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Base Metals Monthly Watch March 2014 Summary

Core Content

This report provides a detailed analysis of the base metals and related equities market for March 2014, with a focus on copper, nickel, zinc, aluminum, and seaborne coal. It highlights the impact of global economic conditions, supply and demand dynamics, and valuation trends on these commodities.

Main Points

Copper Market

• Price Movement: Copper prices declined by ~6.1% in March, ending at $3.02/lb.
• Valuation: The average historical P/CF multiple for base metal producers fell to 5.8x, down ~17% year to date, below the historical average of 7.2x.
• Inventory Trends: LME copper inventories dropped by ~4.0% to 265,175 tonnes, reflecting strong physical demand and declining supply.
• Supply and Demand: The significant decline in inventories (~59% from June 2013) suggests a potential for price recovery. However, the market is currently in an oversupply position due to weak demand.
• Outlook: Despite short-term challenges, the report anticipates a positive outlook for copper in late 2015 and beyond, driven by improving demand and supply rationalization.

Nickel Market

• Price Movement: Nickel prices increased by ~8.0% in March, ending at $7.19/lb.
• Inventory Trends: LME nickel stockpiles rose by ~5.2% to 284,694 tonnes.
• Supply and Demand: The report notes that some long-awaited nickel projects have begun production, which could increase supply. Indonesia's export ban on unprocessed nickel ore and bauxite is expected to reduce global supply by ~500,000 tonnes annually, but the price impact may not be significant until 2015.
• Outlook: The outlook for nickel remains uncertain due to high inventories and potential supply increases.

Zinc Market

• Price Movement: Zinc prices declined by ~6.7% in March, ending at $0.89/lb.
• Inventory Trends: LME zinc inventories increased by ~2.3% to 779,600 tonnes.
• Supply and Demand: The report anticipates a deficit in the zinc market by late 2014 or early 2015 due to supply reductions from key producers.
• Outlook: The fundamental outlook for zinc is expected to improve in the medium to long term, with potential for price recovery as supply decreases.

Aluminum Market

• Price Movement: Aluminum prices increased by ~1.9% in March, ending at $0.79/lb.
• Inventory Trends: LME aluminum inventories rose by ~1.3% to 5.4MM tonnes.
• Supply and Demand: Production curtailments due to low prices are expected to support aluminum prices in the short term. However, historically high inventories remain a concern, and a meaningful increase in physical consumption or production cuts will be necessary to absorb current levels.
• Outlook: The report maintains a weak outlook for aluminum due to high inventories and potential for new supply increases.

Seaborne Coal Market

• Price Movement: March quarter contract prices for hard coking coal settled at $143/t, down 5.9% from December quarter prices.
• Supply and Demand: The report notes signs of optimism in the metallurgical coal market, with potential for price improvements in 2014 due to supply rationalization and demand improvements from China.
• Outlook: Longer term, the market is expected to see a constructive dynamic as higher-cost producers are likely to cut production, which could support coal pricing.

Key Economic Indicators and CE Scores

• U.S. Economic Recap: February retail sales growth was 1.5%, industrial production growth was flat at 3.0%, and existing home sales declined by 0.4%. The CE score for the U.S. was 3, indicating mixed signals.
• China Economic Recap: China's GDP growth target was set at 7.5% for 2014, which supports base metals demand. However, economic data was weaker, with PMI easing to 50.2 and exports falling by 18.1%. The CE score for China was 2.
• Euro Zone Recap: The euro zone PMI Index declined slightly to 53.0, indicating continued weak manufacturing activity. The CE score for Europe was 3.

Investor Considerations

• Market Valuation: Valuations for base metals equities are at trough levels, suggesting potential for recovery once market rationality returns.
• Commodity Price Drivers: Short-term price movements are heavily influenced by global economic news and the U.S. dollar, rather than traditional supply/demand fundamentals.
• Conflicts of Interest: CIBC World Markets does business with companies covered in the report, which may affect the objectivity of the analysis. Investors are advised to consider this as a single factor in their decision-making.

Conclusion

• The long-term outlook for base metals remains intact, with expectations of improved demand in 2014.
• Structural challenges in supply, rising costs, and grade decline are expected to support base metals prices.
• The report anticipates a relatively healthy pricing environment for copper in late 2015 and beyond, while the outlook for other metals remains cautious.