend has continued into 2013, with sales in the first two months of the year off 9.5 percent on last year. The outlook for 2013 is for sales to decline 2.5 percent on 2012 but it should be noted that that decline is from 2012′s already low base. Construction activity in Europe was down five percent in 2012, again from a low base.

In emerging markets we expect zinc demand growth to remain firm – it should recover while domestic demand continues to rise and as rebounds in economic activity in China and the US help boost demand for exports from the emerging markets. In 2012, zinc consumption in the following countries rose, the figure in brackets: Brazil (4.2 percent), India (six percent), Russia (10 percent), South Korea (five percent), Indonesia (12 percent) and Turkey (20 percent). This all looks promising.

Zinc Supply outlook

Despite last year’s 3.5-percent fall in refined zinc production to 12,618,000 tonnes, there is no actual shortage of capacity or of metal. Last year’s production cuts stemmed more from the squeezing of smelters’ profit margins rather than because of concentrate shortfalls or production disruptions.

Indeed, while refined production fell, mine output climbed five percent to 13,604,000 tonnes in 2011, which has led to a build-up of concentrate inventory.

China’s refined production dropped 7.5 percent last year – the first year-on-year drop for 23 years. Given that smelter capacity in China is estimated at around 6.5 million tonnes and refined output was 4.8 million tonnes, smelters were operating at around 75 percent of capacity compared with a typically ex-China rate of 90 percent. This suggests there is plenty of room for smelters to step up production should demand and prices warrant it.

So zinc supply is likely to be price-elastic, especially given higher treatment charges (TCs), high concentrate stocks and further mine production increases in numerous countries, which should more than offset mine closes, most notably at the Brunswick and Perseverance mines in Canada.

But because Chinese smelters were active last year in cutting production, they may well do so again this year. Last year, zinc prices averaged $1,948 per tonne and traded at a low of $1,745. With zinc prices now half way between last year’s average and the low, it may well be that smelters make further cuts, although the higher TCs this year will have increased their margins somewhat. But it would probably not take too much of a drop in prices below $1,800 to trigger cuts to output, which could then once again give prices a lift.

Conversely, however, given the elasticity of supply, the high levels of stock and plentiful idle smelter capacity, the upside is likely to be capped other than for relatively short-lived periods of short-covering rallies and fund-buying frenzies. Rallies, as we saw in February and October 2012 and again in February this year, are likely to provide producers, especially those with high production costs, with further opportunities to put on hedges.

Chinese Trade

Source: Official customs statistics

The rise in China’s imports of metal last year is not surprising because domestic refined production was cut; for the same reason, it is not surprising that imports of concentrates fell too because mine production was not cut. Higher TCs for imported concentrates may encourage some pick-up in imports but, with domestic stockpiles of concentrate high and with mine production rising, we would not expect too much of a pick-up.

Higher TCs and high concentrate stocks may well lead to a recovery in refined output this year, which in turn might lead to a drop in imports of refined metal, leaving more metal in the West. But this outcome is only likely if prices are high enough to entice smelters to increase output.

Source: ILZSG

 LME Zinc Stocks

LME stocks stood at 1.22 million tonnes at the end of 2012, up from 990,000 tonnes at the end of June and 820,000 tonnes at the start of 2011. At the end of March, stocks were 1.17 million tonnes, down four percent from the start of the year. Given the run-up in cancelled warrants to a peak of 719,400 tonnes in March, it is not surprising that stocks have started to fall.

With most of the outflow from LME warehouses routinely coming from Antwerp and New Orleans, metal seems to be shifting from LME warehouses to other warehouses where it is going into off-warrant financing deals. The fact there is little evidence of widespread withdrawals of small parcels of metal implies that the off-take is not consumer-driven.

As of the end of March, the large concentrations of zinc in LME warehouses were at New Orleans (748,300 tonnes), Antwerp (150,000 tonnes), Detroit (116,225 tonnes), Johor (57,875 tonnes) and Vlissingen (42,725 tonnes). At the locations where zinc is held in LME warehouses, there are collectively across all metals 2.97 million tonnes of cancelled warrants. This suggests that the exit queue to get zinc out of warehouse will remain long, which is likely to mean physical premiums remain elevated.

FastMarkets Zinc Report Q1 2013 Summary

The outlook for zinc is confusing – bullish and bearish crosscurrents are affecting the market. Demand is set to recover in the US, China and in time in emerging markets but real demand in Europe is likely to remain weak. The supply side looks adequate and we expect a pick-up in TCs to boost smelter output but lower prices may well trigger further production cuts, but those in turn will no doubt give prices a lift.

For now, the stock overhang seems to be well managed by a combination of cash-and-carry deals and restricted load-out rates – these are expected to keep supply regulated. They should in turn prevent a downward spiral in prices but, should prices rise too far, premiums escalate or backwardations develop, we would expect the stronger price structure to attract metal from off market, which in turn is likely to cap the upside.

The main downside threat to zinc is likely to come from external factors – a broad-based sell-off across markets on a deteriorating macroeconomic picture could carry all metal prices lower. In that case, we would then expect more cuts to underpin prices, although it may take a move below $1,800 to trigger that.

With more than 1.48 million tonnes of exchange stocks, it will require a few years of significant deficits to absorb the overhang. LME stocks alone are already equal to around 8.8 percent of annual consumption.

FastMarkets Zinc Report Q1 2013 Conclusion

The outlooks for the recoveries in China and the US remain positive but we have revised our expectations for Europe lower. The market has proved that it can handle the large stock overhang so far, which should prevent a price slump, especially after producers last year proved quite active in cutting output, at least in China.

But there is a large overhang of metal and concentrates in inventory and no shortage of refining capacity, all of which should cap the upside. Overall, we feel that this will mean prices remain in the sideways trading range they have now established, which runs between $1,800 and $2,250.

On balance, we feel that prices will remain rangebound for most of 2013, with overhead supply between $2,200 and $2,250 capping the upside and support evident between $1,800 and $1,720. In the second quarter we would expect prices to hold in a range between $1,750 and $2,100.

Sources: ILZSG, fastmarkets.com forecasts

Appendix

Sources: Company data and various press reports

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Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Tin market, analysis on changes to tin prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report. To download the Tin only section of the report, click here:Tin 23.04.13,Quarterly_Metals Report

Tin Price Analysis Q1 2013

Tin has been consolidating the gains it made in the August-January rally when prices rose 47 percent to a high of $25,250 per tonne from a low of $17,125. The metal has since pulled back to $20,500 – the higher prices attracted a combination of producer selling, a pick-up in exports from Indonesia and some re-exporting of metal from China.

Out of all the base metals, tin is the only one expected to remain in a supply deficit in 2013 so its outlook remains relatively bullish. Supply and demand, however, have a habit of being quite choppy as consumers restock and destock into price swings and supply from Indonesia tends to be price-elastic too. In addition, Chinese traders import into price weakness only then to re-export into price strength.

The volatility in price is a function of the tin market being a small one where a few large producers and industries dominate supply and demand.

Tin Demand Outlook

Last year, economic hardship was evident around the globe, which in turn prompted low levels of business and household confidence, damaging demand for electrical items, white goods and IT spending. Solder accounts for around 52 percent of tin consumption; the drop in demand via these products led to a 10-percent fall in solder production in China last year.

Outside of electronics, tin is used in tinplating, chemicals, brass and bronze and to float glass. Tinplating has in recent years been a steady consumer of around 60,000 tonnes per year of the metal, which equates to around 16 percent of consumption, while chemicals are a growth area, consuming around 15 percent. Tinplate capacity is expanding in China at a fast pace but there is considerable overcapacity, with utilisation rates running around 50 percent.

Brass and bronze account for around five percent of demand but the weak housing markets have weighed on demand for these alloys. A recovery in the housing market in the US and continuing urbanisation in China should support a recovery in this sector.

With the electronics industry now the major user of tin, it is encouraging that semiconductor sales, which are a good barometer for the state of the electronics industry, appear to have turned a corner. They are rising again after a drawn-out period of weakness from the summer of 2011 to October 2012.

In November, Semiconductor Industry Association (SIA) data on global semiconductor shipment sales turned positive, climbed 1.2 percent on the same month of the previous year, and were up 3.8 percent in both December and January. Sales in January were up 10.5 percent in the Americas, and 7.8 percent higher in Asia-Pacific but down 12.3 percent in Japan and off 4.9 percent in Europe. If the rebound continues and a weaker yen helps a Japan recovery, we would expect some restocking to follow.

In 2012, tin consumption dropped 6.2 percent to 363,300 tonnes, according to the World Bureau of Metal Statistics (WBMS), but we expect apparent demand to rise four percent this year as the market moves from destocking mode last year, to one with stronger consumption this year. But given the supply deficit, we also feel consumers will be readier to restock too.

Source: ITRI

Tin Supply Outlook

In 2012, global tin production was 358,300 tonnes, which was down 10,400 tonnes on 2011, according to the WBMS. In the six years between 2005 and 2010, refined production averaged around 350,000 tonnes.

The bottleneck in tin supply is at the mining stage of production. Mine output in 2012 was 281,000 tonnes, while the average between 2005 and 2011 was 325,000 tonnes – the peak was in 2007 at 350,000 tonnes. This shows how miners have struggled to raise output.

Declining ore grades and government intervention to stop the squandering of national resources when prices are low have led to a decline in mine output, while low prices have deterred much-needed investment in the industry.

It would probably need a price of around $40,000 per tonne to make new underground mines economically viable, ITRI estimates. For now, poor demand growth has led to a build-up of tin stocks; these are likely to provide a cushion from a pick-up in demand. But since the tin market has been in a supply deficit during these difficult economic times, a major deficit could develop once better economic times arrive and demand improves.

Of the 10 largest producers, only three – YTC, Yunnan Chengfeng and Metallo Chimique – recorded a rise in production last year, a recent ITRI survey showed. YTC’s growth has come about because there has been a consolidation of ownership within the tin industry in China.

Production at the two other major integrated tin producers, PT Timah and Minsur, has declined in recent years, with PT Timah losing market share to private companies that are now buying the majority of the small-scale mine output, while a depletion of ore reserves and falling ore grades at Minsur’s San Rafael mine has resulted in a steady decline in output. It fell 9.6 percent in 2012 to 26,105 tonnes and is expected to drop to 24,000 tonnes in 2013.

Refined tin production in China was 148,107 tonnes in 2012, up 2.9 percent from 2011. January-February production was 21,430 tonnes, a drop of 1.6 percent from a year ago.

PT Timah is expected to produce 30,000 tonnes of tin in 2013, up from 29,600 tonnes in 2012, but it is now focusing on cutting production costs rather than targeting volume.

Changing mining laws in Indonesia, which come into effect on July 1 this year, will require tin exports to be of 99.9 percent purity, up from 99.85 percent previously. This will encourage greater local processing, which in turn will add more value to the domestic tin industry.

How this new law will affect Indonesia’s export of tin remains open to debate. Some industry insiders expect exports to drop as much as 24 percent to 75,000 tonnes this year because most medium-sized and smaller operations will not meet the higher purity standard.

Indonesia exported 98,817 tonnes of tin in 2012, which was three percent higher than in 2011. The country’s exports account for 40 percent of global tin trade so any disruption to exports due to the change in export laws could have a marked impact on global supply. But what we have noticed in the past is that whereas government involvement might have short-term impact on supply, the pressing need for cashflow by the country’s producers means that supply disruptions tend not to last too long.

While we would not be surprised if this became a bullish development later in the year, in the near term it may actually be a bearish factor should Indonesian exporters attempt to export as much as possible ahead of the change. Exports in January were 9,154.7 tonnes, 5.4 percent higher than in December, but they dropped 8.7 percent to 8,354.50 tonnes in February after heavy rains disrupted mining.

The overall trend in tin supply is that producers are either struggling against declining ore grades or are reluctant to boost production given the low price. There are some small-scale increases in production expected in Australia, the UK and in the DRC where conflict-free metal production is on the increase – some 200 tonnes was due to be shipped from the Kalimbi mine to Malaysia at the end of March but the region has a long way to go before output returns to its former highs.

Cassiterite production in the DRC was 5,460 tonnes in 2011, down from 13,415 tonnes in 2010 and the peak of 19,719 tonnes in 2008, which highlights the loss of production from the region.

Tin supply should therefore remain tight – there are no major new mining projects close to being commissioned. Over the longer term there are some 60 new mines in the pipeline, according to ITRI, which collectively have the potential to add around 100,000 tonnes per year of tin capacity, but these are not expected to come on stream over the next five years. So supply increases over the next few years will have to come from small rises in mine output and the drawdown of stocks.

Global Tin Stocks

China has been an active trader in tin and is a net importer – its consumption outpaces its production. In 2012, China produced 148,107 tonnes of refined metal but consumed 176,000 tonnes. In recent years, it has stepped up imports during periods of price weakness, with imports in 2012, reaching 31,334 tonnes, which was up some 32 percent on the year.

China could have accumulated 18,000 tonnes of tin stocks, ITRI estimates, so could cut back on its imports to 1,000 tonnes per month and still cover its structural deficit – not that we would expect the country to cut stocks to that extent.

LME Tin Stocks

LME stocks stood at 14,025 tonnes at the end of March, which is 10 percent higher than at the start of the year. Because stocks have averaged 12,200 tonnes since the start of 2012, it looks as though there has been some consumer and producer destocking into LME-registered warehouses. Most of the metal is held in Asian warehouses, with just 110 tonnes in Baltimore and 90 tonnes in Rotterdam, as of the end of March. Cancelled warrant stood at 3,445 tonnes; the bulk is located in Asia and there are just five tonnes in Rotterdam.

Given global consumption of 363,600 tonnes, LME stocks are not that high – they would cover just 3.9 percent of annual demand. Given the potential for restocking, this suggests there is not much of a stock cushion on the LME. While there would appear to be more in China, it would no doubt take a pick-up in LME prices relative to Chinese prices to attract the metal out.

Tin Outlook

Another projected supply deficit provides a supportive backdrop for tin’s outlook. In recent months and years the combination of Chinese buying on the dips and Indonesia’s regulating of exports when prices drop below $18,000 have underpinned the price; we expect this status quo to be maintained. We have also noticed that Indonesia tends to export more than it produces when prices move up to around $24,000-25,000 and China also tends to export metal at those price levels. So a natural range for tin at present seems to be $18,000-25,000.

Looking further forward, however, the market looks more bullish – the supply side of the market faces numerous challenges and, after a long period of consumer destocking, the demand outlook could step up a gear when consumers move from destocking to a hand-to-mouth existence. The market could get even more bullish on two counts: first, if consumers feel the need to restock; and second, if Indonesia’s changing export laws lead to a drop in the quantity exported.

The market does not seem unduly worried for now about shortages – cancelled warrants stand at 3,445 tonnes, which is roughly what they averaged during 2012 at 3,400 tonnes. Revisions to LME warehouse rules for tin and nickel also mean that tin is less likely to get stuck in long exit queues – from April warehouses will be obliged to release 60 tonnes per day of tin and/or nickel if requested.

Overall, the outlook for tin is brighter – we expect the recovery in the US to gather pace as 2013 progresses and we feel the recovery in China will do likewise after a slow start this year. We would not underestimate the impact that an end to destocking can have on apparent demand – in an illiquid market such as tin, it can have a powerful effect on prices.

In the medium term, we expect prices to remain rangebound, with higher prices attracting a pick-up in exports from Indonesia in the first half and possibly some destocking in China. From July onwards, we should expect a fall in exports from Indonesia once the export laws change; this could be bullish per se but could be even more bullish if it coincides with a pick-up in economic activity.

FastMarkets Tin Report Q1 2013 Conclusion

For the rest of 2013, we expect apparent consumption to recover after the destocking in 2012. We also expect a recovery to get underway in China now that the new government is at the helm, as we are in the second quarter and we feel the recovery will continue in the US.

Given tight supply, any recovery in China is likely to be reflected in firmer prices but, with Indonesia concentrating on cutting output costs rather than in boosting production and with exports likely to be negatively affected by new government legislation from July, higher prices may only prompt a limited supply response – at least from Indonesia. Overall, we expect the markets to remain relatively balanced in 2013 – we expect producers and traders will be initially able to respond to a pick-up in demand by drawing down stocks.

For the first quarter we were looking for prices to trade within a $23,000-25,500 range; they ultimately traded in a $22,390-25,250 range. For the second quarter, given the drop to $20,500 in mid-April, we would look for a $20,000-24,000 range and for the year as a whole we would look for prices to average $24,000.

Sources: ITRI, fastmarkets.com forecasts

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Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Nickel market, analysis on changes to nickel prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report. to download the Nickel only section of the report, click here: Nickel 23.04.13,Quarterly_Metals Report

Nickel Price Analysis Q1 2013

The nickel market is oversupplied, keeping prices relatively low and well into the cost curve. There are numerous production swing factors that are likely to underpin prices in the range of $15,000-17,000 per tonne but other factors, such as stock financing and stockpiling of nickel ores at Chinese ports ahead of next year’s ban of ore exports from Indonesia seem to be keeping nickel at a higher price level than is probably justified, based upon fundamentals alone.

Although this oversupply situation is capping the upside, we would not be surprised by bouts of restocking later this year, which could lead to upside price flurries. This is especially so given the mechanics of the nickel market and users’ preference for nickel units that trade at a discount to the LME nickel price, such as nickel in stainless steel scrap and nickel pig iron (NPI).

The outlook therefore suggests there is no shortage of supply but it probably would not take much of a drop in prices to trigger supply cuts, while the market should be quite responsive to any signs that stainless steel producers are about to raise output. But while supply is also likely to be responsive to any pick-up in price, we do not expect the market to move into a supply deficit in 2013, although a panicky bout of restocking could well lead to an upside spike in nickel prices down the road.

The International Nickel Study Group (INSG) has lifted its forecast for a surplus of 93,800 tonnes in 2013 from an earlier forecast of 70,000 tonnes, reflecting the impact of new supply coming on stream. That is after a surplus of around 87,200 tonnes in 2012. We feel, however, that demand may well surprise on the upside this year, which may well mean the market ends with a smaller surplus. History tells us that restocking cycles in nickel can lead to sharp price moves but we would expect production to keep up although it may require a price incentive to do so.

The market has been disappointed so far this year by the state of the economic recovery in China, which has led to long liquidation by funds, unwinding all of the price gains made since October. But prices are for now still above the summer lows around $15,250.

Nickel Demand Outlook

A stronger recovery is still expected in China this year, which we feel will lead to stronger demand for stainless steel and nickel units.

Global stainless steel production climbed three percent in 2012 to 35.1 million tonnes and is expected to climb 4.5 percent this year to 36.7 million tonnes. China and India are the main powerhouses for stainless steel production and production growth. But capacity expansions in these countries are likely to make some of the existing capacity in the US and Europe less competitive. That said new stainless steel capacity is also being brought on line in the US.

In 2012, China’s stainless steel production climbed around 13 percent to 16 million tonnes and is expected to grow around 10 percent this year to reach 17.6 million tonnes, whereas non-Chinese stainless steel production is expected to grow around four percent this year.

In the stainless steel production cycle, there tends to be a rush to buy more secondary nickel feed sources such as stainless steel scrap, the generation of which tends to lag behind economic growth, when stainless steel output is raised. In turn, this leads to a pick-up in demand for primary nickel and a drawdown in LME stocks – which can in turn fuel the rally.

The performance of non-stainless steel demand for nickel, which covers demand from the aerospace industry and the petrochemical industries, was mixed in 2012. The latter suffered while companies held off from making capital investments in the uncertain economic climate but the former performed strongly.

The outlook for stainless steel is more bullish this year – production is expected to rise in China where new capacity is due to come on stream and demand recovers, following government measures to boost spending on infrastructure projects. North American output is also expected to rise while its economic recovery continues and apparent demand picks up following last year’s destocking.

European demand for stainless steel is subdued. This is likely to remain the case in 2013 but there may be some improvement in the figures – destocking appears to have already ended and apparent demand is growing while stainless steel mills run on a hand-to-mouth basis.

With evidence suggesting the recovery in the US continues and with a recovery in China expected to gather momentum, we expect a brighter outlook for nickel demand as 2013 progresses.

Nickel Supply Outlook

Nickel’s supply situation and outlook has become quite complicated, with several factors muddying the waters. Much of the new supply is lower-cost but because NPI production has a steep marginal cost curve, new low-cost production is likely to lead to corresponding closures at higher-cost producers.

In addition, much of the new capacity being built outside China involves complicated technology, such as high-pressure acid leaching (HPAL) that can be difficult to start up, so it is difficult to know with any certainty when these new operations will start commercial production and what output will be obtained.

In 2013, some 80,000 tonnes per year of new non-Chinese nickel capacity is expected to come on-stream and 45,000 tonnes of that capacity will be from HPAL operations. Depending on how smoothly the new production comes into operation, there could be a big swing in the amount of new supply.

The market moved into a state of oversupply at the start of 2012 when new greenfield production came on stream outside China and new lower-cost NPI production was brought online in China. This supply surplus is expected to continue throughout 2013 before returning to a more balanced situation in 2014

Next year will be further complicated should Indonesia’s ban on the export of nickel ores that are used to produce NPI come into effect. In the run-up to the ban, exports of nickel ore are likely to accelerate while Chinese NPI producers build up strategic stockpiles.

As things stand, although Chinese companies are starting to build some processing capacity in Indonesia, little is likely to be operational before the ban starts. What happens after the export ban is a big unknown – will it be enforced or will exports be allowed, but be subject to a higher export tax?

Some 400,000 tonnes per year of NPI capacity in China is dependent on nickel ore exports from Indonesia, highlighting the severity of the issue. Stockpiled ores may provide enough feed for six months or so after the ban but nickel supply could suffer a significant setback, if a solution is not found early in 2014.

So while supply is likely to be abundant in 2013, there may be a significant change in 2014. We should therefore prepare for the market to start to anticipate later in 2013 the potential for supply tightness in 2014.

For now, exports of nickel ore from Indonesia continue, which is feeding the new low-cost NPI production from rotary kiln-electric furnaces (RKEF). As more of this low-cost NPI enters the market, the marginal cost of production drops, which in turn is likely to dictate where the floor price for nickel should be.

Imports of nickel ores into China continue to climb while the industry stockpiles material ahead of next year’s Indonesia ore export ban. Interestingly, imports of refined nickel have picked up this year even though the arbitrage window has been closed since last October. So whereas it may not make sense to import nickel for consumption because it would be cheaper to buy local nickel units, it may be economically viable to import nickel for financing purposes. The high value of nickel per tonne, compared with the likes of zinc or aluminium, makes it an efficient metal to hold as collateral – it takes less space to store a million dollars of nickel than it does aluminium.

Source: Official customs statistics

 LME Nickel Stocks

ME stocks have been climbing again in recent months, moving to around 167,000 tonnes by the end of March from around 142,000 tonnes at the start of the year and 90,000 tonnes at the start of 2012. LME stocks are now at all-time highs, having surpassed the February 2010 high (see chart).

Given that many of the nickel units now produced are not LME deliverable and therefore trade at a discount to LME prices, we view the inflow into LME warehouses as representing the global supply surplus. But the fact that stocks have increased more than our estimate for last year’s supply surplus implies that consumers destocked last year. Again, it is not surprising that consumers destocked given the price sell-off between February and August; the recent pullback to $15,400 from $18,770 may well have led to further destocking.

One interesting development is the steady rise in the level of cancelled warrants, averaging around 28,000 tonnes in March compared with an average of 9,150 tonnes in 2012. This suggests that traders are keen to ensure that the build-up of stocks in LME warehouses does not weigh on prices too much. With new loadout rates for nickel coming into effect in April, a buffer of cancelled nickel warrants should help to create an exit queue for the metal.

On balance, we expect the nickel market’s surplus to shrink this year – we expect stronger demand to lead to a pick-up in actual consumption. Nickel, being the beast it is, tends to react quite aggressively to restocking as it does to destocking – we feel this could mean apparent demand could climb quite smartly later in 2013.

Although we see little problem in supply keeping up with increases on demand, we feel it will take higher prices to incentivise higher production.

Sources: INSG, BaseMetals.com forecasts

FastMarkets Nickel Q1 2103 Report Conclusion

The nickel market is at an interesting juncture. The supply situation has become quite complicated – many aspects of supply are price-elastic – but technology issues will also to some degree influence how much of the expected new production reaches the market. In addition, the supply picture could suffer a significant supply disruption in 2014 – the market may well start to move, ahead of Indonesia’s ban on nickel ore exports.

Capacity-wise, the market is well supplied and the marginal cost curve should regulate production overall. The ease with which non-Chinese production is ramped up is therefore likely to govern where the floor price lies. Delays to the ramp-up of new production would raise the floor price – more higher-cost NPI production would be needed.

These swing factors are likely to set a range for nickel between $15,000 and $22,500 for 2013. In the first quarter, prices have averaged $17,309. Given how low prices are at the start of the second quarter, we would look for an average price of around $16,800 for this three-month period, with a likely range of $15,000-18,000.

So far this year, economic activity in the US has been stronger than we expected. The economy has managed to avoid being derailed by the fiscal cliff and the Sequester although these may provide some drag later in the year. Conversely, the economic performance of China in the first quarter has been more subdued than anticipated but we feel a stronger recovery will follow now that the new political leaders are in situ.

We foresee a move from the current hand-to-mouth existence to some mild restocking. Generally, we expect the recovery in the US to continue to make headway in 2013 and for China’s recovery to gather momentum.

As is often the case with nickel demand, prices can react sharply at first when the stainless steel industry is in restocking mode – this may well be the case at some stage during the second quarter.

Although we cannot rule out another bout of weakness, especially if there is a broad-based risk-reduction sell-off across markets, we feel nickel prices would be unlikely to stay below $15,500 for long.

Overall, we expect prices to move into a higher sideways trading range above $17,000 during the second half but we would expect prices to struggle to hold above $18,500 although a short-covering/restocking rally could see prices spike up above that level for a while. We feel surplus capacity that is price-elastic above $18,500 and high stocks will cap the upside.

Given the weakness in recent months, we have revised down our forecast for 2013 as a whole to $17,500, from $18,500.

Appendix

Source: Various Press Articles

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Lead Price Analysis Q1 2013

We have viewed the lead market for some time now as fairly balanced as far as supply and demand are concerned; the latest International Lead and Zinc Study Group (ILZSG) concurs. It puts the supply surplus at around 40,000 tonnes, which in a 10.5-million-tonne market suggests a surplus of just 0.3 percent over global consumption. Looking at the whole of 2013, we expect both supply and demand to rise at similar rates of around six percent, thereby keeping the market in balance. One noticeable feature of the market is a build-up of metal inventory in China while LME stocks have been falling.

This might have been an issue had it not been for the fact that we expect metal production to rise this year both inside and outside of China – we therefore do not expect much tightness in the market, although we are aware that visible stocks in the West are not that high in relation to consumption. The long-term lead chart shows prices are stuck in a meandering sideways range that since late 2011 has run between $2,500 and $1,770 per tonne – given the current fundamentals, we expect this range to remain in place, although the risk would be to the upside should there be a stronger recovery in China and the US. Should this attract more investment interest, it could cause prices to overreact on the upside – at least for a while, especially considering the funds are currently believed to be short.

The lead market is in an interesting space – unlike most of the other metals, there is little trade in refined metal between the West and China. China became self-sufficient in refined lead in 2011 and produced a surplus in 2011 and 2012, but the potential for the surplus to be exported is low because there is a 10-percent export tariff on refined metal. China does, however, still rely on imported concentrates and exports lead in the form of lead-acid batteries.

The other aspect of the market that distinguishes lead from the other metals is that recycled lead accounts for some 56 percent of refined metal supply – secondary production accounts for 91 percent of US supply, 67 percent of German supply and 63 percent of Japanese supply. This means the generation and availability of scrap has a major influence of lead supply and price, which means lead can at times trade quite differently from the base metals complex as a whole. This was the case last year when a mild winter in 2011/2012 meant less vehicle batteries failed, which led to a shortage of scrap. Not surprisingly given the percentage of US lead supply that comes from secondary means, the shortage was felt the most strongly in the US.

Lead Demand outlook

Given the economic outlook for China and the US, the recovery in the auto industry in these regions and the global increase in demand for industrial batteries, we expect demand for lead to be relatively strong this year. This is especially so because demand for industrial batteries for the rollout of 4G mobile telephony is less dependent on economic growth and more the result of technological advancement. Another growth trend for industrial batteries is their use in providing emergency back-up power. As more business is done online, as computer networks control more aspects of our lives and as cloud computing becomes more popular, demand for back-up power has taken off. These new trends may have started in developed economies but are likely to spread into emerging economies quickly, all of which paints a strong demand picture for lead.

In the US, auto sales continue to recover at a fast pace – the ageing vehicle population continues to boost new sales. In addition, as the housing market recovers, more homeowners are likely to borrow against their positive equity, which should mean household spending continues to recover.

In Europe, demand for OEM lead-acid batteries for new vehicles is likely to remain depressed while new car sales suffer from the economic gridlock but demand for industrial batteries, for the same reason as above, should prove recession-proof, as is demand for replacement batteries. Looking further ahead, the economic hardship in Europe is doubtless creating pent-up demand for new auto sales that the market has to look forward to, although this may be a few years away. Indeed, latest car sales figures for Europe make depressing reading, being down around 10per cent.

In China, we expect lead demand to remain very strong – there is so much potential for organic growth across all the industrial applications for lead including: 4G telephony, back-up industrial batteries, OEM vehicle batteries and replacement batteries as the vehicle and e-bike populations continue to grow. In 2012, Chinese lead demand rose an estimated three percent on 2011. Since auto sales in 2012 were subdued, we would expect even stronger growth this year, especially if last year’s low demand growth was dragged down by a degree of destocking.

Lead Supply outlook

Last year several primary smelters remained on care and maintenance, notably La Oroya in Peru and Port Vesme in Italy, and others either lowered output (Zellidja in Morocco) or closed (OTZK in Bulgaria) due to profitability issues, which continued to disrupt lead supply. In addition, there was a shortage of lead scrap to feed secondary lead smelters. Consequently, lead production only rose 0.3 percent in 2012. The outlook this year is brighter: some of the idled primary smelters are being brought back into production and the current shortage of scrap lead appears to have eased.

The 100,000 tpy La Oroya smelter is restarting production as is the Port Vesme smelter in Italy, but interestingly there was no evidence of any production yet at either complex in January, according to ILZSG data. The 51,000 tpy Karachipampa smelter in Bolivia is reportedly ramping up production after the government invested the equivalent of $50 million to provide concentrate. Secondary production capacity has also climbed in the West via the start-up of Johnson Controls’ 125,000 tpy recycling plant in South Carolina and the expansion of EnviroFocus’s 76,000 tpy plant in Florida. ILZSG data for 2012 showed US secondary lead production climbed to 1,181,000 tonnes from 1,130,000 tonnes in 2011 – despite the tightness in lead scrap, it seems that more scrap was processed, which in turn suggests that the scrap shortage was a consequence of higher demand for scrap when new secondary capacity was commissioned rather than less scrap around per se.

Supply from mine output in China has surged in recent years, climbing 20 percent in 2012 after a 19 percent increase in 2011. Mine output in 2012 was 77 percent higher than it was in 2009. After such a rapid advance, we now expect mine output growth to slow.

Needless to say, this rapid pace of growth has helped China to become self-sufficient in refined lead. Mine output outside of China is expected to increase around 225,000 tonnes in 2013, with numerous small expansions from a host of Western miners, plus a 50,000 tpy increase at Mount Isa in Australia and a much-awaited restart at 90,000 tpy Magellan mine in Australia, which is expected to produce 55,000 tonnes in 2013. Refined output increased 0.3 percent in 2012 on the previous year, but given the pick-up in mine output, less scrap tightness and additional secondary capacity, we expect refined production to increase around six percent this year. Global supply from recycled lead last year was just short of six million tonnes compared with 4.6 million tonnes of primary lead production.

LME Lead Stocks

LME lead stocks dropped 35,375 tonnes last year to 317,700 tonnes, which may well relate to the tightness in scrap availability. Stocks have since fallen to 259,675 tonnes up to the end of March, a drop of 55,675 tonnes. The bulk of the stock drawdowns have come from regular withdrawals of 1,500 tonnes per day from Johor, which suggests metal is being removed from LME warehouses and placed in off-warrant financing deals.

Out of the 259,675 tonnes of lead in LME warehouses, 78,825 tonnes of warrants have been cancelled and 49,950 tonnes of the lead is in Vlissingen. There are 7,600 tonnes of cancelled lead warrants in Vlissingen but the total exit queue there is large – there are 920,775 tonnes of cancelled aluminium and 46,692 tonnes of cancelled warrants of other metals, which will act as an exit queue. So there is potential for tightness to develop in lead, especially if the new lead production either ends up going into financing deals or is parked in warehouses where there are large exit queues, rather than reaching consumers.

Even if all the LME lead was readily available, which it is clearly not, the amount of cover it would provide is relatively low in any case – it would only cover 2.3 percent of annual global demand.

Source: ILZSG   China’s trade data shows a very low level of trade in refined lead, with around 2,000 tonnes imported in the first two months of the year. But this is unsurprising given the increase in domestic mine output. Despite the rise in domestic mine output, concentrate imports remained high last year, rising 26 percent. Since China remains dependent on imported concentrates to meet its refined production, we expect concentrate imports to remain relatively high, especially if domestic mine output growth slows after some rapid advances in recent years.

Source: Official customs statistics

 Sources: ILZSG, fastmarkets.com forecasts

 FastMarkets Lead Report q1 2013 Conclusion

The switch from a supply surplus to a more balanced market in 2013 combined with relatively low stock levels – much of which are tightly held or are virtually held off market – should support a firmer foundation for lead prices this year. With the demand outlook improving in the US and China, which is likely to feed through to other emerging markets too, we feel demand for batteries will be robust, especially for industrial batteries, which should help underpin lead prices.

We are surprised by the extent to which lead prices have fallen since February’s peak but we feel the base metals complex as a whole ran ahead of itself in the November-February period and prices have since corrected. From these levels we are generally quite friendly towards lead and, while we do not expect a bull market to unfold per se, we would look for the most part for trading in a price range of $2,000-2,500. Should there be a more pronounced risk-reduction sell-off across markets due to a macroeconomic event, there could be a brief test of $1,800-1,900 but we feel it would just be a spike lower. Due to the price weakness in the first quarter when prices averaged $2,300 but traded down to a low of $2,093, we have revised our forecast for 2013 as a whole to $2,250. For the second quarter, we would look for price to hold within a $2,000-2,300 range.

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Gold for June delivery on the Comex division of the New York Mercantile Exchange was last down $12.40 at $1,352.20 per ounce. Trade has ranged from $1,336.30 to $1,364.00.

“Downward pressure on gold continues and we are now back to levels post the mid-April selloff. Investor sentiment remains negative as highlighted by the persistence of ETF selling and the extension of spec shorts to an all-time high,” investment bank UBS said.

Net Comex longs declined 700,000 ounces to 7.0 million ounces as of May 14 largely due to more shorts being initiated. The gross short position in gold now sits at a record 14.3 million ounces, nearly double the levels at the start of the year, noted UBS, citing CFTC data.

“The risk for gold right now stems from likely contained physical buying from India on the back of the recent Reserve Bank of India’s restrictions on consignment and potential downside from the FOMC minutes due this Wednesday,” UBS added.

In recent weeks, several Federal Reserve policymakers have indicated that it might soon be time to taper its quantitative easing programme. The central bank is currently committed to purchasing $85 billion in new debt per month in an open-ended programme (QE). Accommodative measures from the US central bank are supportive of gold because extra liquidity tends to debase the dollar and create future inflationary risks.

“I am not saying cut it off. We don’t want to go from wild turkey to cold turkey overnight. That would be too violent but that is the nature of the discussion right now,” Richard Fisher, president of the Dallas Federal Reserve Bank, said on Monday on CNBC.

“As a point of clarity, I would start by cutting back or reefing in, as I like to say in sailor’s terms, the mortgage-backed securities purchases. I don’t think we need to proceed at the same volumes that we have. That market is on its way,” Fisher added.

In wider markets, the euro was last about a quarter of a cent stronger at 1.2863 against the dollar, while Germany’s DAX was up 0.13 percent and France’s CAC-40 was down 0.10 percent.

The data calendar is light today – many financial centres are closed today for a one-day holiday. The only item of note was UK RightMove house prices index, which came in at 2.1 percent.

As for the other precious metals, Comex silver for July delivery washed out this morning – it was last down 68.7 cents at $21.665 per ounce. Trade has ranged from $20.250 to $22.350.

“Silver saw some aggressive liquidation action overnight, with the July contract falling down to its lowest level since September of 2010,” the CME Group said in a market commentary. “In addition to knock-on selling from gold, silver was reportedly under pressure from technically inspired selling as the market approached and failed to hold the April spike low.”

Platinum futures for June delivery on the Nymex were down $13.50 at $1,454.50 per ounce and the July palladium contract was at $740.95, up 70 cents.

“Like the rest of the precious metals markets, platinum is under pressure to start the new trading week, with a large portion of that coming from gold and silver price action,” CME said. “As in gold, platinum is discounting news of significant wage increase intentions from South African mining unions.”

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Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Copper market, analysis on changes to copper prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report, or to download the copper only report click here: QMR Copper

Copper Price Analysis Q1 2013

Copper prices continued to oscillate sideways around $8,000 per tonne in the first quarter, with three-month prices averaging $7,928. The high during this period was $8,346 while prices had been as low as $7,486.25; they have since dropped to a low of $6,800.

As the chart below shows, the broad sideways range has now held since the fourth quarter of 2011, which suggests the market is roughly balanced, with the price swings mapping the changes in the macroeconomic mood. This may start to change – it appears that the market is moving towards a more sustainable supply surplus and prices at the time of writing have tested support levels again, albeit for reasons triggered by factors outside the immediate sphere of copper fundamentals.

In late 2012 and early 2013, optimism was running high that the US economic recovery would continue and that China would move into recovery mode too. On the strength of that, metal prices ran higher while investment interest picked up. Although US data has tended to remain upbeat, Chinese data has been less constructive and a recovery in demand during the first quarter has proved to be fairly elusive. This forced a reappraisal of the outlook for commodity demand and a corresponding correction in prices.

That said we still have high hopes for a recovery in China and the extent to which this emerges in the months ahead will no doubt determine how well copper prices manage to hold up. Indeed, the manufacturing PMI data has boded well but latest GDP figures are disappointing.

The market was in a deficit of 340,000 tonnes in 2012, according to preliminary data from the International Copper Study Group (ICSG), but it had swung into a surplus in October and remained in one for the whole of the fourth quarter – totalling 237,000 tonnes.

Copper Surplus 2013

This switch from deficit to surplus is in-line with expectations and, with stocks climbing and a surplus forecast for this year, there may well be downward pressure on prices especially while copper trades significantly above its marginal costs of production, which we put at around $5,000 per tonne. As always, the perceived ‘’magic number’’ for copper is around the $3 per pound, or $6,615 per ton, where substantial support can be expected, should the current lack of confidence in the metals markets continue.

Although ICSG showed a deficit in 2012, we do not feel this reflects reality because there was a large build-up of copper stockpiles in Chinese bonded warehouses, which distorts the Chinese apparent consumption data. If we assume that some 500,000 tonnes of copper went into bonded warehouses last year, the market was in effect in a slight supply surplus in 2012 rather than a deficit. All in all, though, we feel the copper market was probably well balanced last year.

Copper Demand in 2012

Global copper demand climbed 608,000 tonnes or 3.1 percent to 20.5 million tonnes in 2012 from 2011, ICSG data on world usage shows. Most of the increase came from Chinese apparent consumption, which rose 11 percent in 2012, which more than offset a 3.8-percent decline across the US, Japan and the EU. China’s surge in demand was, however, based on a 17-percent increase in imports, which no doubt gives a distorted picture of what actual demand was.

Overall, given the slowdown in China’s economic growth – the country’s manufacturing PMI was below 50 between July 2011 and October 2012, indicating manufacturing was contracting for most of 2012 – it seems likely that copper demand growth in China last year was subdued.

Copper Supply in 2012

Mine production rose 715,000 tonnes or 4.5 percent to 16.023 million tonnes in 2012 from the previous year, according to the ICSG. There were increases in China (26 percent) DRC (21 percent), Mexico (18 percent), Peru (five percent) and Chile (three percent), which more than offset declining output in Indonesia (26 percent) and Australia (four percent). The average world mine capacity utilisation rate climbed to 82 percent from 80.6 percent in 2011.

Source: ICSG

Refined output increased 485,000 tonnes or 2.5 percent to 20.132 million tonnes in 2012 compared with 2011, with primary output up 2.3 percent and secondary output up 3.3 percent. The main increases came from China (11 percent) via new capacity; Japan (14 percent), where the industry recovered from the 2011 earthquake and tsunami, and the DRC (28 percent), where new capacity was brought on line. Output declined six percent in Chile, three percent in the US and 45 percent in the Philippines after a fire at the country’s sole smelter. Capacity utilisation dropped to 79 percent from 80.6 percent in 2011.

Copper LME Stocks

LME stocks have started to climb again, rising 250,625 tonnes in the first quarter. We do not feel that the stock increase reflects the size of the supply surplus, because it has become apparent that some warehousing companies have been offering incentives of up to $100 per tonne to put metal into warehouse.

The incentive has probably led to the warranting of copper that was formerly off-warrant. Indeed, some of the metal moving into LME warehouses is believed to have come from Chinese bonded warehouses. That said, the supply surplus is more than likely to end up in the LME stock data too.

The notion that the copper surplus will end up in LME warehouses is interesting – the large exit queues at many LME warehouses could mean that the surplus ends up being kept off market, which in turn might prevent the surplus from weighing on prices. As we have seen in aluminium and zinc in recent years, sustained surpluses have not led to ever-decreasing metal prices. As the table opposite shows, where there are large tonnages of copper, there tend to be large levels of cancelled warrants too, which means it is likely to take considerable time to get hold of the copper in LME warehouses.

The exceptions are Busan where there are 46,400 tonnes of copper but total cancelled warrants stand at just 17,348 tonnes, and St Louis, where there are 22,550 tonnes of copper but only 6,750 tonnes of cancelled warrants. Still, the new LME load-out rates that came into effect at the start of April should shorten the exit queues for the likes of copper, which tends not to be the dominant metal in warehouse. Ironically, given the incentives being offered at certain warehousing locations, the new LME load out rules could help the relocation of stocks into areas where the metals can be more tightly held, thus exacerbating the tightness and premium structures.

LME forward spreads have also widened in recent months, raising the likelihood of surplus copper being tied into financing deals, which would be another way for traders and producers to keep metal off market. The three-to-15 months copper spread had moved out to around $105 per tonne contango by the end of March from an average of $76 in February and $61 in January, although recent movements have tightened the spread to just under $100

Last year, a considerable amount of copper in China was used as collateral against loans, effectively keeping it off market. With China expected to remain nervous about inflation, especially in the property market, we feel that lending practices will remain tight, which is likely to mean copper continues to be used for financial purposes. So there is now a situation where surplus copper is likely to be kept off market in China and in the West, which could go a long way to preventing copper prices from reacting to the developing bearish fundamentals.

One interesting aspect of the market is the mismatch in stock location and regional demand. With an estimated 1.1 million tonnes of copper in bonded warehouses and on the SHFE compared with 625,000 tonnes held on the LME and Comex, China holds around 63 percent of copper inventory but accounts for around 43 percent of global consumption.

But while China runs a structural copper deficit, with refined consumption of around 8.8 million tonnes and refined production of around 5.6 million tonnes, it seems unlikely that much of the Chinese stockpile will leave the country.. In recent weeks, the Arb window has been open spasmodically; again attracting metal from LME to Shanghai. It is noticeable that bonded warehouse stock levels have started trending downwards in recent weeks – attracted by premiums in Far Eastern LME warehouse?

With that in mind, it is lucky that a good proportion of the supply response is, for a change, not limited to China. In 2012, we estimate that Western copper production increased around 450,000 tonnes, a figure that is set to double to around 900,000 tonnes this year and nearer one million tonnes in 2014, which should help prevent the regional mismatch in stocks from causing tightness in the West. As the table on the next page shows, the ICSG forecasts global refined capacity to reach 26.854 million tonnes this year, which would be up 5.4 percent from last year.

Mine capacity is seen growing at an average annual rate of eight percent between 2013 and 2016. Peru will contribute the most to new output, accounting for 26 percent of the increase, with 10 percent coming from Zambia, eight percent from the DRC and seven percent from the USA.

What is interesting is that some 1.2 million tonnes per year of copper mine capacity by the end of 2016 will be in countries that have not been associated with copper mining in the past – these include Afghanistan, Ecuador, Eritrea, Israel, Kyrgyzstan, Panama and Sudan.

Smelter capacity is expected to grow at an average rate of 4.7 percent per year over the same period, with Asia accounting for 87 percent of the increase in capacity – the China, India, Indonesia and Iran totals will all increase. Refined capacity should reach 30 million tonnes per year by the end of 2016, a rise of 18 percent from 2012.

Interestingly, mine capacity is set to grow at a faster pace than smelter and refined capacities, which should enable concentrate stockpiles – which have been depleted in recent years – to be built up again. This should create a better supplied market with a bigger stockpile cushion to protect against any supply disruptions, all of which should provide consumers with some comfort – and possibly lower prices.

Source: ICSG

Chinese trade data showed increases across the board in 2012, with the increase in imports of scrap, concentrates and refined metal all suggesting restocking, which is now likely to provide some kind of cushion against price increases if demand starts to gather pace as we believe it will.

It will be interesting to see whether after the increase in imports last year and the build-up in stocks of refined copper in bonded warehouses leads to a drop in the level of imports in 2013. On paper, it does look as though there is enough stockpiled metal in China to cushion the market from a pick-up in demand, but it may be that a lot of the stockpiled copper is tied up in collateral deals and is therefore not readily available to consumers.

This could boost imports again – we note with interest that the LME/Shanghai arbitrage window reopened late in March, which implies demand for copper was strong enough to enable traders to start importing copper again, which supports the view that the copper already in Shanghai may not be freely available.

Source: Official customs statistics

Copper Prices Current situation

The run-up in prices that started late in October last year and ran into February this year seems to have been fuelled by the combination of beliefs that the US would sidestep the fiscal cliff, which it seems to have done, and that China’s recovery would gain traction into 2013 and once the new leaders took the helm. This prompted a pick-up in fund buying that led to a faster and more pronounced rally in prices than was probably justified by the fundamentals.

Ultimately, the economic data out of China has not matched expectations and the change in political leadership in Italy and the botched bailout of Cyprus have also raised concerns that the crisis in the EU could escalate again. This prompted long liquidation by the funds, in turn triggering a price correction that has now wiped out all the gains made since last summer.  Very recently the entire market complex was spooked by the announcement from Cyprus of Central Bank gold sales, raising the question of whether this action could spread elsewhere in Europe. The fall out has been dramatic and copper prices have dropped to levels not seen for a very long time.

The Copper Price Outlook

In the previous quarter’s report, one factor that made us bullish on metals in general was the potential for apparent demand to improve after a period of global destocking throughout much of 2012. We still feel that there is still room for this once the current loss of confidence and volatility has worked its way through – and we expect restocking in China to lead the way.

Reports suggest that demand for autos, white goods and housing have made good recoveries and that the extra demand this has generated has so far been supplied from inventory. This bodes well for a pick-up in production – some manufacturers in China are already raising their growth forecasts for 2013, with many looking for growth in excess of 10 percent. If good demand is being met by drawing down inventory, it stands to reason that production will have to increase soon; when it does, that will mean consumption of commodities will improve too.

How 2013 turns out is likely to be determined by the extent to which consumers feel the need to restock. Manufacturing PMIs have become quite mixed – the US ISM number climbed to 54.2 in February from 53.1 in January and 50.7 in December but then dropped to 51.3 in March, which suggest the US recovery is still stop/start.

The Chinese number climbed to 50.9 in March, having dropped to 50.1 in February, from 50.4 in January and 50.6 in December. With the new government in situ and with the lunar New Year past, the recovery might start to gain traction. Japan’s manufacturing PMI climbed back above the 50 level in March to 50.4 from 48.5 in February and a low of 45.0 in December.

Europe’s PMI remains in the doldrums. The pan-EU number was 46.8 in March, up only slightly from 46.6 in February. Germany, generally considered to be the powerhouse of Europe, also shocked the market – its PMI fell to 49 in March from 50.3 – and France’s remained depressed at 44 in March.

The global PMI reading was last at 51.2, up from 50.9 in February but down from 51.4 in January. All in all, global manufacturing is expanding but at a subdued pace so the outlook for the rest of this year will depend to a great extent on whether more sustainable growth emerges in the US and China.

Overall, given the infrastructure spending announcements from last year, a belated recovery may now begin late into the seasonally strong second quarter. This could be a market-moving development for the metals.

In the current business climate, companies are sitting on piles of cash but are concerned about investing. Until solutions are found to Europe’s debt problems, this is likely to remain the case; still, some of this cash might well be mobilised – especially in North America – should US leaders come up with a workable long-term plan to manage the US debt and deficit. This issue has the potential to become a bullish factor for the market if it starts to unfold.

The debt crisis in Europe seems unlikely to go away soon; we expect it to remain a drag on the economy while austerity rules. In turn, demand for copper there is likely to remain subdued, although there may be some pick-up in apparent demand because there is a limit to how much destocking can be done. The demand outlook for copper faces headwinds from Japan and the BRIC countries too – their economies are suffering. Export demand is weak while Europe remains in the doldrums.

Another problem for copper remains strong substitution. The price differential in recent years has encouraged manufacturers to use other materials, notably aluminium, where possible. Copper lost ground in plumbing six years ago and now is losing market share in wire, cable and heat exchangers. With copper still 290 percent more expensive than aluminium compared with 75 percent on average between 1981 and 2010, the incentive for substitution remains alive.

With prices pulling back, it will be interesting to see what the uptake of copper exchange-traded funds (ETFs) is like. We have long argued that whereas would-be investors might be put off by the cost of warehousing and insuring the metal, this would become less of an issue at lower copper prices – investors would be more likely to be prepared to buy copper ETFs if they viewed the copper price as cheap. As such, we feel the presence of ETFs will help support copper prices now they have moved down below $7,000 per tonne. Again, the market will need to consolidate and regain its composure.

The overall view for 2013 is that the copper market will be broadly balanced. We expect a supply surplus to develop but it is likely to be small enough to view the market as balanced; however, the surplus is expected to grow in the years ahead when new projects at an advanced stage of development are commissioned.

In the near term, much will depend on how demand recovers, especially in China, and how tightly held the copper stockpiles are. With this in mind, we note how quickly cancelled copper warrants have climbed on the LME since early March. They stood at 155,375 tonnes on April 15, up from 24,875 tonnes at the beginning of March.

The US will also be a key area – it is currently a bullish aspect to the outlook. Avoidance of the fiscal cliff and sequester opens the way for a sustained recovery but with many decisions about the debt ceiling still to be made the outlook for the year as a whole is still uncertain. If handled well, the US recovery could really gather momentum and provide a strong lift to global demand.

In summary, the outlook for demand in 2013 is stronger than it was in 2012. We expect the US recovery to gain momentum and we still expect a Chinese recovery to start, which will lead to restocking. The drag factor remains in Europe – we would not expect too much cheer from this region but, if it can avoid another crisis, stability there would be a welcome development – although that might be expecting a lot.

FastMarkets Q1 2013 Copper Report Conclusion

Copper has had some of the tightest fundamentals of all the metals in recent years, which is no doubt why prices have managed to hold so far above the marginal cost of production. On paper, the market looks set to move into a supply surplus in 2013, which should in theory put downward pressure on prices; indeed, that seems to have been unfolding in recent months.

But supply surpluses have not led to downward spirals in other metals and we think producers, traders and warehouse companies have become adept in keeping surpluses off market. We expect the same phenomenon in copper now – indeed, the run-up in cancelled copper warrants may be the start of this.

Our outlook for 2013 assumes that China will move from a situation where growth has been slowing to one where infrastructure spending and urbanisation gives the economy a boost, while the US recovery is put on more stable grounds and continues to gather momentum – the US auto industry is already recovering strongly. China’s auto sales are following suit and the US construction industry is building momentum too.

On balance, we expect good scale-down buying interest to emerge once the current bout of weakness has been contained at prices below $7,000 and would watch for signs of consumer restocking in China and the US. Even without restocking per se, we feel apparent demand will pick up in all regions in 2013 as destocking ends. Prices have already dipped briefly below $6,900 and support was encountered in the face of large scale stop-loss selling and position liquidation.  The market is now considerably less overbought than has been the case in recent months and therefore any upsurge in buying interest will be more intense.

Looking further into 2013, the prospect of a supply surplus of some 270,000 tonnes should keep prices capped but further supply disruptions, combined with less liquid stocks and possible consumer restocking in China and the US, may well absorb more of the surplus.

Prices averaged $7,928 in the first quarter; because this first-quarter average was lower than expected, we have revised down our forecast for the 2013 average to $7,700 from $8,200. In the second quarter we expect prices to spend most of the time in the $7,000-7,600 range.

Sources: ICSG, FastMarkets.com forecasts

For this quarter the volatility experienced in recent days has raised a huge question mark over price movements, which are not responding to fundamental news. The Force Majeure at Bingham has been completely ignored, as have the labour issues at the Chilean ports and potential labour problems later in the year amongst the mine workers in Chile and at Grasberg.

As and when the market stabilises these factors will start to exert upward pressure on prices and provide further stimulus. So, for this quarter we will no doubt endure a period of price volatility at these lower levels, probably followed by an improvement as we move towards June. In the meantime, we could see spikes down to the $6,625 area but feel these will be short-lived and later in the quarter we could see a recovery up into the $7,500-$7,800 area.

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Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Aluminium market, analysis on changes to aluminium prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report. To download the aluminium report as a pdf click here:Aluminium 23.04.13,Quarterly_Metals Report

Aluminium Price Analysis Q1 2013

Aluminium is in an interesting situation in that the rampant oversupply that has dogged the market for six years has so far failed to force the industry to rationalise output. Clearly, the laws of supply and demand have been distorted by the availability of cheap money that has made cash-and-carry deals economically viable and a set of LME rules and logistical restrictions have also enabled warehouse companies to restrict the outflow of metal from their sheds.

The combination of these two practices has meant traders and producers have found profitable ways to keep surplus metal off market. While these practices are economically viable, it is best to assume the status quo will last. There is a risk that reality catches up with the market – in which case the current situation could unravel in a disorderly manner – but the fact that efficient markets have not brought about a correction already suggests these aberrations are likely to continue. This means our outlook is therefore based less on the fundamentals and more on subjective reasoning.

For the past 12 months, aluminium prices have oscillated sideways either side of $2,000 per tonne and in a range of $1,827-2,200. Given the presence of massive oversupply and continuing supply surpluses, high-cost producers must regard themselves lucky that prices have not responded to the oversupply by heading lower.

Needless to say, they cannot feel particularly comfortable with the current situation so we feel they will have been keen hedge sellers into price strength – this has effectively capped the upside above $2,200; we also feel that the cap will remain in place for a considerable time until the market looks set to move back into a supply deficit.

Price weakness, however, has been limited by the combination of surplus metal being held off market, fears that lower prices will prompt production cuts and a pick-up in pricing by consumers who want to capitalise on lower prices to help offset the high premiums they must now pay.

On balance, we expect more of the same throughout the rest of 2013 – i.e. more rangebound trading either side of $2,000, similar to last year’s average of $2,019. This allows for a brighter economic outlook to unfold later in the year, albeit for a market still burdened with high stock levels.

Given the structure of the market and the stockpiles, we feel that market mechanics will now work to keep benchmark prices rangebound. Should demand pick up and tight availability lead to backwardations and even higher premiums, we would expect profit incentives to lead to the release of more metal from cash-and-carry deals.

If prices sink below $1,800, we would expect more cuts to output. Should, for whatever reason, metal start to flow out of financing deals and back into LME-bonded warehouses, metal is still likely to be kept off market due to the large exit queues that are now well established.

Aluminium Supply and Demand in 2012

Global primary aluminium production increased 1,447,000 tonnes or 3.2 percent to 46,169,400 tonnes in 2012 from 2011, according to data from the World Bureau of Metal Statistics (WBMS). Of that total, China produced 20,268,000 tonnes, which accounted for some 44 percent of global output. China’s production in 2012 rose 12.7 percent or 2,280,000 tonnes on 2011.

As this data implies, China was the main area of increased production, although output in the Arabian Gulf States increased 180,000 tonnes. Production dropped in North and South America, Europe, South Africa and Oceania and was stable in East and Central Europe, according to International Aluminium Institute (IAI) data.

Aluminium demand reached 45,750,000 tonnes in 2012, up 2,915,000 tonnes or 6.8 percent on the previous year, according to WBMS data. China consumed an estimated 20,880,000 tonnes – some 45 percent of global consumption.

In 2012, the market therefore had a supply surplus of 419,400 tonnes, down from a surplus of 1,887,000 tonnes in 2011. Production cuts in most areas outside China helped rein in the surplus but it still meant 2012 was the sixth consecutive year of surplus, during which time some 4.7 million tonnes has accumulated.

Aluminium Outlook for 2013

We expect another supply surplus this year although that could change – prices have recently tested and breached the lower end of their three year trading range. We would not be surprised if further weakness were to prompt producers to announce more cuts to output.

Conversely, we are more optimistic for stronger demand – we expect the shift from destocking in 2012 to lead to an improved apparent demand this year but whether these developments will be enough to change the supply/demand balance enough to create a supply deficit remains to be seen.

Supply Outlook

Production will increase an estimated 7.5 percent to 49,600,000 tonnes this year, boosted by the restart of idle capacity and the commissioning of new operations. In South Africa, the Hillside smelter will resume full production, having lost one third of its capacity last year after an incident and a full year of production should be seen at the Alma smelter in Canada after output was hit by industrial action last year.

In addition, new capacity is being ramped up at Saudi Arabia’s 630,000-tonne-per-year Ras Az Zawr smelter – output there should reach 230,000 tonnes this year. India’s 329,000-tonne-per-year Mahan smelter is expected to produce 125,000 tonnes this year, while the 560,000-tonne-per-year Korba smelter is expected to produce an additional 150,000 tonnes this year. Chinese aluminium capacity is expected to climb a further 2.6 million tonnes via new capacity and expansions.

In most metals’ markets, the prospect of a 7.5-percent increase in supply in this economic climate would seem too fast but in aluminium’s case such growth is not an issue – aluminium’s compound annual growth rate (CAGR) is one of the strongest of the metals.

In the 10 years between 2001 and 2011, aluminium’s CAGR was six percent, almost double the rate in the other base metals. In 2013, with the world economy moving away from destocking, apparent demand is likely to receive a boost and there may well be room for some restocking in the stronger economies of the US and China.

We generally expect demand to grow faster in 2013 – we see stronger recoveries in China and the US, which in turn are likely to feed through to stronger recoveries in emerging markets too. Actual demand in Europe should remain subdued but apparent demand may well improve while the destocking cycle ends. In 2012, demand in the EU27 dropped 7.7 percent on 2011, according to the WBMS. We would not be surprised if demand rebounded by around one percent in Europe this year.

In addition, the price advantage aluminium enjoys over copper is likely to continue to win it market share from the red metal. Copper is 290 percent more expensive than aluminium compared with an average of 75 percent between 1981 and 2010 so it is little wonder that aluminium has a great demand outlook. Indeed, we wonder whether it is aluminium’s strong demand profile that is giving producers and traders the confidence to amass so much metal in inventory.

On balance, we are looking for aluminium demand to grow around eight percent this year after growth of 6.8 percent in 2012, with real growth coming from regions outside Europe, although Europe might see some pick-up in apparent demand while destocking ends.

Aluminium Stocks

Reported stocks at exchanges at the end of March totalled 5.735 million tonnes, up 82,655 tonnes from the end of 2012. LME stocks in the first quarter climbed just 19,675 tonnes; this slower rate of increase suggests that the supply surplus is easing.

Producer stocks declined 142,000 tonnes in 2012 to 1,262,000 tonnes, according to the WBMS. Overall, total reported stocks held at exchanges, producers and at Japan’s three main ports total some 7.3 million tonnes. On top of that, there are thought to be significant stocks held off warrant – some estimates put total aluminium stocks at around 14 million tonnes, which would be enough to supply 30 percent of last year’s consumption.

While banks have easy access to cheap money, the aluminium stockpile – worth some $27 billion – can probably be financed without too much trouble. But if financing becomes more costly or liquidity tightened, carrying such high stocks might be deemed imprudent.

Cancelled warrants on the LME stood at 1,945,700 tonnes at the end of March, some 37 percent of total LME stocks, which suggests a considerable amount of metal has been earmarked to be delivered out. Whether this is metal wanted by consumers to avoid having to pay the high physical premiums, or whether it is metal waiting to be taken off warrant and put into financing deals outside the LME warehousing system remains to be seen.

Global output, according to IAI data, continues to climb – daily production averaged 123,500 tonnes in 2012 compared with 120,500 tonnes in 2011 but it has averaged 129,000 tonnes in the first two months of 2013. Production outside of China fell to 69,500 tonnes per day in 2012 from 71,800 tonnes per day in 2011 but Chinese output climbed to 54,000 tonnes per day from 48,700 tonnes per day.

With China’s State Reserve Bureau (SRB) stepping up its purchases of aluminium to support the domestic industry, it does look as though China is struggling to let market forces rationalise production, which is no doubt due to socioeconomic reasons. But with many of the country’s smelters reporting significant losses in 2012, production cuts are likely if prices remain under pressure.

Source: IAI

One development last year that could have affected China’s ability to produce aluminium was Indonesia’s ban on the export of bauxite. Although the ban did not last, the fact that another ban on ore exports will roll out in 2014 requires careful monitoring. While China is likely to find ways to import enough raw materials to feed its smelters, the cost of that feed may increase, which in turn would raise the country’s costs of production.

As the trade table shows, one notable development has been the drop in bauxite imports, while alumina and primary metal imports have climbed.

Source: Official customs statistics

Conclusion

There are many crosscurrents affecting the aluminium market; a look at the supply side of the equation shows a market in surplus and one burdened with massive stockpiles. A look at the price chart shows prices have been oscillating sideways since late 2011. With prices at the bottom of the sideway range in early April, the chances of production cuts has risen, which in turn may well start to provide support.

On the other hand, aluminium demand is holding up well and the relatively low price is enabling the market to gain market share, which is bullish for the long-term outlook. In addition, the mechanics of the market are enabling surplus metal to be financed profitably, so for now a large amount of the surplus metal is being kept off market to the extent that spot metal carries a hefty premium; indeed, premiums have recently set fresh record levels in the US.

Overall, we remain bullish for aluminium’s demand in the long term but we feel the supply side will remain bearish – there is abundant idle capacity that could be reactivated to accommodate any rise in Chinese and North American growth.

Our concern is that the aluminium market is not responding to the laws of supply and demand; we wonder whether this aberration can last. Still, it has for a long time so the chances that it will continue to do so are good.

For now the economics of keeping metal off market seem likely to remain in force, but we would point out that changes in QE could alter the dynamics of cash-and-carry deals, which might start to happen as early as the end of the year. Although we feel it will more likely happen sometime in 2014.

At present, the main bright spots on the global economic front are North America and China; we think the latter will gain momentum as 2013 progresses. For now the US economy has managed to shake off the potential headwinds from the fiscal cliff and the Sequester but we should not get too complacent that this will remain the case – some hard decisions about the US debt and deficit will need to be made at some stage.

Still, assuming the US policymakers avoid shooting themselves in the foot, the US economy should remain a bright spot in 2013, especially for aluminium, which should benefit from continuing recoveries in the automotive and construction industries.

For 2013, we expect prices to spend most of the time in the $1,750-2,300 range and would look for an average price of $2,000. In the first quarter, prices averaged $2,002; we expect prices to trade in the $1,750-2,100 range during the second quarter.

Sources: IAI, WBMS, fastmarkets.com forecasts

Appendix One

Sources: Company data, various press reports

Appendix Two

Sources: Company data, various press reports

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Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the PGM markets, analysis on changes to platinum and palladium prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive as soon as it is published,and daily analysis and research. To read the full report covering gold, platinum, palladium and base metals click here: 23.04.13,Quarterly_Metals Report

Platinum and Palladium market Analysis Q1 2013

The supply-side concerns that had dominated the platinum group metals (PGMS) in the second half of 2012 continued into the New Year – analysts and forecasters predicted record sizeable deficits in the year ahead for both metals.

Initial gains met with strong overhead resistance at the start of January around the 50 DMA in platinum at $1,575.50, while palladium struggled to push significantly above the $700 mark, encountering further resistance between $705 and $711.

Although platinum stalled and palladium slipped, touching $665 on January 8, both metals would swing swiftly higher in the coming session and maintain their bullish trajectories well into February after fresh news of supply constraints emerged.

Anglo American Platinum (Amplats) – the world’s largest platinum producer – announced on January 15 the outcome of its year-long strategic review, which would see the closure of unprofitable operations and a move towards smaller, more viable mining operations, with a view to receiving 3.8 billion rand of benefits per year by 2015. The restructure included the closure of four shafts in the Rustenburg area and the sale of its Union mine, the net effect resulting in the reduction of around 400,000 ounces of platinum output to a baseline target of 2.1-2.3 million ounces per year.

Palladium got an additional lift at the end of the same week from Anton Berlin, deputy head of Norilsk sales arm Normetimpex – he suggested that sales from Russia’s Gokhran state repository this year would range from “zero to several tonnes”.

The market thought that Gokhran was close to depleting its stockpiles, with sales in 2012 of just 250,000 ounces compared with 775,000 ounces in 2011 and as much as 1.49 million ounces in 2007. Anecdotal evidence supports the notion of limited or zero state stockpile sales for this year, with Swiss trade data showing no exports to the clearing hub in January and just 299 kilograms (9,613 ounces) in February.

Amplats Impact on PGMs

Anticipation and market reaction to the Amplats news drove platinum as high as $1,704.50 per ounce by mid-January – its best since October – where resistance emerged, leading the metal to consolidate.

This was followed by an advance to a peak of $1,742 on February 7 when Amplats released its annual results, stating a heavy loss for the year and reiterating its plans for cutting production. This drew heavy criticism from the South African government as well as mining unions on its redundancy plans.

Palladium had traded as high as $777 while platinum was setting its highs, reaching its best since September 2011 before it succumbed to a sharp sell-off by funds over the next two weeks, testing a low as $710.

Still, palladium was again probing higher early in March, bolstered by upbeat auto sales results from gasoline-dominant markets such as China and the US, where seasonally adjusted annual sales held around 15.3 million units in December, January and February compared with 14 million units a year previously. Palladium eventually peaked at $787 on March 8.

The expectation of tighter fundamentals and the potential for further supply disruptions led fund/CTA traders to increase their exposure further across much of the quarter, adding to the large net longs already present at the end of the fourth quarter.

The NLFP in platinum increased 39 percent by early February – around the time the metal set its high for the quarter – hitting a record 50,138 contracts, surpassing the October peak of 47,676 contracts. Meanwhile, the NFLP in palladium tracked steadily higher across the period, reflecting the underlying price strength, eventually peaking at 27,171 contracts early in March.

The ratio of longs to short very much reflected the change in the net length, with the ratio in platinum as high as 11.3:1 when the NFLP peaked before stepping back to 5.4 by the end of the quarter. By contrast the ratio in palladium increased steadily from a low of 6.3 in early January to 11.9 in mid-March.

In addition to the growth of fund bullish exposure, investment demand via the various exchange-traded platforms also fuelled price momentum – investors added a net 29,310 ounces of platinum and a sizeable 183,404 ounces of palladium across the quarter.

Interestingly, while platinum holdings fell initially when the price corrected from its February highs, the dip served to entice bargain hunter interest, again reflecting the strong fundamental outlook for platinum despite the continued weakness in Europe’s diesel-dominated passenger vehicle market, recording year-on-year sales declines of 8.6 percent and 10.5 percent respectively in January and February.

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