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Document Summary: Base Metals Monthly Watch January 2014

Core Content Overview

This document provides a detailed analysis of the base metals market in January 2014, with a focus on nickel, copper, zinc, aluminum, and seaborne coal. It also includes a review of the global economic environment and its impact on commodity prices and equities. The report highlights key developments, including the Indonesia Nickel Ore Export Ban, and outlines the market outlook for 2014 and beyond.

Main Points

1. Indonesia Nickel Ore Export Ban

• Effective Date: January 12, 2014.
• Purpose: To encourage in-country value-added production.
• Impact:
  • Indonesia is the largest supplier of nickel ore, contributing 33% of global production in 2013.
  • The ban could remove 40–50 million tonnes of nickel ore from the market annually.
  • This would result in the removal of approximately 500,000 tonnes of primary nickel from the market.
  • Price Impact: Not expected to be significant until 2015, due to China's stockpiled supply of laterite nickel ore.

2. Base Metal Prices and Equities

• Base Metal Prices: Traded lower in January, down ~3.2% month-over-month (M/M).
• Base Metal Equities:
  • S&P/TSX Materials Index rose ~9.1% M/M.
  • FTSE Mining Index declined ~0.6% M/M.

3. Commodity Market Performance

• Aluminum: Prices fell ~5.2% M/M to $0.75/lb, with LME inventories down ~0.6% to 5.42MM tonnes.
• Copper: Prices dropped ~3.8% M/M to $3.22/lb, with LME inventories falling ~14.2% to 314,525 tonnes.
• Nickel: Prices rose ~0.7% M/M, with LME stockpiles increasing ~1.9% to 266,538 tonnes.
• Zinc: Prices declined ~4.3% M/M to $0.89/lb, with LME inventories dropping ~8.5% to 854,450 tonnes.
• Seaborne Coal:
  • December quarter contract prices settled at $152/t, up ~4.6% from September.
  • The report anticipates price improvements in 2014 due to rationalization in supply and demand improvements from China.

Global Economic Recap

United States

• Retail Sales: Grew 4.1% in December, slightly down from 4.2% in November.
• Industrial Production: Increased 3.7% in December, up from 3.4% in November.
• Economic Surprise Index: Positive for the month, indicating better-than-expected performance.
• CE Score: +1, reflecting mixed signals with a focus on positive economic indicators.

China

• Export Growth: Declined to 4.3% in December, down from 12.7% in November.
• Manufacturing PMI: Dropped to 51.0 from 51.4, still above 50, indicating growth.
• Retail Sales Growth: Fell to 13.6% Y/Y from 13.7% Y/Y in November.
• Industrial Production Growth: Slowed to 9.7% Y/Y from 10.0% Y/Y in November.
• CE Score: 0, showing a neutral outlook with mixed signals.
• Economic Outlook: Despite moderate growth, the new leadership remains committed to growth targets and economic reform, supporting base metal demand.

Euro Zone

• PMI Index: Rose to 53.9 in January, the highest since May 2011.
• Economic Recovery: Remains fragile with pockets of weakness.
• CE Score: +5, indicating strong positive signals.
• Economic Outlook: Positive but uncertain, with the overall recovery still fragile.

Long-term Outlook

• Short-term Dynamics: Commodity prices are influenced more by global economic sentiment and the U.S. dollar than by traditional supply/demand fundamentals.
• Market Outlook for 2014:
  • Base metals demand is expected to improve, offering a positive outlook.
  • However, the report does not anticipate an "exuberant" economic environment that would induce euphoria.
• Long-term Trends:
  • A sustained global economic recovery is needed for continued bullish commodity cycles.
  • Structural challenges, including rising costs, grade decline, and new supply constraints, are expected to support prices, especially for copper.
  • Potential Supply Shortages: May emerge in late 2014/early 2015 due to reduced mine supply and increased demand.
  • Investor Sentiment: Likely to remain cautious due to the uncertain economic environment and potential supply-side disappointments from greenfield projects.

Key Risks and Considerations

• Price Volatility: The report notes that price movements are influenced by macroeconomic factors and the U.S. dollar, rather than fundamentals alone.
• Supply Constraints: New supply from greenfield projects may face delays, potentially limiting price upside.
• Inventory Levels: High inventories in some metals (e.g., aluminum, zinc) remain a concern for price stability.
• Economic Headline Risk: Persistent issues in Europe and China may continue to affect market sentiment.
• Investor Behavior: The link between commodities and the U.S. dollar remains strong, which could pressure prices as fund flows return to the dollar.

Key Figures and Data Points

Conclusion

The base metals market in January 2014 showed mixed performance, with equities rising but prices generally falling. The Indonesia export ban on nickel ore and bauxite is a major supply-side event, but its impact on prices is expected to be delayed until 2015 due to China’s stockpiles. While the short-term outlook for the market remains uncertain, the long-term potential for price support is still intact, driven by structural challenges and potential supply constraints. The report emphasizes the importance of global economic sentiment and the U.S. dollar in shaping market dynamics.