Commodities. Outlook. Base metals. July Aluminium

Transcription

1 Commodities Outlook July 211 Base metals Aluminium Aluminium plummeted in early May, falling 7% in just three days. Unlike come of the other base metals, aluminium has found relatively good support, with prices retreating to mid-march levels rather than the mid-december levels seen in metals like copper. Aluminium has a very high correlation with crude oil. The surge in the oil price as a result of the Middle-Eastern unrest in recent months has been touted as a key reason behind aluminium s recent price strength, with any pull-back in energy prices serving to undermine the perceived floor to the price, and vice versa. Looking ahead, China is raising the greatest concerns. While any slowdown in growth rates in China will be of concern to players in all markets, implications are perhaps greater for aluminium, given the scale of reactivation of smelting capacity and impending start-ups of greenfield operations. The Chinese aluminium market is well balanced at present but this could readily switch to being oversupplied if output continues to rise and demand growth is reined in, leading to growing concerns that the country might resume exports. China is planning to lay yet another level of control on the construction of smelting capacity. However, this comes with a will it, won t it clause attached. In late April, Beijing announced a new edict requiring central and provincial authorities to cease the approval of new aluminium Figure 1: Aluminium vs. crude oil 3,6 $/mt Figure 2: Electricity costs globally 6 USD/MWh 2,9 45 2,2 1, $/bbl ME US Europe China World avg Source: Standard Bank Research Source: Standard Bank Research Strategists Walter de Wet, CFA* Walter.DeWet@standardbank.com David Davis* David.Davis@sbgsecurities.com Leon Westgate* Leon.Westgate@standardbank.com Marc Ground, CFA* Marc.Ground@standardbank.co.za James Zhang* Jinzhong.Zhang@standardbank.com Please refer to the disclaimer at the end of this document.

2 smelting projects and issued in a sterner tone than is customary. As usual, the headline makes for startling reading, but also, as per usual, the devil is in the detail. The government s release states that there are 23 smelting projects in the pipeline, which could potentially raise the country s smelting capacity, from a year-end 21 total of 23m tpy, to 3m tpy by 215. What was not so clear was that the new ban would not impact expansions already under construction. Interestingly, its also worth noting that there are some key regions, particularly in the country s west, which are also excluded from the latest ruling. Smelters continue to be encouraged in these regions as, although they are largely underdeveloped, they nevertheless have major hydro-electric power potential. The number of new smelters/expansions due on stream elsewhere in the near term are very limited. Consequently, given the tightness in the US and European physical markets and (as yet) very limited Chinese exports, smelter restarts remain an attractive option. Although the markets have been rattled by the rush of weak economic indicators in recent days, on the ground demand for aluminium remains strong. Record high (and in the US still rising) physical premiums support this view, though metal tied up in financing deals in Europe, and the often very long waiting times to get material out of some US warehouses, is a key factor behind the perceived tightness. Table 1: Supply/demand balance for aluminium Key forecasts (thousand of tonnes) Production Total 33,884 38,7 39,339 37,83 41,665 44,378 46,515 48,76 5,861 Year-on year % change 6.4% 12.2% 3.5% (3.8%) 1.1% 6.5% 4.8% 4.7% 4.4% Consumption Total 34,246 37,554 38,531 35,882 4,677 43,57 46,127 48,638 51,124 Year-on year % change 7.% 9.7% 2.6% (6.9%) 13.4% 7.1% 5.9% 5.4% 5.1% Implied surplus (deficit) (362) , (263) LME cash prices Historical & base case ($/tonne) $2,567 $2,639 $2,576 $1,665 $2,17 $2,43 $2,51 $2,75 $2,9 Sources: Standard Bank Research; MBR 2

3 Copper We are not surprised by the poor performance of copper prices lately; our price forecasts remain unchanged, with copper moving back in line with our expectations. Earlier this year, when there was much talk in some quarters of copper going to $11,/tonne and even $12,/ tonne, we were already sounding a note of caution. Back then, we were largely out on our own. However, the wider market has since moved in line with our bearish short-term view, and we have gone from being an outlier to consensus. So how far might prices fall in the short term? A lack of fundamental support means that technical signals and trading patterns are governing direction. On the weekly chart, there is clear support around $8,5/tonne, though a wash-out possibly as far as $8,/tonne would also not be a surprise. However, what copper still has going for it, is a supportive longer-term picture. With the longer-term fundamental bull case still intact, any episodes of dollar weakness will likely see dip-buying activity emerge. However, the key to a sustained recovery in the copper market ultimately remains the return of the Chinese, something we see happening only in H2:11. Looking further ahead, it has always been our view that 212 will be fundamentally tighter than 211 and, as a result, the higher prices will come next year. This remains our stance. So, beyond the mid-211 price correction, we still expect copper prices to resume an upward trend and even set fresh highs next year as the short-term Chinese demand adjustment runs its course and the inherently bullish underlying fundamentals of the copper market reassert themselves. China s copper market fundamentals remain weak. Based on our calculations (and discounting an estimated 3,-tonne build in bonded warehouse stocks), apparent demand grew by just.9% y/y in Q1. The latest macro data shows that the expansion of the manufacturing sector continues to slow, and this should continue as May, June and July are seasonally weaker months for industrial output. On the supply side, record production in March and similarly strong output in April was seen as smelters maintained high capacity utilisation on improved spot market concentrate availability. In the ICSG s latest forecasts, the group sees the global copper market recording a deficit of 377, tonnes in 211. This is very close to our previous forecast of 385, tonnes. The more bullish elements in the market had earlier this year been forecasting deficits closer to 1m tonnes, but these are increasingly being reined in now. The publication of the ICSG s more conservative forecast will likely see the consensus esti- Figure 3: Supply/demand balance for copper 5 mt (') Figure 4: LME and SFE copper stocks 8 mt (') F 212F 213F 214F Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 LME Shanghai Sources: Standard Bank Research; MBR Sources: Standard Bank Research; LME, SFE 3

4 mates for this year revised lower. However, we have gone a step further, with the revisions to our Chinese numbers this month now giving us a deficit of just 199, tonnes. For 212, the ICSG is forecasting another deficit year, and at 279, tonnes versus our 242, tonnes, we are much more in sync. They forecast global demand growth of 4.3% next year, which matches our own growth expectations, but with mine and refinery production forecasts of 6.4% and 4.9% respectively, we are comfortable being more cautious on the supply outlook, given this market s tendency for disruptions. Provisionally, we see a largely balanced market in 213. While lots can change over the next few months, 212 is potentially looking like a window of opportunity for the bulls rather than representing another sustained upwards shift to even higher long-term prices. Table 2: Supply/demand balance for copper Key forecasts (thousand of tonnes) Mine production Total 14,99 15,483 15,546 15,95 16,97 16,443 17,383 18,113 18,819 Year-on year % change.5% 3.3%.4% 2.6%.9% 2.1% 5.7% 4.2% 3.9% Refined production Total 17,552 18,286 18,756 18,718 19,62 2,314 21,15 22,186 23,14 Year-on year % change 5.4% 4.2% 2.6% (.2%) 4.7% 3.6% 4.1% 4.9% 4.3% Refined consumption Total 17,468 18,33 18,492 18,225 19,66 2,513 21,392 22,25 23,4 Year-on year % change 4.3% 4.8% 1.% (1.4%) 7.9% 4.3% 4.3% 3.8% 3.6% Implied surplus (deficit) 84 (17) (58) (199) (242) (19) 136 LME cash prices Historical & base case ($/tonne) $6,73 $7,126 $6,969 $5,15 $7,539 $9,525 $1, $9,2 $8, Sources: Standard Bank Research; MBR 4

5 Energy Crude oil In Q1:11, the oil market was dominated by the turmoil in the Middle East and North Africa (MENA) region. The conflict in Libya has resulted in a supply shortfall of about 1.5mbd in crude. With the ongoing fighting inside Libya and the enforcement of a no-fly zone over Libya, crude supply from Libya is unlikely to recover soon. There is also the possibility that Libya s oil facilities will be damaged, which could constrain medium-term crude supply from Libya, on top of the existing short-term supply cut. The oil market was also hit by the devastating earthquake in Japan which caused severe damage to several coastal nuclear power stations, oil refineries and petrochemical plants. Consequently, the energy market s ability to rebalance was challenged further, and uncertainty over the oil market in general was exacerbated. We believe that the oil market will need to adjust itself for Libya s supply shortfall and Japan s earthquake. The unrest in the MENA region has increased central projections for oil prices, and the tail-risks for oil flat prices to both upside and downside have increased substantially. For the coming quarters, our key market views are: (1) Upside risks for oil flat price and volatilities due to reduced inventories, OPEC spare capacity and spare refining capacity; (2) Bearish WTI and ICE GO term structures for Q2:11 and Q3;11 due to their respective location and product-specific inventories overhang; and (3) Refining margins and product cracks will remain under pressure. For the longer term, we believe that the price will be anchored at around $95/bbl for the following reasons: (a) major oil producers have hiked their public spending, and (b) we expect cost pressure for oil production, especially from non-conventional sources, to ramp up again as a result of broad commodity-led price increases. OPEC spare capacity Before the civil war in Libya ensued, which rendered most of the country s crude oil supply unavailable, we estimate that there was approximately 4.8mbd spare production capacity held by OPEC member countries. More than half this spare capacity was located in Saudi Arabia, Kuwait and the UAE. Figure 5: Oil value share of world GDP vs. real GDP growth Figure 6: Front-month WTI price vs. S&P5 index 8. % % (y/y) Index $/bbl $9 $12 $15 Oil Value Share of World GDP Real World GDP Grow th (RHS) Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 S&P5 WTI (RHS) Sources: World Bank; IMF; Standard Bank Research Sources: Nymex; Bloomberg; Standard Bank Research 5

6 To counter-balance the supply shortfall from Libya, Saudi and several other OPEC member countries have been increasing production by approximately 33kbd from January this year. This has effective eliminated equivalent volume of the spare production capacity. Clearly the incremental production is much smaller than the lost 1.5mbd Libya supply, therefore, these OPEC members might have to increase production further to replace Libya s supply, which could reduce OPEC s spare capacity down to just above 3mbd OECD inventories OECD oil inventories have been much reduced due to (a) diminished supply from OPEC and (b) demand picking up globally as the global economy recovers. This is clearly visible in total US commercial oil inventories. The total commercial inventories for both crude and oil products in the US have declined from a 5-year seasonal high in early March, to 41.6MB below the seasonal level last year, as of last week s DOE inventory report, which is also only 17.8MB above 5-year average. Of the 17.8MB, 13MB can be attributed to the excessive crude inventories at Cushing. These much reduced oil inventories will make the market much more sensitive to any supply disruptions. Elevated price expectations from OPEC On the back of the unrest in the MENA region, Saudi has significantly increased its spending profile, which has lifted the breakeven oil price level to around $9/bbl. Meanwhile, Iran has been reported to have its 211/212 budget based on an price of $81.5/bbl. Public spending increase was raised not only in Saudi Arabia, but also in most other OPEC countries. In the upcoming OPEC meeting on 2 June 211, it is likely the organisation revises up it production quotas, but unlikely to the level fully accounting for the lose of Libya s supply. Members such as Iran and Venezuela have been very vocal about wanting higher oil prices; this could exert pressure on other members. In addition, OPEC members are also likely to seek for higher oil prices on the back of the weakening US dollar to preserve their purchasing power. On balance, we think that OPEC will make a relatively small upward revision to its production quotas, while it s likely that the compliance level drifts lower, to compensate. Oil market continues to attract strong money inflows The CFTC s Commitment of Traders reports have been continuously shown strong fund money flows into the oil market since the beginning this year. The enthusiasm has been fuelled by the unrest in the MENA region and tightening market fundamentals. Due to abundant liquidity and negative real interest rate in many countries, the oil market is Figure 7: OPEC spare capacity vs. oil price Figure 8: Total US Commercial Oil Inventories 16 $/BBL Lost Libya Supply mbd 6 1,18, kbbl ,11, 8 3 1,4, , OPEC Spare Capacity (RHS) Brent Monthly Price 9, Jan Mar May Jul Sep Nov 5-yr Range yr Average Sources: OPEC; IEA; Standard Bank Research Sources: Bloomberg; Standard Bank Research 6

7 likely to continue to attract strong money inflows. Although the Fed s QE2 programme will end in June, we expect global liquidity continue to grow as reserve assets rise. Table 3: Supply/demand balance for oil Key forecasts (millions of barrels per day) DEMAND OECD Non-OECD SUPPLY Non-OPEC OPEC PRICES ($/bbl) WTI BRENT Source: IEA; Standard Bank 7

8 Precious metals Gold We maintain that gold will push higher in 211H2. We believe that it will trade above $1,6 before the end of the year. Our long-held view has been that the gold price, driven in the current environment by investment demand, remains a function of global liquidity and real interest rates (statistically, we find that liquidity is by far the dominant driving factor in this equation). We view other influences, such as dollar moves, political risks and equities, as only important short-term drivers. This view essentially boils down to viewing gold as a currency at least since 24 when ETFs entered the gold market. From a macro perspective, we measure global liquidity as the US Fed s balance sheet plus global FX reserves. By using this measure, we capture not only the Fed s monetary policy activity, but also global government borrowing which reflects in a rise in FX reserve holdings. By indexing this liquidity measure with gold, starting in 24, it is clear that gold trades around this measure. In fact, de-trending this relationship, we find that gold is mean-reverting around liquidity. Statistically, we also find liquidity a causal driver. Given that short-term nominal rates aren t likely to rise and implied inflation has remained close to its highest levels since 28, real interest rates should remain low. Furthermore, while we do not expect the Fed to expand its balance sheet further post-qe2, we do believe that continued government borrowing, which takes place independently from central bank policy, will still create excess liquidity. As long as some countries have a need to accumulate foreign reserve assets, governments that need to borrow should be able to grow debt and increase global liquidity. This should support gold. We note that the prominence of investment demand, particularly inferred or unidentifiable investment, will likely fall away when the global economy rebalances, i.e. countries stop running chronic current account deficits (such as the US) or surpluses (such as China). We do not expect this in the next two years. We believe that inferred investment demand will play a smaller role in determining the gold price, only to be replaced by rising investment and jewellery demand, mainly from India and China, which will likely persist in the longer term. In the physical market, support remains intact. While consistent physical buying interest has come from India specifically, we are witnessing a broader interest from Asia in general even Figure 9: Gold vs. global liquidity Figure 1: Gold price and the marginal cost of production 36 Index 1,2 $/oz Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan YTD Global liquidity Source: Standard Bank Research Spot gold Source: Standard Bank Research Cash cost of marginal producer Low est gold price for year 8

9 with gold above $1,5. Scrap and other physical selling have not been completely absent but we have not seen physical selling outpace buying in recent weeks. Long term, we see the cash-cost of the marginal producer as a floor for gold. Currently, we estimate this cost at $85 (in 211 terms). Table 4: Supply/demand balance for gold Key forecasts (tonnes) Supply Mine supply Old scrap supply Primary supply Demand Jewellery Industrial Total fabrication Bar hoarding/coins/medals Exchange traded funds Primary demand Primary surplus (deficit) Total official sector supply (76) (185) (135) (135) (135) Net hedging (de-hedging) (434) (444) (352) (236) (13) (5) (3) Gold price ($/oz) Sources: GFMS; World Gold Council; Standard Bank Research; SBG Securities Research 9

10 Platinum and palladium We are bullish platinum and palladium over the next two to years. For platinum, we forecast a relatively balanced market over this period. However, believe that the market will move into an ever increasing surplus growing to around 5, oz by 215. We believe that palladium supply and demand will face a large, ever growing deficit over the next five years. Our calculations suggest that this deficit will not be topped up by Russian stockpiles as these would have been depleted during 211 (see Precious metals supply and demand update and price forecast dated 25 January 211). We expect tight platinum and palladium supply, particularly from the South African platinum mining industry, to increase on average by around 2% over the next five years. This industry faces further production problems, the effects of safety stoppages, strikes, cost pressures and high capital costs. Producers will therefore probably be unable to respond rapidly to increases in demand. Such a tight market would put upward pressure on precious metal prices. Because of tight supply, producers will face increasing competition from the recycling of precious metals from: autocatalysts, jewellery and electronic equipment. We note that investment demand for platinum and palladium and recycling of these metals will likely be the main swing factors in determining the market surplus/deficit going forward. We calculate that investment in platinum ETFs in 21 amounted to some 536 oz. Our balanced market forecast for platinum in 211 depends on sustained investment demand; a reduction in investment demand will likely push the platinum market into surplus. We calculate that the recycling of platinum could reach around 36% of demand in 215 (from around 23% in 21); in this regard, our model implies an upward-trending market surplus. Johnson Matthey calculates that global investment in palladium (including ETFs) amount to between 8. and 1. million oz, which is well over a year s supply of metal. We noted above that we believe that palladium supply and demand will face a large, ever growing deficit over the next five years; in this regard we are likely to see upward pressure on the price. The sustainability of high palladium prices is therefore likely to depend on investor sentiment, as higher price could release metal into the market thereby moderating the price. The large implied market deficit in palladium and the large investment holdings in palladium therefore represents a double-edged sword to the palladium price. Our position on platinum and palladium remains unchanged. We believe that the cash cost of the marginal producer is still the relevant benchmark to judge whether platinum and palladium provide value or not. (We view this as the relevant benchmark because we forecast a continued deficit for palladium and a small deficit for platinum the next two years.) Therefore, the Figure 11: Platinum surplus/deficit Figure 12: Palladium surplus/deficit 7 oz (') 3, oz (') 35 1, , F 212F 213F 214F -3, F 212F 213F 214F Sources: Standard Bank Research; SBG Securities Research Sources: Standard Bank Research; SBG Securities Research 1

11 market could trade lower, although fundamentally we see growing value in platinum and palladium on approach of $1,7 and $7 respectively (at ZAR7./USD). The amount of production at risk is still small at these levels, but the current price levels, we expect further underinvestment in the South African PGM sector. We target $1,9 and $95 respectively for these metals in Q4:11. Furthermore, we forecast the platinum price to average US$1,85/oz in 211 and US$1 98/oz in 212. We could see the platinum price spike to over US$2,/oz in the next two years. We forecast the palladium price to average US$835/oz in 211 and US$875/oz in 212. We could well see palladium going through US$1,/oz within the next two years. Figure 13: Platinum demand vs. recycling Figure 14: Palladium demand vs. recycling 1, Pt ('oz) 14, Pd('oz) 7,5 1,5 5, 7, 2,5 3, F 213F 215F F 213F 215F Total demand Recycled supply Total demand Recycled supply Sources: Standard Bank Research; SBG Securities Research Sources: Standard Bank Research; SBG Securities Research 11

12 Table 5: Supply/demand balance for platinum and palladium Key forecasts (thousands of oz) PLATINUM Total supply 6,83 6,55 6,151 5,97 5,896 5,99 6,11 6,21 6,29 Total demand 7,335 7,92 7,94 6,842 7,88 8,121 8,373 8,63 8,899 Recycled supply -1,21-1,494-1,98-1,221-1,83-2,55-2,334-2,653-2,9 Surplus (deficit) Price ($/oz) 1,36 1,574 1,29 1, ,5 2,1 PALLADIUM Total supply 7,95 8,585 6,61 6,352 6,21 6,215 6,282 6,29 6,287 Total demand 7,517 7,855 8,791 8,15 9,836 1,398 1,872 11,499 11,882 Recycled supply -1,329-1,499-1,724-1,584-1,893-2,92-2,43-2,32-2,653 Surplus (deficit) 1,762 2, ,733-2,92-2,548-2,98-2,942 Price ($/oz) RHODIUM Total supply Total demand 1,9 1, Surplus (deficit) Price ($/oz) 6,262 6,522 1,537 2,388 2,418 2,675 2,775 2,85 Sources: Standard Bank Research ; SBG Securities Research; GFMS 12

13 Agriculture # Corn Although forecasts for world corn consumption have been revised down from those at the beginning of the year, the 21/11 data is still expected to reach a record high. Reasons for the downward revision stem from a smaller-than-expected uptick in US consumption because of slowing economic growth. However, demand in China remains firm despite mounting food price pressures and the associated inflation-fighting monetary tightening. Globally, strong corn demand is being driven largely by rising demand for meat, coupled with limited supplies of other feed grains. This trend is the most notable in the emerging economies of Asia, North Africa and Latin America, for two reasons: a) population growth increases demand for food, and b) socio-economic improvements drive the demand for more protein-rich diets. However, industrial demand is expected to decelerate as developing economies cut back on government incentives. Global supply of corn is expected to remain tight this year due to weather conditions in the US, Europe and Commonwealth of Independent States. However, owing to firm underlying demand and higher prices (making corn the more attractive alternative to other crops), planting is expected to increase over the next two years. Dependent on weather conditions, this could result in record high output. Firm demand conditions should keep global corn inventories, albeit that they are growing, tight well into 213. Therefore, there is still upside risk to prices if adverse weather constrains global supply. That said, the futures market remains volatile owing to the Eurozone debt crisis (and its possible impact on the global economy and the slowing US economy. This should keep prices capped for the remainder of the year. Wheat Global wheat consumption is expected to have reached another record in 21/11 despite high prices. Continuing the trend of recent years, feed manufacturers and industrial processors are the main driving force behind growing demand, as opposed to human food consumption. Higher corn prices has encouraged greater use of wheat for feed, with total wheat feed usage at the highest levels in two decades. As for corn, wheat demand is expected to continue growing as the global economy recovers, with the main impetus coming from the developing economies as disposable incomes rise. Figure 15: Global corn production and consumption 84 metric tons (millions) Figure 16: Global wheat production and consumption 7 metric tons (millions) Production Consumption Production Consumption Sources: USDA Sources: USDA 13

14 Global wheat production prospects are mixed in the traditional northern hemisphere producers of Europe and the US. Dependent on the outcome of the Canada and US harvest next year, there is a risk that the supply of high-quality wheat could remain tight in 211/12. Nevertheless, high prices should see increased planting, which should see overall production rise in 212. The outlook for prices is mostly dominated by concerns over the slowing US recovery and the impact of the Eurozone debt crisis on the global economy. Consequently, prices are expected to ease off in H2:11, with possible upside risks in 212 owing to the uncertainty about North American crops, especially the higher-quality grades. # This material has been sourced from the International Grains Council, US Department of Agriculture and Economist Intelligence Unit. Table 6: Forecast for corn and wheat prices Q1:211 Q2:211 Q3:211 Q4: CORN (US cent/bu.) Consensus Current forward WHEAT (US cent/bu.) Consensus Current forward Sources: Bloomberg 14

15 Commodity forecasts Key forecasts Long-term PRECIOUS METALS Gold ($/oz) ,227 1,485 1,45 1,4 1,39 1,38 (y/y %) Platinum ($/oz) 1,36 1,574 1,29 1, ,5 2,1 1,995 (y/y %) BASE METALS Aluminium ($/mt) 2,64 2,572 1,673 2,175 2,43 2,51 2,75 2,9 2,45 (y/y %) Copper ($/mt) 7,14 6,948 5,179 7,556 9,525 1, 9,2 8, 6, (y/y %) ENERGY WTI ($/bbl) (y/y %) Source: Standard Bank Research 15

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