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5 November 2018 | 3:43PM EST

Metals Monitor

Flicker of hope

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Copper:Too much pessimism baked in the price (3/6/12-month forecasts of $6500/7000/7000/t): Copper fundamentals remain solid. Despite the recent softness in the Yangshan copper premium and the loosening of the China scrap market, Chinese demand is healthy and inventory continues to fall globally. The micro and macro divergence that drove the copper market this year still rings true. Recently, copper prices moved sharply on US-China trade negotiation news. In our view, the $5800-6300/t range we saw in the past three months reflects too bearish a view on the macro front. Much of the market concerns, whether a potential China slowdown, continued USD strength, or escalating trade tensions, were mostly priced in. While our supply and demand estimates point to a balanced market in 2019, we expect copper prices to move higher from the spot as the macro worries lessen.

Aluminum: Market too relaxed about supply risks (3/6/12-month forecasts of $2200/2100/2000/t): Even with Alunorte still running at 50% capacity, Rusal sanctions, and China winter cuts beginning, the market is not pricing in any supply risks. Most recently, prices fell to c.$1950/t and our margins tracker suggests poor profitability for smelters in and outside of China. In fact, closure announcements for high-cost smelters are emerging (e.g., 300ktpa capacity in Spain and 400ktpa capacity in Gansu and Shanxi). While demand has been weaker than expected, the market is clearly in deficit and inventory continues to draw. In addition, money managers have significantly reduced long positions for aluminum. Overall, we see risks to aluminum prices skewed to the upside in the near term although our 12-month forecast is still anchored at $2000/t on China new capacity ramping up in Yunnan, Guangxi and Inner Mongolia.

Zinc: Still a very tight market (3/6/12-month forecasts of $3300/3000/2800/t): While the consensus is that zinc mine supply is on the rise and zinc prices should be falling over the next few years from its early-2018 high of $3500/t, there is much disagreement on both the degree and timing. On the bullish side, inventory is low and the forward curve is backwardated. On the bearish side, treatment charges (TC) are increasing. We expect higher zinc prices for three reasons. First, we put more emphasis on inventory than TC because higher TCs are related to smelter maintenance in China. Second, although mine supply is almost sure to climb, smelting capacity may be the next bottleneck. Higher zinc prices are needed to incentivize construction of new smelters. Third, sentiment on the macro picture has been quite bearish and improvements on this front should propel zinc higher.

Nickel: All eyes on Tsingshan HPAL (3/6/12-month forecasts of $15000/16000/18000/t): Fundamentals of nickel improved somewhat over the past few months. Production of 300-series stainless steel in China and Indonesia picked up in Q3. Stainless steel inventory in Wuxi and Foshan, while still elevated, is off the highs of early 2018. However, nickel prices fell c.25% in Q3, from close to $16000/t in June to below $12000/t now. The difference, in our view, is the prospect of new HPAL projects in Indonesia converting laterite ore into battery grade material. Already a number of companies, including

Tsingshan in collaboration with battery producers, have announced plans to build or expand HPAL facilities. These projects appear to be going forward even at current nickel prices, signaling potentially much lower costs than the market was expecting. While we agree that, if successful, these projects may be a game changer for EV battery and nickel prices, it is too early to price it in as the market currently does.

Iron ore: Policy-driven volatility (3/6/12-month forecasts of $70/60/60/t): After staying range-bound between $60/t and $70/t for six months, the 62% Fe iron ore price broke above $75/t in October. In our view, most of this is from policy-driven demand increases. The market interpreted the government announced that winter cuts will not be “one-size fits all” as a relaxation to steel production curtailment. Subsequently, the steel mill utilization rate increased and restocking demand drove iron ore prices higher. As the winter cuts officially begin in November, we expect prices to move lower. More specifically, a combination of rising supply and falling demand should take iron ore price below $70/t in Q4.

Exhibit 1: Base metals forecasts

Source: Goldman Sachs Global Investment Research

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