All base metal prices spiked to multi-year highs in the last quarter of this year, as commodities as a whole became an attractive investment again after six or more years of falling out of favour. Tin prices rose by 46%, lead 32%, nickel 30%, copper 21% and aluminium 15%.

“This year was all about Chinese retail investors taking a punt on metals and sending prices higher,” a merchant trader said.

And although a correction may well occur in the near term, analysts believe that hot money will keep coming to the metals sector next year. But which metal will benefit the most?

“This whole infrastructure boost in China, the US, the UK and Japan will especially benefit three metals: copper, nickel and zinc,” Société Générale analyst Robin Bhar said.

What will set them apart is not demand but the supply and inventory situation, he added.

The sharp price gains have seen copper, zinc, aluminium and nickel trade well above the marginal cost of production, making it “entirely feasible” that some of the high-cost operations that were taken off line in 2015 and 2016 could come back online, noted analyst Natasha Kaneva of JP Morgan.

Zinc: From concentrate to refined
Zinc almost doubled in price to reach a nine-year high of $2,985 per tonne, basis LME three-month delivery, at the end of November. The driver was largely investment buying against a backdrop of tightening concentrates supply following mine shutdowns and strong Chinese buying.

Zinc treatment charges (TCs), the fees miners pay to smelters to cover the cost of turning concentrates into metal, have plunged by nearly 70% in the second half of this year to just $40 per tonne. The key factor for zinc to retain its crown in 2017 is whether the concentrate tightness will spread into the refined market, which market participants are sceptical about.

“The refined zinc market is still really soft – there is a lot of supply out there and we are getting very cheap offers. Will the market get tighter next year? Maybe, but the current price is attractive to restart production,” the merchant trader said.

According to JP Morgan, some 625,000 tonnes of production outside China could come back online in the next two years, although Glencore may wait until 2018 to restart the 500,000 tpy of capacity that it curtailed in October 2015 when prices were below $1,700 per tonne.

The big unknown is how much China will increase production by, but growth should be capped at 2% next year due to environmental restrictions, JP Morgan said.

Still, Société Générale believes zinc prices will increase by another 28% in 2017 to $2,650 per tonne on average.

Nickel: A bullish supply story
Nickel was investors’ favourite metal in 2015, and it could well regain the title in 2017 after this year’s strong performance due to tighter ore supply from Indonesia and Philippines and the strong rebound in China’s stainless steel output.

Indonesia has made it clear that it will not relax its export ban on nickel ores, which has been in place since January 2014, while the Filipino government has kept a tough stance after suspending or recommending suspensions of 30 mining firms – equivalent to 55.5% of domestic production or 230,000 tonnes of nickel units per year.

The tightness in ores has also sent China’s nickel pig iron (NPI) supply lower for most of the year, triggering a surge in imports of refined nickel and ferro-nickel into the country.

Macquarie expects the global nickel deficit to increase to 93,000 tonnes in 2017 from 67,000 tonnes this year.

This tightness could underpin nickel prices by a further 26% to an average of $12,000 per tonne next year, according to Société Générale.

However, a few factors could deter investors next year, including the high level of inventories on and off-exchange. Current LME and SHFE stocks amount to 23% of global annual consumption while invisible stocks may exceed 1 million tonnes, equivalent to 50% of total annual demand, according to Metal Bulletin Research.

In addition, a majority of the 218,000 tonnes of mine production capacity (nickel ore, matte, NPI, ferro-nickel and refined nickel) that was curtailed in 2015 and 2016 “could be relatively easy to restart”, while China is also believed to have restarted some NPI production, according to JP Morgan.

Copper’s turn to shine?
The traditional bellwether of the base metals complex has been outshone by some of its smaller peers for some years, and to regain the spotlight in 2017, it would need more than current fundamentals suggest.

There is evidence of renewed speculative interest in copper and hope that demand growth will accelerate in China next year when large investment projects in the power grid and the high-speed railway network start.

But most analysts cannot see three-month copper prices exceeding the $6,000 per tonne mark again next year unless unexpected supply disruptions emerge.

New supply is due to hit the market over the next 18-24 months, and given the high price environment, scrap availability is rising and almost 850,000 tonnes of production capacity is under a threat of potential restarts, according to JP Morgan.

On-exchange inventories are also expected to increase – some expect another 200,000 tonnes of deliveries into LME warehouses between now and February – but cancellations are also likely to continue amid a price war between Trafigura and Glencore.

So copper may have to wait until 2018 for its turn on the top of the podium. For aluminium, it may even be longer, because the oversupply situation and the lingering backwardation in LME nearby spreads will continue to keep investors at bay.

As for lead and tin, they both have some interesting supply dynamics going into next year, but investors are simply not ready to invest en masse in these markets. For lead, it is because of its bad environmental record and declining use for battery production; tin because of its smaller market size and its dependence on Indonesia’s changing mining policies.