Quarterly Metals Report April 2016 Analysis & Forecasts for Base & Precious Metals, Iron Ore & Steel

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1 MARKETING COMMUNICATION Quarterly Metals Report Analysis & Forecasts for Base & Precious Metals, Iron Ore & Steel Contents Market Overview 2 Aluminium 6 Copper 8 Lead 10 Nickel 12 Tin 14 Zinc 16 Iron Ore & Steel 18 Gold 20 Silver 22 PGMs 23 Appendices 24 Disclaimer 31 Compiled and Published by Sucden Financial Limited on 19 Metals Comments/Analysis: William Adams, Head of Research, FastMarkets.com Steve Hardcastle, Head of Client Services, Sucden Financial Limited Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority.

2 Summary Summary The question remains as to whether the recent slight improvement in China s outlook is transitory or whether a sustained improvement can be seen. The US and Japanese economies are giving more positive signals while Europe is stuttering and facing further problems. Have commodity prices adjusted to the scenario? Will the oversold situation resolve itself? Until these questions find resolution, prices are likely to track sideways albeit with slightly higher support levels. Aluminium The more it changes, the more it stays the same. High stocks, potentially weaker fundamentals, and a dearth of meaningful net supply cuts remain the leading factors. Anticipated range $1,440 - $1,600. Copper Continues to be constrained by proxy selling but fundamentals and stock movements starting to exert influence. Possible restocking should underpin the market. Support seen around $4,700 but selling pressure above $5,200. Lead Relatively low inventories and buoyant auto and battery markets mean potential supply deficit should underpin prices. Expected range for the quarter of $1,650 - $1,950. Nickel Disappointing first quarter and the market appears bereft of positive influences. The effects of production cuts are likely to be outweighed by the high level of stocks and the slumbering stainless market. Range expected to be $8,000 to $9,500. Tin Lower exports from Indonesia, sporadic production increases and generally stable consumption levels are underpinning the market and tin is outperforming the other metals. Range likely to be $15,400 to $17,000. Zinc The combination of the oversold state of the market and the growing supply deficit resulting from production cuts have stabilised prices and we look for a higher range of between $1,725 and $1,925 for this quarter. Iron Ore & Steel Were the recent price increases built on anything solid? It is difficult to envisage an ongoing rally from here this quarter. The more likely view is one of consolidation. Range expected to be $44 to $58. Gold Risk aversion, US Fed tightening and slightly better sentiment have each contributed to gold price movements so far this year. With interest rate hikes seemingly less likely following the slightly more dovish comments from Ms Yellen, we are left with the enduring risk and sentiment factors which will underpin and strengthen prices in this quarter at least. Range anticipated to be $1,180 - $1,325. Silver Likely to attract speculative and investment demand activity possible to the extent of outperforming gold. Range anticipated $15 - $18. PGMs Performed well in Q1 although very volatile. Industrial demand likely to remain strong but investment demand seems patchy. Ranges anticipated at $920 - $1,040 and $550 - $650 for platinum and palladium respectively. Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority. The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy. This report is not subject to any prohibition on dealing ahead of the dissemination of investment research. Accordingly the information may have been acted upon by us for our own purposes and has not been procured for the exclusive benefit of customers. Sucden Financial believes that the information contained within this report is already in the public domain. Private customers should not invest in these products unless they are satisfied that the products are suitable for them and they have sought professional advice.

3 Market Overview Market Overview Outlook The economic outlook has generally been bearish during the first quarter the market has been fearful that China s economy was slowing more than previously expected. The danger is that this would cause contagion. Weak Chinese demand would hit demand for imports; that weakness in turn would spread to those countries that exported to China i.e. most of the rest of the world. This fear hit commodity prices hard in the second half of 2015 and into early 2016 but the downward trends also led to prices becoming oversold Chinese funds, banned from shorting equities, ended up shorting commodities as a proxy for the Chinese economy. Fears that exceptionally weak commodity prices would lead to commodity companies defaulting on loans, triggering another debt crisis, added to the gloom and led to an oversold situation. The exception was gold, which gained ground because of the increased fear factor. Once the markets picked themselves up off the floor in mid-january, the process of correcting the oversold situation started to unfold, leading to strong rallies across the metals and in oil. The fact gold prices have held up suggests that institutional investors may have become more interested in buying commodity baskets again. The question now is whether this upside correction is merely a counter-trend move driven by short-covering or the start of a more sustainable rally. The jury is largely out on this there are arguments for both sides and more data is needed before determining which holds the most sway. On balance, we expect the global economy to improve but there are likely to be numerous headwinds along the way. As well, high stock levels in many of the metals may well prevent bull markets from getting started but some metals have better fundamentals than others and could therefore enjoy stronger rallies. Growth in the global economy is generally weak, with fourth-quarter GDP at 1.4 percent in the US, 0.3 percent in the EU and percent in Japan while China s official GDP dipped to 6.8 percent in the fourth quarter last year. All eyes on Chinese economic data Compared with the double-digit growth in China during the super-cycle, the drop in China s GDP is significant in percentage terms. But taking into account compound growth over the past decade and how large the Chinese economy now is, growth of 6.8 percent, if an accurate assessment, still means a lot more of everything is needed each year. This notion, we think, tends to be lost in all the gloom. Assuming that falling prices have led to destocking, which is a finite phenomenon, the end of destocking and rising prices may well lead to restocking, which could give the economy a much-needed boost. The commodity markets are now on tenterhooks to see if that is starting to unfold. 2

4 Market Overview The Chinese manufacturing PMIs both the State and Caixin readings have started to show signs of improvement. The state reading is pushing up above the 50 level, suggesting the manufacturing sector is expanding, while the Caixin reading of smaller companies has been trending higher since October, even if it is still below the 50 level. We would expect PMI data in the months ahead to be extremely influential on sentiment. The Chinese CPI continues to trend higher and PPI, although still showing deflation, has improved in each month of this year the Chinese economic super-tanker may be slowly turning round for the better. If this trend develops, sentiment is likely to recover at a fast pace, we think, which in turn could lead to a restocking rally in commodities. But it is still a big if as to whether China s economy continues to recover the signs we are seeing could turn out to be a false dawn. Growth ex-china ticking along but still too slow Although the commodity markets are fixed on China's growth prospects, growth and financial stability in the rest of the world is also important and for once the markets are not experiencing any major financial or geopolitical crises as has so often been the case recently. Despite this, growth is at best subdued. EU GDP has averaged 0.3 percent per quarter since mid-2013, Japan s GDP per quarter has oscillated either side of flat and the US GDP has averaged around 2.25 percent over the same period on an annualised basis. This overall low level of growth is not helping boost demand; neither is it generating the level of growth needed to provide exit velocity to set the global economy back to strong growth. With the IMF forecasting global growth of 3.2 percent this year, according to its latest forecast, the global economy is treading a thin line between recession and expansion. The more dovish US monetary policy helps Despite considerable fluctuations in Fed-speak, global markets have benefitted from a more dovish Fed stance, especially because chair Janet Yellen has tended to be more dovish than the rest of her team; ultimately, she is their boss. The dovish stance has allayed fears in emerging markets (EM) that interest rates will rise sharply, which would make their repayment of foreign debt a bigger burden and impinge on their growth. The better outlook for EM economies has led to an inflow of investment into the region, halting the earlier capital flight that in turn had seen considerable EM currency weakness. The rebound in commodity prices, especially oil, has also helped to boost growth in EMs. More recently, EM currencies have started to rebound, which we feel is a sign of health. 3

5 Market Overview With global growth treading a fine line, it seems unlikely that the Fed will do anything that runs the risk of scuppering it. Although the market expects two interest rate rises this year, the Fed fund rates imply barely a 25-basis-point rise in According to the 30-day Fed futures prices, there is a 49-percent likelihood that interest rates are still at 0.5 percent at the December FOMC meeting, a 37.7 percent likelihood of them rising to 0.75 percent and an 11.4 percent chance of them reaching one percent. If there are no increases or just one of 25 basis points in US interest rates this year and market sentiment is still expects two rate rises, there is room for disappointment among dollar bulls. This could further weaken the dollar, which in turn could help underpin commodity prices. The longer the low interest rate environment holds, the less the risk of another EM tantrum. As the chart of the dollar index shows, after a long run-up in the dollar, which accelerated in the second half of 2014 when the Fed started to talk about reining in quantitative easing (QE) and the return to a more normal monetary policy, it looks as though the dollar had discounted the first few rate rises. Since the Fed first raised rates in December, the dollar index has not climbed; indeed, as expectations for the second rise have been kicked down the road, the dollar has fallen. Further delays to rate rises may well make room for further dollar weakness. But with Japan and the EU still doing QE and pursuing negative interest-rate policies while the US next move is likely to be to raise rates, any pullback in the dollar index is likely to be relatively short-lived. The danger is that if the fragile nature of the global economy, especially while it faces some political uncertainty over a potential Brexit and the rise of populism, overrides the Fed s wish to keep ahead of the curve inflation could then establish a foothold. This would be even more likely should oil prices rise sustainably if OPEC manages to freeze output. A rise in inflation would likely be bullish for all commodities it would lift commodity producers costs, which could bring about more production cuts, while for the likes of gold it could lift investment demand. Recent timeline Given how washed out commodity prices had become around the end of last year, we think the commodity sector had adjusted to the weak outlook. Even though the outlook showed little sign of improving earlier in the year, commodity prices started to rally - a lack of further selling pressure prompted some short-covering and some some bargainhunting, which then attracted CTA-type buying, which fuelled the rebounds. The rallies have been strong, averaging 23.7 percent. Aluminium gained the least, climbing 12 percent, while tin rallied the most, jumping 33.9 percent, and copper rose 18.8 percent. The approach at the end of the first quarter seemed to have prompted profit-taking; now the market is waiting to see what follows. 4

6 Market Overview This fragile set-up means markets are vulnerable on both the upside and downside. Restocking could fuel a rally while any economic crisis - a hard landing in China, equity market corrections, a renewed Greek crisis - or a political crisis (Brexit, OPEC factions, EU Immigration, a shock US election result) could lead to another downward spiral in commodity prices. On balance, we feel the slowdown in China is being orchestrated and is all part of the plan to transform the old economy to a new model that will be geared up to feed off consumer spending. Given the control that policymakers still have in the economy, we would be surprised by a hard landing although in a crisis the unexpected can unfold too quickly to be managed. The One Belt One Road project was announced some years ago; as the planning stages are completed, more projects should start. When that happens, we would expect order books to fill up, which is bound to be bullish for commodities. It is noteworthy that iron ore and steel prices are rallying more than expected in recent months, which could be a sign that industry is receiving more orders. As well, while the anti-corruption clampdowns, which have often been blamed for delaying infrastructure projects, run their course, improved confidence may well see more infrastructure projects get off the ground, especially because local governments have been allowed to raise money via municipal bonds. The Chinese government s plan to change the focus of the economy was never going to be a seamless operation; the turnaround would take time and be disruptive and it may still have a lot further to run. But if the commodity markets have reacted to the shock adjustment and have overshot on the downside in the process, there may well be room for some longer-lasting counter-trend moves while some of the changes start to bear fruit. Outlook After becoming oversold around the end of the year, it looks as though the metals have undergone an adjustment prompted by short-covering that led to some fund-buying and perhaps some bargain-hunting before profit-taking has set in more recently. The question now is whether the global economy, led by China, recovers enough to warrant users of metal to restock. Given the significant production adjustments and strategic buying in recent quarters and a handful of encouraging signs and reports from Asia that demand is improving, there seems a good chance that the fundamentals will improve. Where stocks of metal are not too high or too liquid, there may be room for higher prices, especially because restocking can cause consumers to chase prices higher. Rising price may also attract more fund-buying. On balance, we are not too bullish but we think demand may improve somewhat, which will complement the supply restraint and lead to some upside pressure on prices. Still, the whole dynamic is likely to remain fragile. Given this, we would expect nervousness about the outlook to prompt producer selling into price strength, which is likely to cap the upside. So we are mildly bullish and expect sideways-to-higher range-trading over the medium term. 5

7 Aluminium Aluminium Prices stronger than the fundamentals Summary Aluminium prices rebounded in the first quarter. Having set a low in November at $1, per tonne, prices have rallied 12 percent to a high of $1,605. The move followed even stronger rebounds in other base metals that averaged 26.1 percent. So aluminium was the laggard and rightly so considering the fundamentals, we think. Prices in China, surprisingly, have rallied 26 percent. But production increases remain in the pipe line. The run-up will have given marginal producers another hedging opportunity, Global supply/demand balance in refined aluminium (in millions of tonnes) (e) 2016 (f) Production Consumption Balance Price (3m) $2,000 $1,860 $1,900 $1,661 $1,500 Source IAI, WBMS, FastMarkets forecasts which is likely to mean the supply-side fundamentals will become even weaker in the months ahead. We expect prices to trend broadly sideways in the range $1440-$1600. Overall trend The dominant trend is to the downside, as the chart above shows. While aluminium's attempt to rebound looks constructive, it was relatively weak compared with the rebounds in the other base metals; the fact so much of it was reversed so quickly suggests confidence in the metal remains poor. The relatively weak rebound in LME aluminium prices suggests the market remains well supplied; indeed, any tightness was seen only on the LME. The considerably stronger rebound in the Shanghai Futures Exchange (SHFE) price suggests the measures taken by China have caught the market offguard, which has led to short-covering. As of late March, the forward curve in the SHFE was backwardated, with May prices at 11,740 yuan per tonne, falling to 11,640 yuan for the October contract, while the LME forward curve is in contango. With production in China likely to be very price-elastic on the way up, we expect the various agreements on cutting output to unravel. The extra danger is that the strong rebound will have given marginal producers an opportunity to hedge. The forward backwardation suggests forward selling, which is likely to mean production will be less price-elastic if the metal sells off again. In turn, this could mean prices end up falling even further. Just too much stock We see the problem in the aluminium market as the amount of stock that has built up over the past seven years. The output cuts of late show that producers are prepared to take action when prices are low but there is such a large producer base, especially in China, that they are unlikely to be able to engineer a big enough production deficit to erode the stock overhang. Global aluminium stocks may be as high as million tonnes so a huge supply deficit is needed to rebalance the market but this seems very unlikely. When aluminium last faced such a glut in 1994, producing countries signed a memorandum of understanding (MoU) that ultimately created a deficit and led to a drawdown of stocks to rebalance the market. But another MoU is probably out of the question in today s antitrust world, which means prices alone may have to bring about the adjustment. If the top level of marginal producers have been able to hedge and are therefore protected from lower prices for a while, prices may well have to fall to force the next tier of marginal producers (with even lower marginal costs) to cut. 6

8 Aluminium So unless a strong economic recovery comes to the rescue, risk looks likely to remain to the downside. At some stage, availability could increase even more should US interest rates rise to a level that threatens the profitability of financing metal; in that case, more of the metal that is currently held off market may return to market as it is delivered against hedges. We feel this scenario lies ahead but, with the LME spreads back in contango, we do not see this situation unfolding over the next six months; if anything, more financing may support the market. No shortage of metal but bouts of tightness still likely The rebound in aluminium prices appears to have been driven by short-covering, as the tightening of the spread from mid-december to early March shows. In October and November, the c-3s spread averaged $19.25 contango but it then tightened, averaging $0.5 contango in December, $0.35 contango in January and a backwardation of $6.25 in February. The back peaked at $23.25 on February 29; it returned to a contango on March 9. The tightness in the spread attracted the delivery of just below 350,000 tonnes between early December and mid-march. As well, some 485,000 tonnes of cancelled warrants were re-warranted over the same period, no doubt also to enable holders of the metal to take advantage of the tighter spreads. Once new LME rules come into play that means rent charges will fall, the longer metal is in an exit queue, the instances of cancelled warrants being re-warranted may decrease. Bouts of tightness on the LME may then become even more acute. Cancelled warrants have ballooned since mid-march, jumping 120 percent to million tonnes. Outlook Despite the first-quarter rally, it is too early to say whether the downward trend in prices is over. We tend to think it remains intact; the recent rally will also mean supply can be even more inelastic in the face of lower prices. We expect bouts of tightness en route but would not be surprised if prices retest the lows. We expect prices to trade in a $1,440-1,600 range in the first quarter; for 2016 as a whole, we expect an average of $1,500. The rebound in prices in April has seen the forward spreads ease, which may well mean a pick-up in forward selling into the rebound. This could cap prices. Cancelled warrants have jumped to 45 percent of total stocks from 20 percent in mid-march. If new warehouse rules discourage the rewarranting of cancelled warrants, liquidity in the LME may suffer. Aluminium production in China appears to be falling fast but, with SHFE prices up 26 percent, we would expect output to rebound. Until then, the picture of falling production may well drive prices higher. Physical premiums weakened in the first quarter the backwardation encouraged merchants to destock but with the return of the contango, premiums may edge higher again. We expect US premiums to remain buoyant. 7

9 Copper Copper Is China s economy starting to recover? Summary The freefall in copper prices has halted there has been a delayed reaction to a build-up of bullish factors. The market had become too complacent about the bearish China trade and the rebound since mid-january caught many in the market wrong-footed. A counter-trend move is now in progress; given the low level of LME stocks and rising prices, a period of restocking may ensue. US funds have been busy covering shorts but that trend may now wane, while money managers on the LME have been getting longer, which may lead to profit-taking. We expect prices in the second quarter to consolidate and build a higher base above $4,700 per tonne. Although there are still Global supply/demand balance in refined copper (in millions of tonnes) (e) 2016 (f) Production Consumption Balance Price $7,946 $7,250 $6,860 $5,600 $5,000 Source: ICSG, FastMarkets forecasts proxy short positions, which are also vulnerable to shortcovering, the twin effects of which are likely to keep the price rangebound We expect prices in the second quarter to consolidate and build a higher base above $4,700 per tonne with selling pressure should prices approach $5200. Overall trend Copper prices have enjoyed a significant counter-trend rally in which they have peaked at $5,131, a rebound of 18.8 percent. This is almost enough to trigger a bull market. On the monthly chart above, the rally looks as though it could go a lot further the downtrend line is around $5,700 but perhaps not just yet. On balance we thought the weakness late last year and early in January was an overshoot on the downside caused by traders and funds looking to short commodities to hedge against weakness in China. Sentiment was so negative that it led to the market ignoring the supply responses that had started and that were added to in January when China s SRB agreed to initiate a stockpiling programme and major Chinese smelters agreed to cut 350,000 tonnes of production. Once prices stopped falling in mid-january, it was only natural that the market started to rebound even when bearish news prevailed. In turn, this set off a chain reaction of short-covering, restocking and CTA-type fund buying. These factors have driven the rebound even though the fundamental outlook has not improved much, with the global manufacturing PMI showing stagnation it fell to 50 in February from 50.9 in January. But more recent data looks more promising. Tightness returns as China soaks up spare metal The oversold state of the market around the end of the year that triggered a response by China in the form of production cuts and stockpiling also led to general restocking and covering of shorts. In turn, LME stocks accelerated lower and the nearby copper spreads tightened. The cash-to-threes spread moved into backwardation in mid-january, peaking at $32.50 in mid-march, while LME stocks dropped to 143,400 tonnes at the end of March from 235,800 tonnes at the end of The metal seems to have been shipped to Shanghai. The LME/Shanghai copper arbitrage window was open for most of January and February; stocks in SHFE-registered warehouses have climbed to 360,925 tonnes from 177,854 tonnes at the end of LME stocks have fallen 92,400 tonnes and SHFE stocks have climbed 8

10 Copper 183,071 tonnes not only has LME metal shifted to China but surplus metal and metal from custom-bonded warehouses in China also appears to have made its way to the SHFE. The 143,400 tonnes of LME stocks, of which 113,475 tonnes are available (i.e. not cancelled), do not provide much of a cushion against supply shortages or disruptions. It again seems that China has taken advantage of multi-year low prices to build up strategic stockpiles; this seems an astute move given the country's structural deficit of refined copper. Copper market to remain in a small deficit The copper market was in a supply deficit of 57, ,000 tonnes in 2015, according to the International Copper Study Group (ICSG), the latter figure taking into account changes to Chinese bonded stocks. In 2016, with output cuts partially offset by new production, the ICSG expects mine output to rise 1.5 percent to 19.4 million tonnes and refined production to rise 1.6 percent to 22.9 million tonnes. Again, we feel the production cuts will stay in force and we expect output growth of just one percent, taking into account supply disruptions. The ICSG forecasts only a 0.5- percent rise in copper demand to 23 million tonnes but we feel this is too pessimistic given that China accounts for 45 percent of global copper consumption and the country s GDP growth is expected at around 6.5 percent such a growth rate in such a large economy seems certain to see global copper demand rise more than 0.5 percent. Our forecast is for demand growth of two percent, which would take consumption to million tonnes and mean a deficit of 170,000 tonnes. Return of investment interest Although commodity markets have generally been very weak in recent years, prompting many investors to leave commodities out of their portfolios, we sense a change unfolding this year. Oil prices, base metals and precious metals have all been rising at times, which we think could stem from some institutional investors slowly buying back into commodity baskets to take advantage of washed-out prices. Outlook We said in our January report we expected prices to reach a low in the first quarter and then to recover. They have done so; we would now expect prices to range-trade above $4,700 while the market waits for better news on the economic front. We expect a second-quarter price range of $4,700-5,200 per tonne. With LME stocks falling back towards the lows, there is not much of a cushion against supply deficits and disruptions. Cancelled warrants are also low. The forward curve in mid-january when prices were at the lows was flat. The run-up in prices has seen it become slightly more backwardated, suggesting some forward selling. The funds trading Comex turned net long for one week late in March and have since turned net short again is the rally over? The net long money managers' position on the LME has dropped on long liquidation and short selling is the rally over? 9

11 Lead Lead Still one of our favoured metals Summary Lead prices have become increasingly choppy since October. Since this is taking place below the lows, perhaps the market is hammering out a base. With the supply fundamentals strengthening, with exchange inventories low on the LME and SHFE and with buoyant auto and industrial battery markets, we remain friendly towards lead. The latest ILZSG data showed the market had shifted to a supply deficit in January; we expect the deficit to grow Global supply/demand balance in refined lead (in thousands of tonnes) throughout the rest of We (e) 2016 (f) expect prices to average $1,800 in Production 10,634 10,598 11,110 10,921 11,249 11, and to range between $1,650 Consumption 10,468 10,524 11,089 10,911 11,238 11,575 and 1,950 in the second quarter. Balance Price $2,402 $2,062 $2,150 $2,120 $1,795 $1,800 Source: ILZSG, FastMarkets Overall trend The series of higher lows and higher highs since the November low means the overall trend may be changing to upward from the downward trend that has been in place since August 2014 despite the increased volatility. With mine supply contracting following mine closures and output cuts, the fundamentals would support such a switch. Secondary supply may well pick up into a price rebound, which is likely to dampen any rally, but with prices low compared to the trading range there may well be considerable room for prices to climb to a higher range. Secondary lead supply may be price-elastic into a price rebound and hoarded scrap is fed into the supply chain but much lead mine production may be less price-elastic miners of zinc/lead mines are likely to be guided more by zinc price. So while low lead stocks may boost lead prices, high zinc stocks may dampen the recovery in zinc prices. Overall, we feel sentiment has dragged lead prices lower rather than bearish fundamentals. Diverging primary and secondary lead supply Since lead prices are 9.6 percent above the November low and around the level where production cuts were announced, we do not expect shuttered lead mine output to be restarted any time soon. More to the point, with the cuts in lead coming from zinc-lead mines owned by Glencore, Nyrstar and Chinese producers, zinc prices are the factor most likely to determine when lead mine supply is reactivated. Production cuts might equate to a loss of some 120,000 tonnes of lead mine output in 2016, we estimate. On top of that, the closures of the Century and Lisheen mines are likely to remove some 80,000 tonnes of lead supply. So while we expect lead mine supply to remain lower, we also expect higher prices to trigger the release of more scrap into the market, which should boost secondary supply of lead. Prices have already become volatile; the steep rallies and sell-offs since November may well be the effect of elasticity of secondary lead supply. Although the release of lead scrap into a price rally may well dampen any rally, we would not expect this to derail a bull market should one develop. 10

12 Lead Lead was in deficit in January: is this the start of a trend? International Lead and Zinc Study Group (ILZSG) data for January showed a supply deficit of 7,000 tonnes in January. If a deficit remains in place, sentiment for lead is likely to turn more bullish. With the market expected to be in deficit this year and next and with lead stocks on the LME and the SHFE low, we feel prices are low given the fundamental outlook Demand outlook improving Demand apparently fell 8.5 percent in 2015, according to ILZSG data. A drop of such magnitude suggests considerable destocking, which means there may well be considerable pent-up demand if restocking should unfold. Auto sales in China are considerably stronger than expected, rising 7.8 percent in March and 6.8 percent in the first quarter compared with the corresponding periods of 2015, according to data from the China Passenger Car Association. Vehicle registrations in Europe climbed 10.1 percent in the first two months of the year on the same period of last year. Strong organic growth in China and strong pent-up demand in Europe after the slump following the financial crisis are bullish for lead. And while auto sales in the US are slowing, we are less worried about this although it may hit OEM battery demand, it is likely to boost replacement battery demand. With strong growth in alternative energy, data centres and mobile technology, all requiring energy storage or back-up power supply, we expect demand for lead-acid industrial batteries to remain strong, even taking into account strong competition from industrial batteries such as lithium-ion types. Outlook The combination of tighter primary supply, low stocks and potential for consumer restocking suggests a bullish outlook for lead this year. We expect prices to work higher towards $1,950 in the second quarter. Lead stocks are relatively low compared to where they have been in recent years but prices are also low, which means their inverse relationship seems to have broken down. With the lead spread having been low in recent years, we do not think there is much metal held off market in financing deals. Vehicle sales are climbing in the main markets of China, and Europe, sales in the US have started to slow. For lead-acid automotive battery demand, we see organic growth in China as the key driver a greater vehicle population means more lead out on the roads. LME lead stocks are low but not as low as they were in December when they reached 127,500 tonnes. But with cancelled warrants also falling, interest in taking lead out of warehouses seems to have slowed. Should lead stocks fall further, prices are likely to take increasingly more note. The LME commitment of traders report shows that the money manager longs have been cutting exposure since February. More recently, there has been a slight pick-up in short selling. The pullback in the long position may well make room for fresh buying to return. 11

13 Nickel Nickel Set to remain rangebound Summary Global supply/demand balance in refined nickel (in thousands of tonnes) (e) 2016 (f) Production 1,785 1,970 1,990 1,940 1,880 Consumption 1,681 1,790 1,890 1,917 2,010 Balance Price $17,535 $15,004 $16,867 $11,858 $10,500 Source: INSG, FastMarkets forecasts Nickel continued to disappoint in the first quarter, falling 3.7 percent after tumbling 42 percent last year. Nickel reached its lowest since 2003, breaking below its 2008 low set during the Great Financial Crisis. Despite a short-covering rally in February, the metal lacked much impetus, principally due to the weak fundamental picture. We believe nickel will remain rangebound between $8,000 and $9,500 in the second quarter, because upward pressure from possible output cuts/stronger demand should be offset by downward pressure from the high level of inventories. Overall trend Nickel remained under selling pressure in the first three months of 2016, reaching a low of $7,580 in February. But it benefitted from a positive swing in investor sentiment towards commodities in February stemming from a strong recovery in oil prices as well as expectations of broad-based supply cuts, which resulted in a short-covering rally. But nickel failed to sustain its gains because of the oversupplied nature of the market, as evidenced by rising available LME and SHFE stocks. With net speculative long positions on the LME currently at a relatively high historical level, the likely absence of meaningful supply cuts this year and only a modest recovery in demand lead us to expect the metal to continue to face downward pressure in the second quarter. Supply remains ample The bullish nickel story stemming from the Indonesian ore export ban in January 2014 has completely evaporated because supply has proved to be larger than expected. Despite prices remaining below $9,000 in recent months, putting 70 percent of the industry at a loss, no meaningful supply cuts have materialised outside the group of Chinese smelters that agreed at the end of 2015 to cut output by 100,000 tonnes or five percent of total supply in While the Indonesian export ban should have tightened China s supply through falling NPI output, Chinese nickel supply has remained sufficient to satisfy demand. In fact, the fall in Chinese NPI production of 80,000 tonnes or 18 percent in 2015 was more than offset by a sharp rise in refined imports, up 172,160 tonnes or 132 percent in 2015, and ferro-nickel imports, up 370,476 tonnes or 131 percent. Against this backdrop, more supply cuts inside and outside China are needed to affect the market's supply-and-demand balance significantly and to reduce global stocks. Although some output cuts are possible in the second half of the year, the industry has shown in the past some reluctance to make the cuts necessary to balance the market because producers tend to wait until the last minute before shuttering their operations and because governments such as that of China are supporting domestic 12

14 Nickel producers to maintain social peace. Consequently, we do not expect there will be sufficient supply cuts in 2016, particularly taking into account the fact that lower energy prices combined with weakening mining currencies will continue to push production costs lower and provide producers with some relief. Stainless steel output could contain downward pressure on nickel Global stainless production, which accounts for about 65 percent of total nickel demand, could rebound in 2016 after falling 0.5 percent in 2015 to 41.5 million tonnes, according to MEPS. Despite sluggish steel demand growth, as falling international stainless steel prices show, MEPS forecasts worldwide output to increase around two percent this year a 1.7-percent recovery in Chinese production should follow last year s two-percent decline, partly due to anti-dumping duties imposed by the EU. While the fall in nickel prices over the past two months was accompanied by destocking, we believe higher prices might prompt stainless producers to restock, which would exert upward pressure on nickel. Still, we acknowledge that a more pronounced slowdown in China, which accounts for about 50 percent of steel production, as well as a further fall in steel prices could result in lower output and therefore constitute key downside risks to global stainless steel output. Our base case scenario echoes that of MEPS we expect a moderate recovery in global stainless production, which should limit the downward pressure on nickel in the second quarter. Visible and invisible stocks likely to continue to cap nickel prices Visible stocks continued to grow in the first quarter. While LME stocks at 431,802 tonnes were broadly flat in the first three months around their all-time high, available stocks (stocks minus cancelled warrants) rose 28,326 tonnes or 10 percent, containing tightness in nearby spreads. SHFE stocks climbed 24,710 tonnes or 51 percent to 73,049 tonnes, confirming the oversupplied nature of the market. In addition to exchange stocks, invisible stocks, which are tied up in financing deals, are believed to exceed one million tonnes, equivalent to around half a year of consumption. Against this backdrop, even though we project a supply deficit of roughly 130,000 tonnes for 2016, the high level of total stocks is likely to prevent the global nickel market from tightening too much, capping any strong price rises. The steady increase in LME available stocks in the first quarter exerted downward pressure on nickel prices. This could continue in the second quarter. The forward curve continued to expand in the first quarter amid lower three-month prices, suggesting there has been some forward buying interest. LME stocks slipped 9,540 tonnes or two percent in the first quarter although they remained close to their all-time high. Cancelled warrants fell 37,866 tonnes or 23 percent. So available stocks rose 28,326 tonnes or 10 percent, capping tightness in the cash-threes spread. LME total nickel stocks are high, corresponding to more than 20 percent of annual consumption. Total stocks (visible and invisible) represent an estimated 50 percent of annual consumption. So a supply deficit in 2016 is unlikely to exert a meaningful upside influence on prices. 13

15 Tin Tin Waiting for a supply response from China Global supply/demand balance in refined tin (in thousands of tonnes) (e) 2016 (f) Production Consumption Balance Price +$21,114 +$22,000 $21,893 $16,070 16,000 Source: WBMS, FastMarkets forecasts Overall trend Tin prices, after hammering out a base in 2015 and early in January this year, have rallied strongly. The final trigger was news that several China smelters would cut output. This coincided with continuing low levels of exports from Indonesia and a drawdown in LME stocks to levels not seen since November Deleveraging in commodities accelerated last year and a nervous start to 2016 prompted by a sharp sell-off in Chinese equities led to an oversold market. The speed of the rebound now suggests the market is unwinding that oversold condition. Because tin can become a thin market, volatility can develop quickly. The rally has been strong but it will be vulnerable to an equally sharp correction should some bearish developments unfold. Still, while Indonesian exports remain restricted and LME stocks are low, the swing supplier will be China. Chinese tin prices dropped below the LME price late in March so we would expect increased exports of tin products to dampen the rally in LME prices. Chinese smelters agree co-ordinated production cuts Nine Chinese tin producers have agreed to cut 17,000 tonnes of output across At face value, that is a significant volume of tin but, with prices rising significantly since that decision, it seems highly improbable that the smelters will keep their promises. This is especially so given that the country has been importing record volumes of tin ores and concentrates from Myanmar. Official customs figures showed ore imports of 72,436 tonnes (gross weight) from Myanmar were 239 percent higher in January than in January Some of this would be due to new production but the run-up in prices would also have led to the release of stockpiled material. Imports from Myanmar were 8,000-9,000 tonnes of metal contained in January, the International Tin Research Institute (ITRI) estimates. In 2015, the 285,592 tonnes of tin ore imports probably contained around 34,000 tonnes of tin. With imports up and refined production down, China will be sitting on significant stockpiles of tin-containing raw materials that will enable it to raise refined output smartly. Given the 47-percent rise in Shanghai Futures Exchange tin prices, it seems highly probable that tin smelters are restarting idle capacity. Summary Tin appears to have put in a base just above $13,000 per tonne, having spiked down to $13,600 a year ago. There have been four subsequent downward spikes but all have found support, the latest in January at $13,145. The rebound since then, which has been driven by Indonesian export restrictions and production cuts in China, has been aggressive prices rallied 33.3 percent off the lows compared with an average across the LME base metals complex of 23 percent. As the chart shows, given the extent of the fall since 2014, the rebound may have only just started. 14

16 Tin Indonesia exports remain restricted Indonesia s tin exports in the first three months of the year totalled 9,710 tonnes, down from 19,686 tonnes in the same period in Last year, exports totalled 70,154 tonnes. In 2015, excluding August, when there were no exports, monthly exports averaged 6,383 tonnes. Exports so far in 2016 are therefore running some 49 percent below last year s rate. Indonesia has in recent years been the world s largest exporter so the fall in exports has understandably tightened the global market. Indonesian producers expect exports of 50,000-60,000 tonnes in 2016; the poor start to the year because of adverse weather and export restrictions exporters had to wait for new quotas has underpinned the bullish price action. Exports are likely to recover somewhat in the months ahead; ICDX trading volumes of 3,475 tonnes in the first seven trading days of April suggest they will, which could pour cold water on the bull market. Output from top 10 producers falls 7.4 percent in 2015 Output increased at only two of the 10 leading producers last year; output was little changed across two of the producers and fell across the other six. Total production at these smelters was 225,601 tonnes, down from 243,654 tonnes last year. Given the broad-based reduction in output, $13,000 seems to be a realistic floor price. LME stocks fall to 1.2 percent of annual consumption LME stocks, at their recent low of 3,655 tonnes, would only cover 1.2 percent of annual global consumption. Stocks in SHFE-registered warehouses have never been high they peaked at around 1,800 tonnes but were last at 778 tonnes. Since we expect the producer response to be seen first in China, we would keep a close eye on SHFE tin stocks. Outlook For now we have raised our 2016 forecast to $16,000 per tonne and see prices averaging $15,410 in the first quarter. We expect a second-quarter range of between $15,400 and $17,000. The trend in LME tin stocks is to the downside. Spreads tightened and stocks edged higher when they got low but not by much. C-3s shifted into a back on January 19; 2,300 tonnes have since been delivered in. Given how low stocks are, we are surprised cancelled warrants are not higher. Low stocks prompted a price rebound in mid-january; prices have levelled off as stocks have climbed. We expect the inverse relationship between stocks and prices to manifest itself while stocks are below 6,000 tonnes. Global semiconductor sales have fallen on a regular basis since October and were down 6.2 percent in February compared with a year earlier. This does not bode well for tin demand but supply seems to be the main driver for now. Indonesian tin prices are oscillating either side of LME prices. With trading volumes on the ICDX rising in April, we should watch to see if ICDX prices start to trade at a discount to LME prices. There is no sign of this yet. 15

17 Zinc Zinc On course as deficit arrives Summary Global supply/demand balance in refined zinc (in thousands of tonnes) (e) 2016 (f) Production 12,593 12,900 13,500 13,900 14,000 Consumption 12,342 12,890 13,600 13,872 14,220 Balance Price $1,948 $1,915 $2,165 $1,939 $1,800 Source: ILZSG, FastMarkets forecasts Zinc prices, despite the arrival of a highly anticipated supply deficit, continued to sell off at the start of the year. After setting a low at $1, per tonne on January 12, prices have rallied 31.5 percent to $1,900. The combination of a previously oversold market and a growing deficit should mean zinc is now in a bull market. As the chart shows, prices are in the lower levels of the trading band so there may be considerable overhead supply in the area. We expect prices to work their way through this but, with the demand profile weak, the initial strong rally driven by short-covering is likely to become more laboured. Overall trend Quite why it took zinc prices so long to respond to last year s production cuts, in addition to the scheduled mine closures of Century and Lisheen, remains a mystery. It was probably that zinc sold off alongside other commodities, partly as a bearish bet against the slowdown in China and as deleveraging swept through the physical market while merchants, traders and consumers destocked. The fundamentals have now caught up with the forecast, shorts are covering and there seem to be signs of restocking and investment interest. We remain bullish on zinc overall because of the tighter supply fundamentals; we would become even more bullish if demand looked set to recover, which it may be doing. While the market has generally not been bullish for the economic outlook, especially for China, this may be changing. There are some signs of improved interest in the Chinese property market and the country s auto sales have held up well, March s manufacturing PMI was encouraging and we still expect a slow pick-up in order flow from the massive One Belt One Road (OBOR) infrastructure projects. Market enters supply deficit The zinc market moved into a supply deficit in October last year; monthly deficits averaged 31,600 tonnes in the fourth quarter before falling to just 1,000 tonnes in January, according to International Lead and Zinc Study Group (ILZSG) data. Despite the smaller January number, it still seems highly probable that the supply deficit will grow in the months ahead an estimated 1.25 million tonnes of output has been lost due to production cuts and closures. Our forecast is for a 220,000-tonne deficit this year but, with LME stocks standing at 420,000 tonnes and SHFE stocks at 270,000 tonnes, there is no immediate threat of any shortage, preventing prices from rallying too far. This could change, however, should the demand outlook strengthen. We are not relying on that happening in the second quarter; if it does, it will be an added bonus. China s demand grew 1.3 percent in 2015, according to ILZSG data, and was a mere 0.4 percent higher in January. Given the size of China s economy and official GDP growth of 6.9 percent, the low demand figure for China suggests the data is still being 16

18 Zinc affected by destocking; we would not be surprised if actual demand was stronger. If higher prices prompt any shift to restocking, there could be a major impact on China s demand data. Bullish until supply response is made For now the supply outlook makes for a bullish price outlook but the rise in price is likely to prompt a supply response. Producers outside China may well remain steadfast but that may not be the case in China. Chinese smelters announced cuts of 500,000 tonnes; production there in the 11 months to November averaged 515,600 tonnes per month, which on an annualised basis suggests smelters have cut output in line with their announcement. With SHFE zinc prices up 28.6 percent from the November low, it seems highly likely that Chinese zinc output will edge higher while production outside China is more likely to stay down. First, the closures of Century and Lisheen are permanent; second, prices are now only some 10 percent above where they were when the cuts were first announced. Generally, we would not expect western output to restart until stocks have retreated to more typical levels and a robust bull market is evident one that would be able to absorb the increase in supply. Outlook Zinc prices have shifted from a bear market to a bull market and we expect the latter to remain in place for the foreseeable future. The price lift from oversold levels has been steep; we would not expect this to continue because short covering is likely to wane while, given the large stock overhang, we doubt consumers will feel the need to restock too aggressively. Falling stocks and the possibility of more trend-following/cta-type fund buying may, however, continue to underpin a more gradual bull market. We expect a price range of $1,725-1,925 in the second quarter and will raise our average price for 2016 to $1,800 from $1,750. The rise in zinc prices above $1,800 has prompted some fast and large moves in the forward spreads. They moved into large backwardations indicative of forward selling. The 3m/5-year spread averaged $48 contango in Jan-Feb but peaked at a backwardation of $92 in March. Zinc stocks continue to decline at a steady pace but are still high. Large deliveries have been made at times when the spread has tightened so stock seems to be held off-market. Cancelled warrants are not high, accounting for 12 percent of LME stocks. The money managers gross long position has climbed in the first quarter and, while shorts continue to cover, there has been some profittaking by longs. The continuing reduction in the gross short positions suggests they realise the fundamentals have turned more bullish now. Physical premiums have been flat in recent months but they are edging higher on seasonal factors and on expectations that LME prices may have further to rise. We would expect mine shortages to feed through to firmer premiums in all regions eventually. 17

19 Iron Ore & Steel Iron Ore & Steel A classic counter-trend move Summary Chinese iron ore required to balance the market (in millions of tonnes) (e) 2016(f) Chinese demand Ex-China seaborne demand Total demand Seaborne supply Demand for Chinese domestic iron ore Source: FastMarkets Iron ore had a spectacular first quarter, with prices rebounding to $63.70 per tonne from December s low of $38.30, a 66.3-percent move. The rally is a classic short-covering/restocking rally a counter-trend move and possibly an accident waiting to happen. The fundamentals dictate that, with new low-cost iron ore coming on stream when demand is soft and there is a surplus of iron ore and steel, iron ore prices are likely to gravitate to the marginal cost of production, which is believed to be around $28 per tonne. With prices around $58, there is still plenty of room for them to fall once the restocking has run its course. Overall trend After the relentless downward trend in iron ore prices (see chart above), perhaps the market should not have been as surprised as it has been by the strong rebound. Restocking after the Chinese New Year, some optimism about a recovery in house prices in China, some pressure on holders of land-banks to build and a shift in speculators' focus have all been reasons for the rally. Given the fundamentals, we see the rebound as a counter-trend move; unless there is a surprise and sustainable recovery in China s economy, iron ore prices could easily retreat to test the lows around $38 per tonne again later in the year. Iron ore seaborne supply to hold up in 2016 Falling prices in recent years have led to production cuts, which are estimated to have pulled 230 million tonnes from the market. But the continuing ramp-up of new output should make up for any losses, keeping the seaborne market well supplied unless there is a sustainable recovery in demand, which seems unlikely. Weak global growth and China s intent to cut excess capacity in the country, combined with anti-dumping measures against China, are likely to reduce its ability to export and in turn lead to lower domestic production. Less output may well mean less demand for seaborne iron ore. New game in town Speculating on iron ore futures seems to have taken off this year, with investors using the market as a call on how they see the health of China Inc. Average daily volume in the iron ore contracts on the Dalian exchange have increased to 3.48 million lots this year from 2.67 million lots in the fourth quarter and 1.95 million lots in the first three quarters of The increased speculation is no doubt partially responsible for how overbought iron ore prices have become. The danger is if marginal producers have taken advantage of the higher prices to hedge future production. If so, an already oversupplied market could become even more oversupplied, which would lower marginal production costs. 18

20 Iron Ore & Steel Steel output still falling Global steel production in the first two months of 2016 was down six percent on the same period of This is after a 1.7-percent fall in 2015 compared with In the first two months, output dropped 15.8 million tonnes, for which China accounted for 9.5 million tonnes. The extent of the cuts seems to be tied to the pick-up in calls for anti-dumping measures against China. The fact that production has fallen so much makes it all the more peculiar that iron ore prices have managed to be as strong as they have. The combination of anti-dumping measures, Chinese policy to cut 150 million tonnes per year of excess steel capacity over the next three-to-five years and lower production has lifted prices, which in turn is helping to underpin stronger iron ore prices the move seems unsustainable. Prices rebound but not by much Hot rolled coil (HRC) prices turned the corner in January and are up around six percent. Still, this is a fairly tame rally compared with the average rally of 24 percent in base metals prices. But steel rebar prices in Shanghai have rallied 49 percent from the lows in November. The run-up in Chinese prices seems unsustainable but, with fewer exports from China, steel prices in the world ex-china may well have further to climb, especially while iron ore prices hold up. Iron ore market looks structurally bearish but market may be wrong-footed by China With the iron ore majors intent on continuing to ramp up low-cost output, it looks as though prices will soon drop back below $50 and stay lower for a considerable time. We warned in our January report that restocking could well produce significant short-covering rallies once prices had stopped falling, which has been the case. What the market now needs is stronger demand out of Asia. We are disappointed that orders for the One Road One Belt projects have been slow to emerge but we still expect them to emerge. In the second quarter, we expect a $44-58 trading range. Steel prices have turned a corner and are rallying strongly across all regions, especially in Asia. A pick-up in restocking on stronger iron ore prices and order books seems to be driving prices. The run-up in iron ore prices at a time when large quantities of new production is coming on stream may well prompt some idled capacity to be reactivated. The fact iron ore can now be hedged may well mean oversupply extends. The iron ore swap forward curve had flattened while prices had dropped. The sharp rally has now seen it steepen significantly (see red line) as forward selling pushes it into a backwardation. Global steel output continued to fall in February but, with prices now rising sharply, production is likely to follow. The run-up in iron ore prices also suggests demand has picked up. We fear the runup in steel prices may be more the result of restocking rather than improved consumption. 19

21 Gold Gold Bullish combination could prevail Summary Gold rallied 16 percent in the first three months of 2016 after falling about 10 percent in Factors in the rise included higher risk aversion, downward revisions to the Fed's tightening cycle and brighter sentiment across commodities. While we expect gold to strengthen further and range between $1,180 and $1,325 in the second quarter because these positive drivers may endure, we expect downward pressure to re-emerge later in 2016 Overall trend Gold enjoyed a spectacular rally in the first quarter of the year, stemming from a stronger dollar and rising US real interest rates. rising 16 percent to an intraday high of $1,283 per ounce on March 11 before consolidating it closed at $1,232 on March 31. The range of factors that drove its impressive performance in the early months of 2016 include growing uncertainty over global growth, lower Fed interest rate expectations and a broad-based improvement in commodities. While we believe these factors will remain at play in the second quarter, providing gold with further upward pressure, we expect them to reverse in the second half of the year, which should result in fresh weakness. Impressive Q1 rally Gold's sharp rise at the start of the year was triggered by fears over a hard landing in China, which resulted in a sharp sell-off in Chinese equities that extended to other parts of the world. This sent investors toward safe-haven assets, boosting ETF holdings. Buying pressure in gold was bolstered by downward revisions to the expected path of US interest rates from investors and the Fed. Fed tightening expectations through the first quarter pushed gold higher by pressuring the dollar four percent lower and by moving real yields on the 10-year US Treasuries to their lowest since April Finally, gold benefited from a positive shift in speculative sentiment in favour of commodities, which resulted in strong inflows into commodity index funds. The significant increase in net speculative long positions in gold on Comex via long accumulation and short-covering played a major role in the first-quarter rally. Demand set to remain strong in Q2 We believe investment and speculative demand could remain strong in the second quarter because macroeconomic environment is increasingly vulnerable to downside risks from growing political uncertainty in the US and Europe. First, in the US, investors face an election year after a two-term presidency, an event that has historically had a negative impact on equities amid higher uncertainty. While US equities managed to rebound sharply in February and March, a sell-off could boost safe-haven demand for gold. Second, in Europe, two clouds are on the horizon the British referendum in June and the unsustainable trajectory of Greek debt. While growing Brexit fears continue to hurt investor sentiment and could have negative effects on the global financial markets, the latest Greek bailout programme is another source of tension against a backdrop of growing discord between the IMF and Germany, which could also trigger some turbulence in financial markets. Should gold continue to be viewed as a safe haven, as we think it will, investors could boost their ETF buying 20

22 Gold and speculators could extend their long positions on Comex, which would bode well. But muted jewellery demand (50 percent of total demand) partly owing to a slightly weaker China (32 percent of jewellery demand) due to unattractive prices and India (27 percent of jewellery demand) because of strikes by jewellers that could offset strong investment demand. But gold could spring negative surprises later this year Despite a challenging global environment and downside risks from abroad, we expect the US economy to remain resilient in We believe the Fed will continue to tighten, albeit gradually, by raising rates twice this year in line with the latest FOMC projections. But since the market currently expects only one increase in 2016, as the 30-day Fed-fund futures show, we believe investors are underestimating the future path of US policy. So we think that a re-pricing of tightening expectations is likely in the second half, which should exert upward pressure on the dollar and US real interest rates. Investment demand could weaken via outflows from ETF holdings while speculative buying on Comex could turn into strong selling should money managers start to unwind their long positions. So we reiterate our view that gold prices could move lower toward $1,000 in the second half of ETF holdings rose 320 tonnes in the first quarter compared with a fall of 54 tonnes in the fourth quarter of last year and a rise of only 20 tonnes in the first quarter of last year. ETF investors could continue to buy gold steadily in the second quarter despite higher prices. Money managers bought a record 514 tonnes on Comex in the first quarter after selling 324 tonnes of gold last year. While speculative positioning is overstretched, we believe that spec sentiment will remain positively skewed in the second quarter, which should translate into further speculative buying. The negative correlation between gold prices and US real interest was high in the first quarter (-0.86 versus in the whole of 2015). The fall in real interest rates, partly driven by lower Fed tightening expectations, could continue on increased risk aversion, which in turn could push gold prices higher still. Although the relationship between financial market volatility and gold prices is not always stable, it was relatively strong in the first quarter at Assuming this correlation remains in place in the second quarter, higher risk aversion amid growing political uncertainty could continue to boost gold prices. 21

23 Silver Silver Expect further upside Summary Silver jumped 11 percent in the first quarter after falling 12 percent last year to its lowest since Its strong performance reflected a marked improvement in investment and speculative demand, largely triggered by the rally in gold. Since we expect gold to push higher in the second quarter, we see further upside in silver, with a three-month range of $ But we believe downward pressure will re-emerge in the second half amid weaker industrial demand. Overall trend Silver enjoyed a positive shift in sentiment in the first quarter largely due to an impressive rally in gold prices, which itself was driven by a weaker dollar and a steep fall in US real interest rates amid renewed risk aversion and lower Fed tightening expectations. We expect sentiment to remain positively skewed in the second quarter, which should translate into further ETF and speculative demand, mainly because risk aversion should prevail amid a macroeconomic environment challenged by growing political uncertainty. Importantly, the gold-silver ratio, which averaged 79 in the first quarter, hit an extremely high historical level, making silver look relatively cheap compared to gold at current price levels. We believe the ratio could revert toward its longer-term (1980-today) average of 62, which would result in a considerable outperformance of silver relative to gold. Against this backdrop, silver could surprise to the upside and reach new year-to-date highs in the second quarter. Later in the year, however, we expect downward pressure to re-emerge for two reasons. First, the strong increase in monetary demand for silver in the early months of 2016 should not last, partly because of higher prices. Second, industrial demand, which accounts for 54 percent of total silver demand, is likely to fall further this year after falling 4.1 percent in 2015 on weaker industrial demand growth, especially from EM economies. ETF investors bought 745 tonnes of silver in the first quarter of the year after selling 506 in 2015, 181 tonnes in 2014 and 82 tonnes in We think ETF buying could remain steady in the second quarter before reversing later this year due to profit-taking. Money managers bought a record 6,249 tonnes on Comex in the first quarter after selling 943 tonnes in Although speculative positioning is overstretched, we believe buying interest will remain strong in the second quarter but could turn into strong selling in the second half. 22

24 PGMs PGMs Expect modest upward pressure Platinum Palladium Summary The PGMs were highly volatile in the first quarter, with platinum closing 9.5 percent higher after falling 26 percent last year and palladium ending flat after dropping 29 percent in Platinum should continue to perform relatively better than palladium although upward pressure should be limited amid poor investment demand. Overall trend Platinum and palladium sold off sharply in January before recovering in February and March. We expect modest upward pressure on PGMs in the second quarter, with platinum ranging between $920 and $1,040 and palladium between $550 and $650. Platinum looks brighter than palladium Platinum performed better than palladium in the first quarter when gold's strong rally exerted upward pressure on platinum (the two are strongly correlated) and because palladium tends to perform poorly when investors are risk-unfriendly the sell-off in equities at the start of the year triggered a sell-off in palladium. Because we expect increased risk aversion in the second quarter, platinum should outperform palladium. The global automotive market should remain robust, partly due to lower energy prices, and a soft dollar should boost investment and speculative demand in the second quarter. For platinum, we expect ETF inflows to continue while speculative buying should pick up. For palladium, while we see outflows from ETF holdings on rising risk-off sentiment, speculative demand should recover. Still, mine output could grow despite low dollardenominated PGM prices, principally because weaker energy prices and mining currencies in the second half could lower production costs, preventing a meaningful supply response. ETF investors sold 26,00 ounces of platinum in the first quarter after selling 266,000 ounces in But money managers bought a total of 291,000 ounces in the first quarter after selling 454,000 ounces last year. ETF investors sold 94,000 ounces of palladium in the first quarter of the year after selling 693,000 ounces in Money managers cut their long exposure by 122,000 ounces in the first quarter after selling more than 1 million ounces in

25 Appendices Appendices Market Overview Appendix Global Manufacturing PMIs USA (ISM) China (Caixin) Eurozone Japan Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Source: Caixin, Markit, ISM, FastMarkets 24

26 Appendices Aluminium Appendix While Chinese imports and exports of primary metal are insignificant, the export of aluminium semis has become increasingly important. Still, profit margins on exports of semis have narrowed and anti-dumping pressure has increased, so exports may fall. Exports of unwrought aluminium and aluminium products in the first three months fell 11 percent from the same period of last year. The drop in aluminium stocks in LME-listed warehouses continues, with stocks now equivalent to some 4.6 percent of global aluminium consumption; well down from the 13.7-percent peak. Global Aluminium Production '000 tonnes PERIOD AFRICA ASIA (EX CHINA) GCC CHINA NORTH AMERICA SOUTH AMERICA WEST EUROPE EAST & CENTRAL EUROPE OCEANIA ROW EST. UN- REPORTE D TOTAL DAILY AVERAGE FEB JAN DEC NOV OCT SEP AUG JUL JUN MAY Apr MAR FEB JAN DEC NOV OCT China RoW IAI production data shows global output fell significantly in February average daily output fell 10.8 percent. There was some delay in reporting the data; we are wary that the data may well be revised in the weeks ahead. SEPT AUG JUL JUN MAY APR MAR FEB JAN Source: IAI 25

27 Appendices Copper Appendix Copper cutbacks Producer Capacity Notes Freeport- Suspends Miami Mine, 50% reduces output at Tyrone mine, halves mining rates at El 60,000-70,000 tpy McMoRan Albra and cuts capex at Tenke Fungurume Asarco 30,000 tpy Cuts output at Ray mine and closes Hayden concentrator Glencore 350,000 tpy Looking to suspend production at Mopani and Katanga for 18 months Imperial Metals 20,000 tpy Suspends Hucklebury mine due to low prices China 350,000 tpy Ten major Chinese producers to cut production in Source: FastMarkets Global copper production and consumption (thousands of tonnes) f Mine production 16,056 16,767 18,240 18,490 19,138 19,432 Refined production 19,599 20,201 21,059 22,479 22,821 22,943 Refined capacity utilisation Consumption 19,719 20,476 21,402 22,892 22,878 23,000 Refined balance Period stock change Refined stocks (end period) 1,205 1,376 1,325 1,343 1,588 Source: ICSG (forecast from Mar 2016) While the LME/Shanghai copper arbitrage window was open in January and February, imports picked up. This made sense, especially with production cuts likely to tighten the concentrate market as 2016 progressed. But imports are now expected to ease - the arb window closed in March and refined stocks have built up in China. 26

28 Appendices Lead appendix World refined lead supply and usage in (in thousands of tonnes) Jan Oct Nov Dec Jan Mine output Metal output Usage Balance Source: ILZSG, FastMarkets Chinese imports of lead concentrates have fallen in recent months compared to where they were at the end of This may well indicate less availability since production closures and cuts have been made. 27

29 tonnes Appendices Tin appendix Top 10 Tin Producers (tonnes) Change 2015 Change Yunnan Tin (China) 69,760 70,383 75,924 8% 75, % MSC (Malaysia) 37,792 32,668 35,152 8% 30, % PT Timah (Indonesia) 29,512 23,718 27,550 16% 27, % Minsur (Peru) 24,822 24,397 24,223-1% 20, % Yunnan Chengfeng (China) 16,600 18,300 22,900 25% 16, % Thaisarco (Thailand) 22,847 22,986 17,085-26% 10, % Guangxi China Tin 14,034 11,870 12,200 3% 11, % EM Vinto (Bolivia) 11,241 11,253 11,806 5% 12, % Metallo Chimique (Belgium) 11,350 10,344 9,814-5% 8, % Gejiu Zi-Li (China) 7,000 6,000 7,000 17% 11, % Total 244, , ,654 5% 225, % Souce: ITRI Tin Prices ICDX & LME ICDX LME Cash 01-Apr-16 16,800 16, Mar-16 16,100 16, Feb-16 14,750 14, Jan-16 14,575 14, Dec-15 15,000 15, Nov-15 15,900 14, Oct-15 16,000 15, Sep-15 14,400 14, Aug-15 15,795 16, Jul-15 14,500 14, Jun-15 15,850 15, May-15 16,200 15, Apr-15 16,515 16, Mar-15 23,495 17, Feb-15 22,900 18, Jan-15 19,320 19, Dec-14 21,000 20, Nov-14 19,995 19, Oct-14 21,575 20, Sep-14 22,220 21, Aug-14 22,700 22, Jul-14 23,025 23, Jun-14 23,665 23, May-14 23,025 23, Apr-14 23,050 22, Mar-14 23,495 22, Feb-14 22,900 22, Jan-14 23,125 22,060 Source: LME, ICDX Indonesian Tin Exports Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Source: ITRI Total Exports Regulation changes on Indonesian exports have led to erratic monthly exports since July last year but the overall trend is a downward one. With new quotas believed to have been issued, we would now expect exports to rebound although they are likely to remain below the 2015 average. A rise in exports may well dampen LME prices. 28

30 Appendices Zinc appendix World refined zinc supply and usage (in thousands of tonnes) Jan Oct Nov Dec Jan Mine output Metal output Metal usage Balance Source : ILZSG Zinc concentrate imports (metal contained) gathered pace last year when traders and smelters restocked, helped by an open arbitrage window. But less production since last year s output cuts has meant reduced availability, which has led to a drop in treatment charges and in Chinese imports of concentrates. The fall in zinc stocks on the LME since 2013 means stocks as a percentage of annual consumption are returning to more normal levels they accounted for 3.0 percent of global consumption early in April. 29