China will continue to have the greatest influence on base metals prices in 2014, according to Apex stalwart Edward Meir, who provides metals price research for INTL FCStone.
Meir appeared on no fewer than seven Apex leaderboards for his price predictions overall in 2013, including the top spot for iron ore, with 99.35% accuracy, and narrowly missed out on first place for his base metals predictions, with 92.05%.
“We’re going to see China continue to slow down and that will remove a significant part from metals demand,” Meir told Metal Bulletin.
“The reform package there is really very anti-growth in the short term. It’s good in the longer term, but in the short term, it means higher currency, higher interest rates, a more difficult credit environment and tighter monetary policy.”
This will be bearish news for prices over the next three to six months, Meir said, but it could also set the stage for a rebound later in the year.
In the final quarter of 2014, leading into 2015, the likelihood is that at least some supply will be taken out of the market in China on continuing weak prices, and this reduction in availability will eventually push prices back up.
“We will see an acceleration in supply spin-offs, and especially in sectors like aluminium, where the West has been cutting a lot of production, but China hasn’t,” Meir said.
“We think it will extend to China and they will take some supply out of the market: there will be a recalibration of the supply/demand balance,” he added.
This could mean the emergence of a “mini bull market” for base metals at the beginning of 2015, Meir said, although there is still potential for a selloff in the first half of 2014.
The first half will be a period of vulnerability for the market, he said, adding that he believes there is still some ground to cover on the downside.
“We will be testing the 2013 lows for most of the base metals over the next six to eight months,” Meir told Metal Bulletin.
“I think the best performing metals will probably be lead and zinc, then tin and copper, and aluminium and nickel are going to bring up the rear,” he added.
The reason for this, he said, is that he does not believe the Indonesian ban on exports of unrefined mineral ores will necessarily remain in effect in its current form for long, which would have implications for all the base metals.
It is likely that the ban will be modified at least somewhat, according to Meir, which could mean nickel price levels in particular would suffer.
“Metal will need to come out. There’s too much [of a risk] of job losses and balance of payments pressures. I don’t think they’re going to stand their ground,” he said.
“It takes time for refineries to get up and running – I think the government will say, ‘if you’re building, you can export’.”
If the Indonesian government decides to remove the export ban altogether, furthermore, this could destroy all the gains the nickel price has made in recent weeks, especially as there are no signs of any production cutbacks.
“It was an artificial boost because of the export ban, but I’m not sure the Indonesian government will have the financial stick-to-itiveness [to keep it],” Meir said.
“If they [keep the ban], it’s a different story – the price could go to $17,000, $18,000, even $20,000 by summer.”
Lead, on the other hand, will be in the tightest supply/demand balance, he added, and could even see a slight deficit in 2014.
“Tin will be in deficit this year as well, and copper will be in surplus, but less so than what was originally expected,” Meir said.
“The tighter markets are going to do better. Lead is a very problematic metal – there’s a lot of environmental pressure and nobody wants a lead smelter anywhere,” he added.
As for aluminium, the major factor affecting prices and premiums will be the huge stockpiles extant globally, which could be up to 10 million tonnes, including off-exchange material.
“We will see what happens in April [when the new LME rules come in] and it will be easier to get metal out,” Meir said.
“We’ll see if premiums start to crack a bit then, but the spreads are still juicy enough for the financial trade to continue right now. As long as [the spreads] stay where they are, I don’t think anything will change, except maybe some material will move off exchange.”
Global demand holding firm
Globally, the demand picture looks relatively firm across the base metals, Meir said, as the US economy is likely to continue to grow, while the eurozone is stabilising, along with Japan.
“I think the demand picture is going to be more predictable. On the Chinese side, there will be 6-10% metals demand growth; the US will be a bit stronger this year and Europe a bit stronger as well,” he said.
“For the BRIC countries, there will probably be more of the same in 2014, and the UK will be stronger.”
US wild card could hit prices
The wild card, however, will be the impact of the Federal Reserve’s plans to taper economic stimulus in the USA, he added.
“There’s another meeting in [January] and there might be another $10 billion taken off the bond buying programme,” Meir said.
It is likely that the US economy will be able to adjust to the changing pressures caused by the tapering programme, but a stronger dollar will almost certainly weaken metals prices.
Year of transition
The result is that 2014 will be a year of transition, after the market scrambles away from the rocky terrain of 2013.
“2013 was really a sideways slog for the most part. We had a few rallies but they all fizzled out,” Meir said.
“The Cypriot [debt] crisis threw things off, as well as the Fed saying it was moving from an accommodative stance to a more restrictive stance,” he added.
The market also began to come to terms with the idea that China would not continue its meteoric rate of growth indefinitely, and came to realise that its economy is susceptible to slowdowns, according to Meir.
The effect of this, he said, will be felt throughout 2014.
“There will be a sharper slowdown [in China] this year. We’ve had some numbers and GDP was decent, but these are still pre-tightening numbers – they’re not capturing the full impact of the government moves,” Meir said.
“There’s just so much excess capacity that they need to rein in. It can’t continue because there’s too much supply in the market, too much debt and too many bad loans.”
Because of their sheer scale, economic movements in China will therefore continue to dominate the landscape, overshadowing other potential influences, while the potential bearish impact of a stronger US dollar drifts towards the horizon.
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