Nickel The Best Performer In The Base Metals Space

Base metals have been quite volatile in 2014 as the dynamics of geo-political tensions in Russia and Ukraine dominated the global picture. Also, faltering growth in China amid financing and construction sector probe along with the Euro Zone possibly slipping into a third recession since the financial crisis has been a matter of concern. The only saving grace for the industrial metals this year has been a strong rebound in the US economy which has supported demand and pushed the metals into green territory.

NICKEL

Nickel has been the best performing commodity in the overall base metal pack as prices jumped by around 35 per cent in 2014(Jan-Aug 2014). The reason for drastic gains is primarily Indonesia; the biggest producer of the metal imposed a ban on metal exports to encourage local processing. In addition, supplies are expected to remain stressed in 2014 as Indonesia which allowed resumption of copper concentrate exports in Aug 2014 stated that it has no plans to wind back a seven-month old ban on exports of unprocessed nickel ore and bauxite. This will likely cut Indonesia’s share of mined output of nickel to mere 8.9 per cent of world supply in 2015 from 29 per cent in 2013.

Further, Avebury Nickel Mines Ltd. in Australia has given a green signal to restart operations at idle mines which might produce as much as 12,000 tons of concentrate a year. However, the additional production won’t be enough to prevent the global market from dropping into a deficit.

In totality, the nickel market balance in 2015 is likely to slip into deficit, bringing an end to the glut seen in the past four years. This should remain the way going forward till 2017, when facilities to process nickel, bauxite and other metals in China (capacity of about 20 million tonnes of ore) will start production and bring back supplies into the market.

LME nickel (CMP: USD 18,530) prices can head higher towards USD 20,444 per tonne, while nickel on the MCX (Rs. 1,134.2) can head higher towards Rs.  1,240 per kilogram.

ZINC

Zinc prices have soared to three-year highs in 2014 with intensifying deficit in the global market as one of the biggest mines, Century, in Australia is due for closure next year and the delayed start-up of its Dugald River Project boosted prices. Several large, aging mines are scheduled to close next year, and miners need higher prices to justify the cost of finding and developing new sources of metal. Miners may not produce enough zinc to meet the needs of steel companies and coin makers until 2018. Owing to this, zinc production is expected to fall short of demand this year for the first time since 2007. According to the International Lead and Zinc Study Group, zinc demand is up 7.7 per cent globally in the first six months of this year to 6.8 million metric tonnes.

As a result, zinc users are drawing on stockpiles of the metal to make up for production shortfalls. Supplies of the metal in LME-licensed warehouses fell to a 3.5-year low in July, and are down 18 per cent this year. The warehouses contain enough zinc to meet 19 days of demand, down from 24 days at the start of the year. Moreover, since zinc goes into household products including brass plumbing fixture, a jump in home building fueled demand acceleration in the US, the world’s second biggest consumer of industrial metals.

For the coming months, prices will continue to climb as some of the world’s largest zinc mines run dry just amidst spurt in demand. In addition, MMG Ltd, which owns Century, had planned to open a new mine in Australia next year, but it’s being delayed to late 2016 due to technical issues. This will also lead to supply concerns soon and boost prices.

LME zinc (CMP: USD 2,275) prices can head higher towards USD 2,560 per tonne, while aluminium on the MCX (Rs.  138.7) can head higher towards Rs.  156 per kilogram.

COPPER

Copper has been an exception in the base metals’ complex, declining by around 6 per cent as tensions between Russia and Ukraine worsened global market sentiments and threatened the demand for this metal. Amidst falling demand, rising supply has taken a toll on prices as increased output from significant producer, Anglo American Plc, (which jumped by 18 per cent to 2,02,000 metric tonnes in Jan-Mar 2014) because of higher ore grades at the Los Bronces and Collahuasi mines in Chile fuelled glut concerns. Moreover, Newmont and Freeport, which account for 97 per cent of Indonesia’s copper output, have resumed copper concentrate exports after both the mining giants agreed to pay a revised duty of 7.5 per cent on its exports.

We expect LME copper prices to trade higher this year as the US copper demand is expected to grow by 4.4 per cent this year, the fastest pace since 2010, and is on track to expand for two consecutive years for the first time since 2000. Further, China is expected to launch a second round of economic stimulus and could further boost copper demand. Moreover, expectation that the European Central Bank will act soon to counter low growth and inflation by way of additional monetary easing will push prices higher.

LME copper (CMP: USD 6,841.25) prices can possibly head higher towards USD 7,550 per tonne, while copper on the MCX (Rs. 422.5) can head higher towards Rs. 465 per kilogram.