Clear outlook. Gain clarity into what s driving your markets using our analysis and forecasts for key metals

Transcription

1 Clear outlook Gain clarity into what s driving your markets using our analysis and forecasts for key metals

2 Tools to trade Working in today s metal markets means you need to be an expert on supply and demand, spot prices and the outlook for markets. You need to know what your competitors are doing, what your customers want now and next, and what both suppliers and clients will or won t do as markets change. And, of course, you must now consider the ramifications of the amped-up trade conflict between the United States and China and its repercussions in the markets you trade, on top of considering what the fundamentals are telling you. New contracts. New opportunities. As this year s mating season takes place, we asked our team of price reporters and analysts to provide their outlook for base metals as well as their insight into other key markets to empower you in your negotiations. Alex Harrison Fastmarkets editorial director SETTING THE GLOBAL STANDARD In the current socio-economic climate it s becoming increasingly important to protect against price fluctuations. At the London Metal Exchange we re always working to provide more riskmanagement solutions for the physical and financial communities especially during times of volatility. From January onwards we ll be launching hot-rolled coil, alumina, aluminium premiums, cobalt and molybdenum cash-settled futures and to follow, gold and silver options. Developed to meet market needs, we re giving the precious, ferrous, aluminium and electric vehicle industries yet more opportunities to hedge and trade their metals risk. Find out more lme.com/newproducts newproducts@lme.com Table of contents Base metals 5 Aluminium: Price outlook bullish given numerous supply-side risks 6 Copper: When to buy the dip 8 Lead: Too early to turn bearish 9 Nickel: No avoiding the long-term bull story 10 Tin: Structural tightness will persist 11 Zinc: Supply has responded, have prices overshot? Beyond base: other prices to watch in The London Metal Exchange (the LME ),. The London Metal Exchange logo is a registered trademark of The London Metal Exchange. All rights reserved. All information contained within this document (the Information ) is provided for reference purposes only. While the LME endeavours to ensure the accuracy, reliability and completeness of the Information, neither the LME, nor any of its affiliates makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness, reliability or suitability of the Information for any particular purpose. The LME accepts no liability whatsoever to any person for any loss or damage arising from any inaccuracy or omission in the Information or from any consequence, decision, action or non-action based on or in reliance upon the Information. All proposed products described in this document are subject to contract, which may or may not be entered into, and regulatory approval, which may or may not be given. Some proposals may also be subject to consultation and therefore may or may not be implemented or may be implemented in a modified form. Following the conclusion of a consultation, regulatory approval may or may not be given to any proposal put forward. The terms of these proposed products, should they be launched, may differ from the terms described in this document. Distribution, redistribution, reproduction, modification or transmission of the Information in whole or in part, in any form or by any means are strictly prohibited without the prior written permission of the LME. The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any investment decision. The LME is not acting for any person to whom it has provided the Information. Persons receiving the Information are not clients of the LME and accordingly the LME is not responsible for providing any such persons with regulatory or other protections. All persons in receipt of the Information should obtain independent investment, legal, tax and other relevant advice before making any decisions based on the Information. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule October 12 Alumina 14 Aluminium premiums 16 Cobalt 18 US hot-rolled coil 20 Lithium 22 Nickel sulfate Fastmarkets 3

3 Base Metals Aluminium Price outlook bullish given numerous supply-side risks This has been an unusually volatile year for aluminium - changing trade policies and shifting trade flows, US sanctions on Rusal and unplanned disruptions to alumina supplies have coincided with a continuing clampdown by Chinese authorities on outdated and polluting capacity. Perhaps more than any other base metal at the time of writing, aluminium s outlook is the hardest to read with great confidence given that so many aspects remain shrouded in uncertainty. On balance, though, we believe LME aluminium prices are likely to edge higher in. Supply disruption threats and cost inflation should be net bullish drivers. The alumina situation is key. A supply deficit in the ex-china market has already stimulated Chinese alumina exports. Tight supply of alumina is therefore likely to become the new norm for a while; alumina prices should continue to move higher too. Our primary aluminium supply/demand balance shows a substantial global supply deficit of well above 1 million tonnes in, even while the pace of demand growth is likely to slow for the third consecutive year to 3.7%. This is down from 4.7% in and an average of around 6% per year over -. Crucially, however, we forecast the pace of primary aluminium production growth to slip to just 2.1% in - the slowest rate since, when the global financial crisis was at its height. In the intervening years, global primary aluminium 3,500 production has expanded at an annual average pace of 6.4%, ranging from 12.4% in to 3.3% in. This situation will underpin the highest annual average aluminium price since ; our basecase forecast is $2,230 per tonne, up from our forecast for this year of $2,167 per tonne. The LME three-month price has hovered between $2,000 and $2,100 per tonne throughout. It hit a low of $2,007 per tonne on Monday September 17, a drop of 11% from the start of the year, before rebounding to around $2,035 per tonne. Fastmarkets Fastmarkets average price forecast average price forecast $2,167 $2,230 With tight supply-demand balances projected for, the base metals are well positioned to enjoy price recoveries over the next 12 months when macroeconomic stresses disperse, according to forecasts from Fastmarkets research team. But we expect the supply deficit of alumina in China itself to widen too due to low inventories and limited additional supplies. The commissioning of planned new refining capacity will be restrained due to environmental inspections in the provinces of Henan and Shanxi. 3,000 2,500 2,000 1,500 1, October Fastmarkets 4 October Fastmarkets 5

4 zinc lead Copper When to buy the dip Copper has come under marked downward pressure so far this year, falling nearly 20% on the LME. This is in sharp contrast with last year s stellar gains of 32%. We argue that the copper price weakness has not been driven by weaker fundamentals but more by macroeconomic fears. Most damaging have been concerns over China s economic growth caused by: Tightening measures implemented by the authorities at the start of the year The escalation of the US-China trade dispute Still, some negative fundamental forces have been in play, especially in the first half of the year. Supply was more resilient than expected due to far fewer mine supply disruptions than typical in recent years. And Chinese copper demand growth disappointed. 4,500 macro tensions abate, production growth to 4,000 investors will shift their slow slightly to 2.4% in 3,500 focus back to the market s from 2.5% in. positive 3,000 fundamentals. The concentrate market 2,500 should tighten due to We 2,000 expect the global weaker mine production refined copper market to growth, resulting in 1,500 record annual deficits of lower treatment/refining 1,000 67,000 tonnes and 115,000 charges (TC/RCs). 500 tonnes this year and next year respectively. The tightness in the refined copper market The deeper deficit should exert downward projected for should pressure on reported essentially stem from an stocks, which we forecast acceleration in copper to fall to 4.9 weeks of consumption growth, consumption at the end of driven by the world ex- nickel from 5.3 weeks at the China. end of this year. 55,000 We expect copper 45,000 consumption growth in China to be little changed 35,000 in at 3.2% compared 25,000 with 3.4% this year, while growth in the rest of the 15,000 world will accelerate to 2.1% from essentially flat. 5,000 Against this, we forecast a base case for the LME cash copper price of $6,573 per tonne in and $7,163 per tonne in. This bullish outlook also reflects investors beginning to price in ballooning supply deficits On the supply side, we that loom in the early forecast global refined 2020s. 11,000 9, Fastmarkets Fastmarkets average price forecast average price forecast $6,573 $7,163 copper 4,000 3,500 3,000 2,500 2,000 1,500 1,000 tin 36,000 31,000 26,000 21,000 16,000 11,000 6,000 al 3,500 3, The second half of the year has so far been better from a fundamental perspective; we think this will remain the theme for the rest of and for because we believe the global copper market has now switched into deficit. Once 7,000 5,000 3, ,500 2,000 1,500 1, October Fastmarkets 6

5 Lead Too early to turn bearish LME lead traded above $2,650 per tonne for the first time since at its highs in February this year before sinking to around $2,000 per tonne by August. As with many of the other metals, the retreat came despite the lead market s own fundamentals appearing to justify a rise in prices rather than a fall. The global refined lead market is running another substantial supply deficit this year after a shortfall of more than 100,000 tonnes in ; the concentrate market remains very tight, with treatment charges still at bottom and limited new mine capacity in the pipeline; and metal stocks are near critically low levels. But the market s focus has shifted away from this bullish fundamental backdrop to the uncertainties surrounding the US trade disputes, tighter monetary policy and a stronger dollar. The concerted global economic growth story of and is being undermined. Given the more subdued business and investment climate as well as the disappointing price performance since lead s highs in February, we have recently revised lower our price forecasts out to the end of. Lead s fundamentals still look bullish so we expect prices to recover in time while supply deficits continue to cause stocks to be drawn down. Indeed, physical shortages leave this metal well placed to be one of the fastest movers to the upside when risk appetite revives. But that recovery will now come from a lower base. We have lowered our fourth-quarter base-case cash price forecast to $2,275 per tonne from $2,450 per tonne and our annual average price forecast for to $2,500 per tonne from $2,644 per tonne. The long-term demand outlook for lead in the important automotive market faces considerable headwinds from the displacement of internal combustion engines (requiring lead-acid batteries) by lithiumion batteries in electric vehicles (EVs). The impact of the EV story on lead in, however, will actually be bullish - miners are shying away from investing in the next generation of lead mines, which is keeping the lead concentrate market tight and primary refined supply restrained. So it is too early to get bearish on lead based on the bullish EV outlook. Fastmarkets Fastmarkets average price forecast average price forecast 4,000 3,500 3,000 2,500 2,000 1,500 1,000 $2,328 $2, Nickel No avoiding the long-term bull story Nickel is widely perceived to have a very bullish long-term outlook - it will benefit from the expected growth in electric vehicles (EVs) and lithium-ion batteries over the next decade or so. The question is: How much of this bullishness will be priced in during the next year? We err on the bullish side on the proviso that global trade-related stresses dissipate and risk appetite returns. History shows that when nickel has a bull narrative it can rally hard and fast. And it is still trading at historically low levels. We think the battery bulls will be back after the summer sell-off - we wouldn t rule out nickel touching $18,000 per tonne in the second half of given a supply deficit in the global refined market that looks set to expand next year to 81,000 tonnes as well as the continuation of stockpiling of Class 1 nickel units down the EV supply chain. Our annual average basecase forecast is currently $16,825 per tonne after $13,859 per tonne in, which assumes a return to $14,000 per tonne in the fourth quarter. The threemonth LME nickel price dipped to an eight-month low of $12,085 per tonne on Wednesday September 12. Two areas of concern for the short term are: the emergence of oversupply in stainless steel in Asia growth in nickel pig iron (NPI) production in Indonesia, while capacity continues to ramp up; and in China, while ore stocks and average ore grades recover This may precipitate a weaker patch in nickel s fundamentals in the fourth quarter if stainless steel mills show some restraint while NPI continues to expand. The role played by China s authorities may prove crucial. They have had 55,000 45,000 35,000 25,000 15,000 5, some success in curbing excesses in the carbon steel market but so far stainless has been somewhat overlooked. That may change this winter. But aside from government-enforced cuts, we believe there is a high probability that Chinese stainless producers will reduce production for market reasons this winter given the pressure on prices from a surge in domestic stocks. Rebalancing China s stainless steel market this winter may provide some short-term pain for nickel in the form of a dip in demand, but it will lay the foundation for another fundamentally bullish year in. Fastmarkets Fastmarkets average price forecast average price forecast $13,859 $16,825 October Fastmarkets 8 October Fastmarkets 9

6 Tin Structural tightness will persist Tin has been one of the most resilient LME base metals this year, especially during the first half, when LME prices edged only 1% lower while the broader LMEX was down 6%. We attribute this resilience to two main factors: The reaction in prices to macroeconomic tensions stemming from China was comparatively smaller because speculators tend to express their macro views through other industrial metals with better liquidity conditions, such as copper. The refined tin market temporarily tightened in the early part of the year due to a supply bottleneck in Indonesia - which accounts for 20% of global refined output - which was created by export permit delays. Indonesian refined tin exports were down 31% year on year in the first quarter but by July had recovered to show a modest gain of 3.7% year on year over the first seven months, according to our records. We project a stable demand outlook for tin this year and next, supported by healthy prospects for tin s main end-use sector, solder, thanks to robust indicators for growth in electronics markets. We forecast refined tin demand to grow by 1.5% in and 1.2% in. Given the stable demand profile, we believe that supply dynamics will be the key determinant of tin s price direction. In Indonesia, tin production has rebounded after the disruptions earlier this year; this trend should continue given investment in new capacity. But we caution that persistently low LME tin prices below $20,000 per tonne may undermine the supply recovery - three-month prices were struggling to hold above $19,000 per tonne in mid- September. In China, refined tin production, having risen an unexpected 8% in the first half thanks to strong shipments from Myanmar and solid domestic mine production, will contract in the second half and next year if supply from Myanmar falls as expected and China tightens environmental controls on domestic production. We therefore forecast growth in global refined tin production of 2.4% in before it slows to 0.9% in. This should result in a deficit of 7,000 tonnes this year and 8,000 tonnes next year. Against this tight fundamental backdrop, we forecast a base-case cash tin price of $20,388 per tonne in and $20,753 per tonne in. Fastmarkets Fastmarkets average price forecast average price forecast 36,000 31,000 26,000 21,000 16,000 11,000 6,000 $20,388 $20, Zinc Supply has responded, have prices overshot? The zinc market is in a phase of transition in supply and demand back to a balanced state from deep deficits of recent years. This readjustment process is being led by the concentrate market moving from undersupply to oversupply. Major mine projects such as MMG s Dugald River and Vedanta s Gamsberg have started up production this year while Century, Myra Falls and Lady Loretta are resuming operations after long suspensions. How quickly will this additional concentrate feed through the supply chain to rebalance the refined zinc market? Indicators suggest this rebalancing is already in progress. Global refined zinc production contracted by 3.7% in but has managed to return to growth this year, increasing by 2.1% year on year during the first half. As well, spot concentrate treartment charges (TCs) rebounded to two-year highs of $80-95 per tonne cif Asia Pacific as of the end of August from $65-75 per tonne in July and lows of $10-30 per tonne at the concentrate market s tightest point at the start of this year. Despite this recovery in mined zinc supply, metal stocks have so far maintained a downward bias, particularly in China. Smelters have been stymied by China s strict environmental inspections and the sharp 8.6% drop in mine production in the first half due to falling ore grades and because several small mines have been forced to close. As well, smelters are unlikely to be able to boost output significantly in the short term because China s winter heating season is due to start imminently. So looks set to be another deficit year overall for the global refined zinc market while looks balanced at worst. 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, We are reluctant to forecast oversupply yet. LME prices, which have been sliding since peaking near $3,600 per tonne in February, may have overshot on the downside this year - in mid-september, the LME three-month price was not far above the August 15 low at $2,283 per tonne. Our price forecast for is currently $2,600 per tonne. TCs should continue to work higher while the concentrate market moves deeper into oversupply next year. Fastmarkets Fastmarkets average price forecast average price forecast $2,951 $2,600 October Fastmarkets 10 October Fastmarkets 11

7 What are the fundamentals telling us? Enabling trading: Alumina Extreme tightness is propelling Fastmarkets MB s benchmark fob Australia alumina index price higher. The fob Australia index was $ per tonne on Monday September 17, up 63% from the start of. The index hit a year high of $ per tonne during April, when US sanctions against Rusal were announced and a month after Hydro s Alunorte refinery declared force majeure. Alumina was trading in August at 30% of the LME outright aluminium price - traders note that any level above 19% causes non-integrated smelters to lose money. The market has been monitoring developments at Alunorte, and a strike in western Australia since the start of August is disrupting supply at Alcoa s three-refinery system, which produces more than 8 million tonnes per year of alumina. Sanctions against Rusal have disrupted the Russian producer s alumina shipments from its refineries in Aughinish, Ireland, and Windalco, Jamaica. What buyers are saying: The worst of the supply disruptions are over - the Alunorte refinery could restart in the fourth quarter after Hydro signed environmental and social development deals with the Brazilian government in September; a strike by Alcoa workers in western Australia was called off at the end of September; and sanctions against Rusal could be removed. There should be more stable supply in. The lack of supply from traditional suppliers can be offset by China, which has been exporting more and at cheaper prices in. Still, buyers acknowledge that supply is tighter than it was and are prepared to pay a higher price than they did a year ago to secure some tonnage for. What sellers are saying: Supply tightness means that buyers are unable to secure large tonnages of alumina. This shortfall forces them to bid for tenders at high premiums amid strong competition for material. There are fewer sellers. A lack of availability enabled sellers to push for record-high prices this year but many producers sold out; some are even short and are unable to fulfil their contractual obligations. Sellers have therefore been competing in recent months with tenders for Indian alumina material - they have been concluding once a week, setting the market level. A tender for Nalco Indian material traded at $650 per tonne at the start of September, up 22% from the previous month s $530 per tonne. Key quote: Supply tightness ex-china is spreading to and across China, where alumina inventories at refineries and smelters are very tight; and the commissioning of planned new capacity will be limited and will proceed slowly due to environmental inspections in the provinces of Henan and Shanxi. Capacity closures will be enforced again during the winter months. The supply deficit outside China has stimulated Chinese exports of alumina. But we expect the deficit in China to widen due to low inventory and limited capacity to increase supply. We therefore believe that tight supply of alumina will become the new norm for a while. We expect alumina prices to rise further. According to our estimates, total alumina capacity potentially affected by disruptions amounts to 68 million tonnes per year, accounting for more than half of global alumina capacity. Fastmarkets senior analyst Yang Cao Our index and forecast: Alumina fob Australia index, $/t YTD average average price average price price forecast $ $ $580 Q3 Q4 Alumina FOB Australia index, USD/tonne (f) (f) October Fastmarkets 12 October Fastmarkets 13

8 Enabling trading: Aluminium premiums What are the fundamentals telling us? Aluminium premiums are down sharply from their April peak in Europe and Japan - by 36% and 53% respectively - while falling by only 8% in the US. They remain well above start-of-year and pre-sanction levels. The market is keeping close tabs on the Rusal sanctions, which are restricting most participants from transacting Rusal-branded metal. If the sanctions are removed, the market will return to relative normality. There will be more usable material and increased supply. Primary premiums could remain low while aluminium product premiums could fall dramatically. But if the sanctions are not lifted, supply will tighten progressively. Many market participants will be short of metal for deals; if so, premiums could soar. What buyers are saying: What sellers are saying: Availability of raw materials remains tight - alumina prices are at record highs, with Fastmarkets MB s benchmark fob Australia index surpassing $640 per tonne in September. These factors are likely to filter down to aluminium premiums at some point. There is no shortage of aluminium in the world - the market s main feature remains one of overcapacity in China s production and rising exports in the form of coils for re-melting and flat rolled products such as foil. Sanctions against Russian producer Rusal will be removed at some point in ; the market will be flooded with aluminium when that happens so there is no need to pay extra to secure metal for next year. Indeed, there is so far no evidence of a contango in forward premiums: Parcels for are being offered at flat to slightly higher premiums than spot levels in Europe and at flat to lower levels in the United States. Offers for the first quarter of next year have been reported around $160 per tonne dutypaid in-warehouse Rotterdam, in line with Fastmarkets MB s assessment of $ per tonne, for instance. Although buyers aim to conclude supply contracts by the end of LME Week, they are holding back from finalizing next year s deals until market direction is clearer. Some are reluctant to contract for any Russian material in case US sanctions remain in place. Supply is tightening due to sanctions against Rusal and record-high prices for alumina. Physical premiums are likely to rise after the October 23 deadline to wind down supply contracts with Rusal, especially because consumers are running on low stocks and not booking much volume forward. Aluminium stocks on the LME are at a decade low, with just 755,750 tonnes on warrant, while off-exchange stocks are also many million tonnes lower than in recent years, reflecting strong demand for the metal. Volatile spreads will remain a major risk for suppliers, with backwardations expected to return to the market to make stock holding unprofitable. There is a risk of selling forward - no one wants to miss out on any increase in premiums. Some sellers would rather take a chance on the spot market. Thus, more people are also looking to sell on a quarterly basis rather than an annual basis for next year. Key quote: The US sanctions on UC Rusal remain a strong supporting factor for physical premiums. At the same time, alumina prices have rocketed and onwarrant aluminium stocks at LME-listed warehouses have been around their lowest in a decade in recent months. Continued cancellations and outflows have tightened availability. Fastmarkets senior analyst Yang Cao Our price assessment and forecast: P1020A US Midwest delivered, cents/lb YTD average average price average price price forecast P1020A Rotterdam duty-paid in-warehouse, $/t YTD average average price average price price forecast 50 0 $ $ $ * full year forecast Q3 Q4 * (f) P1020A Rotterdam Duty-Unpaid In-Warehouse (USD/tonne) P1020A Rotterdam Duty-Paid In-Warehouse (USD/tonne) October Fastmarkets 14 October Fastmarkets 15

9 What are the fundamentals telling us? Enabling trading: Cobalt High prices in recent years and an extremely bullish outlook for lithium-ion batteries have led to a one-off supply response via the ramp-up of Glencore and ERG s large cobalt operations in the Democratic Republic of Congo, with material coming on stream this year and next. The switch to NMC battery chemistry from LFP/LMO will boost cobalt demand significantly, even if the volume of cobalt in each cell is set to decline. Larger battery packs will mean more cells per EV. Cobalt faces a supply surplus from new supply coming on stream but, once demand has grown to absorb it, shortages are likely to reappear. We expect any surplus to be snapped up by downstream consumers and OEMs. What buyers are saying: What sellers are saying: Key quotes: Our price assessment and forecast: Cobalt prices overshot in the first half of the year and, given the current fundamentals, a short-term rally back to $40 per lb and above is unlikely. Benchmark low-grade cobalt prices, assessed by Fastmarkets MB, peaked at $ /lb, in-warehouse Rotterdam, in the second half of April this year. The cobalt market must absorb a large supply response: increased availability of hydroxide from Glencore s Katanga and ERG s Metalkol Roan Tailings & Reclamation operations eases the tightness in battery raw materials. Spot payables against the metal price have already fallen since hitting highs at the start of the year. Higher cobalt prices have also boosted scrap supply, offsetting demand for spot purchases. The fact that consumers continued to declare maximum volumes on their long-term contracts, even during the traditionally quieter summer months, is a bullish sign for demand, even while spot market interest - and prices - waned considerably. Low-grade cobalt prices fell 24.5% over the summer, reaching a low of $ per lb at the end of August, before a slight recovery in September. While new hydroxide output pushes the market to a surplus in the short term, stockpiling by original equipment manufacturers (OEMs) is likely to obsorb that new material. Supply of metal, meanwhile, is likely to remain tight because of strong demand for traditional uses of cobalt outside the battery sector. The pricing structure of the cobalt market is such that hydroxide and salts are exposed to this tightness. Next year looks surprisingly bullish. The summer correction was expected, and buyers were reducing their inventories and waiting for the market to bottom out. But now there s demand coming for material that just isn t there. a trader The demand outlook is second to none, with lithium-ion battery demand growth expected to see CAGR of 15-20%. Fastmarkets MB head of battery raw materials research William Adams Low-grade cobalt, in-warehouse Rotterdam, $/lb (low of range) YTD average average price average price price forecast $25.97 $39.12 $35.80 Changes to China s electric vehicle (EV) subsidy policy have expedited a shift to battery chemistries with higher nickel and lower cobalt content, resulting in less demand for the latter. Despite shifts to nickel-rich cathode chemistries, battery sector demand is still bullish for cobalt given forecast EV production figures and the shift from LFP and LMO cathodes to NCM Q3 Q4 (f) (f) Low-grade cobalt, in-warehouse Rotterdam (USD/lb) October Fastmarkets 16 October Fastmarkets 17

10 What are the fundamentals telling us? Enabling trading: US hot - rolled coil The maximalist trade policies of the Trump administration - unpredictable in the best of times - have made US steel prices - volatile in the best of times - harder than ever to forecast. Steel prices in the United States are at their highest compared with those abroad since the financial crisis. For HRC specifically, high prices dovetail with a sluggish demand environment: Apparent steel usage has declined modestly so far this year. Mill sales have retreated but imports have soared. In general, this contrasts with the steel market, where mill sales have risen at the expense of falling imports. Key quote: Our index and forecast: What buyers are saying: What sellers are saying: Increasing volatility has made it more important than ever for Hot-rolled coil index US domestic Midwest fob mill US$/cwt YTD average average price average price price forecast Concerns about price declines amid a glut of readily available material in the Prices declined over the summer because backlogs and lead times shortened and businesses to keep track of pricing. A properly constructed daily price $31 $42.08 $41.15 domestic market are keeping buyers out of the market. By how much might prices fall further? US hot-rolled coil was trading mills were more aggressively negotiating for deals amid the summer slowdown. index could help drive better price transparency for its users. at $41.54 per hundredweight ($ per tonne) in mid-september, down 9.4% from its peak of $45.84 per cwt. Although buyers appear to have stocked up earlier in the year to avoid price increases, they might need to replenish before the end of the year. Still, end- Tim Stevenson, partner at commodity advisory Metal Edge Partners, on Fastmarkets AMM s decision to increase the frequency of its US Midwest Hot-Rolled Coil Index from weekly to daily on Monday October 1. Buyers who locked in contracts in did of-year inventory taxes could cap stock well to avoid earlier price increases but builds. they will be at a disadvantage because next year s long-term deals will reflect this year s spot market reality. Contractual Domestic prices are still well above prices discussions are due soon. elsewhere, hinting at a possible correction before the end of the year. For example, HRC in mid-september was selling for $615 to $626 per tonne at ports in southern Europe and for $570 per tonne exported from China. But Section 232 tariffs are providing a buffer Q3 Q4 (f) (f) US Mid-West HRC index (USD/short ton) October Fastmarkets 18 October Fastmarkets 19

11 What are the fundamentals telling us? Enabling trading: Lithium A supply response is under way via the ramp-up of hard rock production in Australia. Demand growth slowed while the market adjusted to changes to China s NEV subsidies in the second and third quarters but it will rebound. The market is moving into a supply surplus and is likely to remain in one for some time. Fastmarkets MB s research team is bullish over the long term. Key quotes: Our price assessment and forecast: What buyers are saying: Rising prices at the end of and the promise of a new energy vehicle (NEV) era prompted a producer response, especially from junior miners, with some reaching the production stage at staggering speed. This resulted in a supply response that is now reaching China. China s investment in recent years in lithium processing resulted in slight oversupply of lithium compounds during, causing prices to trend lower. The system of subsidies Beijing made available to battery makers was put on hold in the first half of, leading to a decline in consumption. Combined with availability of cheaper units of lithium compounds from China s Qinghai region, this pushed prices down. Downstream consumers in China remain partially covered by contracts. But the opportunity offered by lower spot market prices is persuading downstream consumers to source higher volumes on a spot basis. What sellers are saying: Auto manufacturers in China have led the surge in NEVs over the past couple of years; traditional auto manufacturers around the world are now accelerating their NEV production. While lithium-ion battery prices fall, not only will NEV prices also drop but more battery energy storage systems (ESS) will become viable. NEVs and ESS - key sectors for lithium-ion batteries - are set for exponential growth. China s five-year plan, endorsing NEVs, created a demand shock - Chinese companies started to invest both in vehicle and lithium-ion battery manufacturing, triggering a rally in lithium prices. Although lithium prices have fallen in the Chinese spot market throughout, lithium producers anticipate a new demand surge toward 2020 and remain committed to increase production capacity to fulfill the expected increase in battery demand. Current higher contract market prices and the availability of Chinese material are persuading smaller producers in China to step into the international market and sell their material in the rest of the world at very competitive prices. a lithium producer We see that the price will be slightly lower in the second half of the year, although still significantly higher than in the second half of last year. SQM, in its second-quarter earnings call Lithium carbonate min 99.5% Li2CO3 battery grade, spot price range, ex-works domestic China, yuan/tonne Oct-Dec YTD average average price average price price forecast 180, , , , ,000 80,000 60,000 40,000 20, ,333 yuan 131,680 yuan 66,875 yuan 0 Q4 Q3(f) Q4(f) (f) (f) Q3(f) Q4(f) Lithium carbonate min 99.5% Li2CO3 battery grade, spot price range, ex-works domestic China (RMB/tonne) October Fastmarkets 20 October Fastmarkets 21

12 What are the fundamentals telling us? Enabling trading: Nickel sulfate New nickel sulfate capacity is being built and capacity at some existing operations is set to be ramped up from the second quarter of next year. BHP s Kwinana Refinery in Western Australia is expected to produce 100,000 tonnes per year by April. LME and SHFE stocks of Class 1 nickel - which can be used to make nickel sulfate - are likely to feed demand until new nickel sulfate capacity comes online. The market is very China-centric at present - direction will be closely linked to EVs and EV battery demand, in which China is at the vanguard. The shift from LFP/LMO battery chemistries to NMC (lithium nickel manganese cobalt oxide) chemistries will increase nickel sulfate demand significantly in the years ahead, as will demand from Tesla s NCA (lithium nickel cobalt aluminium oxide) batteries while the company s EV output rises. What buyers are saying: What sellers are saying: Since nickel sulfate prices have been over-inflated due to the premature focus on demand growth in the electric vehicle (EV) sector, there is downside potential in the near term. Prices were trading at 26,000-26,500 yuan ($3,792-3,865) per tonne in mid-september; the overall price trend has been downward. A boost in nickel sulfate consumption from the EV boom will start in 2020 at the earliest. Many producers are ramping up their nickel sulfate output in response to the growing need of consumers and in anticipation of further demand growth, increasing availability and broadening the range of sources of material. Increased usage of nickel sulfate will allow battery producers to meet requirements for longer driving distances. The high cobalt price should lead to increased nickel sulfate usage because nickel is cheaper and provides higher energy density, making it more attractive than cobalt for now. Key quote: The volatility of the nickel sulfate price can t be independent from the nickel full-plate price at the moment - if the price differential between the two widens too much, we will see a correction in the nickel sulfate price. The significant pick-up in nickel sulfate consumption on the backdrop of wide application of nickel-rich batteries won t take place any time before analyst Our price assessment: Nickel sulfate min 21%, max: 22.5%; cobalt 10ppm max, China ex-works, yuan/tonne YTD average price: 26, ,800 26,700 26,600 26,500 26,400 26,300 26,200 26,100 26, Jul 31-Jul 7-Aug 14-Aug 21-Aug 28-Aug 4- Sep 11-Sep Nickel sulfate min 21%, max: 22.5%; cobalt 10ppm max, China ex-works, RMB/tonne October Fastmarkets 22 October Fastmarkets 23

13 Enabling trading We ve been benchmarking commodities since 1882 Being deeply embedded in the markets we serve allows us to provide truly market-reflective prices to enable global trade. By combining our expertise from across Metal Bulletin, American Metal Market & Industrial Minerals, we now provide you with one definitive source for commodity data & insights. Discover our brand story at: fastmarkets.com October