While economic data from the US continue to be encouraging and the recession in Europe seems to have ended, emerging markets are facing disappointing growth rates and concerns about structural weaknesses are mounting. Nevertheless, ABN AMRO remains convinced that the global economy is in the process of an acceleration of growth and that the next six quarters will produce much better data than the previous six. The eurozone economy is set for a gradual recovery, mainly due to the reduction of austerity measures and an increase in global demand growth. Meanwhile, Asian economies continue to show a mixed picture and downside risks have mounted for the region. But Fed tapering fears are dominating industrial metal markets and when the Fed starts tapering its rate of asset purchasing, interest rates are set to increase which will give investors cold feet. Therefore, sentiment is expected to weaken in metal markets. However, other positive fundamental developments will prevent markets from strongly deteriorating. The global manufacturing PMI edged up to 50.8 in July from 50.6 in June. Although the pace might be slow (and still below the long-term average), the index is heading in the right direction. The expansion of industrial activity is also noticeable in the three major metal consuming regions – China, Europe and the US – where the most recent manufacturing PMI readings have increased sharply.
The aluminium market has been in surplus since the financial crisis of 2008. The crisis caused a strong drop in demand in North America and Europe, while supply increased further and capacity also continued to rise (especially in China). The market is desperate for strict producer discipline – and severe cuts in excess capacity – which would normalise market conditions and provide some price support. While the Chinese government has announced a plan to restructure its aluminium sector, we feel it is somewhat ambitious. By 2015, the top ten smelters must account for 90% of the country’s total production capacity. We remain sceptical about the feasibility of these plans and expect the current oversupply to last for some time. In a Chinese market structure where more than 60% of the smelter capacity is in the hands of non-government entities, restructuring will prove to be difficult to realise. Nevertheless, thanks to solid manufacturing data from China, prices performed well in August, increasing by 5% while LME stocks declined by 1%.
Conditions are expected to remain uncertain and volatile, especially in Europe where buying activity remains weak just after the summer holiday season. In end-using sectors – such as construction, car manufacturing and consumer goods – conditions have not yet recovered and European consumers remain quiet, hoping for lower delivery premiums. Stocks at the LME warehouse in Vlissingen – the world’s largest aluminium inventory by volume – have already increased by 42% since the start of 2013. Demand outside Europe is stronger. Given the decent pace of US economic growth – with GDP gaining pace, firm job growth, manufacturing activity expected to stay solid and further strengthening of the housing market – prospects for aluminium demand are sound. In addition, aluminium will be increasingly used in the car manufacturing sector because this lightweight metal reduces the weight of cars while making them more fuel-efficient. The average aluminium content in cars is expected to rise from 10% in 2012 to approximately 20% in 2025.
Copper – Economic data improves copper outlook
Economic indicators from major copper consuming regions provide a solid base for our copper outlook. Economic data from the US point to further recovery. The labour market is gaining strength, conditions in the housing market have improved and industrial production is steadily increasing. The preliminary PMI for the US manufacturing sector rose modestly to 53.9 in August, which is well above the neutral 50 mark. And as US economic growth maintains a decent pace, the economy in Europe is finally picking up. The manufacturing PMI increased sharply in August, once again reaching the level of June 2011. In China, meanwhile, the preliminary PMI for the manufacturing sector increased by 5% [p-o-p], suggesting stronger activity over the coming period. A recovering Chinese economy is also reflected in copper demand. During the first seven months of 2013, volumes of imported refined copper decreased by 22%, while the import of copper concentrates and copper anodes rose 37% and 14%, respectively, in that period. This suggests that China is increasing its copper smelting and refining capacity.
From June, Chinese imports of refined copper increased again after eight consecutive months of strong declines. Copper prices rebounded sharply in August, gaining 5%. The increases were mainly supported by increased manufacturing activity and better economic data in major regions. On 26 June, copper stocks at LME warehouses reached a 2013 record high, then started to decrease. Since that peak, inventories at LME fell by 17%. Meanwhile, inventories at the Shanghai Foreign Exchange (SHFE) had been declining since April and lost 37% in four months’ time. The combination of decreasing stock volumes and improving economic indicators suggests that end-using demand is picking up again. Going forward, consumption levels will remain solid, with strong growth in China and a stabilisation trend in Europe and the US. Copper production is expected to increase further until 2014. We foresee a small surplus of 1.0% of consumption over 2013 and 2014. Fundamentally, we consider the copper market to be sound, and in our view this justifies price increases going forward.
Steel (HRC) – US outperforms EU and China
Weak demand and oversupply continue to dominate market conditions, especially in Europe and China. Although the number of transactions is currently also influenced by seasonal factors, demand volumes by end-using sectors are still below their pre-crisis levels. Overcapacity persists, particularly in China and Europe. China has announced ambitious plans to tackle the issue, including closing small inefficient mills and requiring the top-ten producers to have a market share of 60% by 2015. But so far we have only heard a few rumours about possible capacity cuts and steel production in China continues to grow (steel output increased 7% yoy in the first seven months of 2013). On top of this, the cuts that have been made only represent a small proportion of total capacity in China. We therefore still have our doubts about whether the goals set by policymakers will be met. In Europe, producer discipline seems to be more strict and steel output decreased by 5% in the first seven months of 2013. This is the case in the US as well – where steel output also declined by 5% – but in July production increased again after 10 months of yoy decreases.
And while uncertainty and concerns persist in the steel sector in Europe and China, the US steel sector is performing relatively well. An increase in end-user demand, especially by the US manufacturing sector, gave the steel sector an impulse and steel output increased during July. Although gains in US manufacturing output and sales are still fairly slow, the economic data shows that general activity in the US manufacturing sector is picking up. This bodes well for the remainder of the year. Nevertheless, steel demand is still rather soft and concerns will remain about the strength of growth. Activity in US non-residential construction is still slow and the Consensus Construction Forecast Panel (of the American Institute of Architects) has lowered its outlook on construction spending for 2013. New car registrations in the US and China continue to increase, while sales volumes in Europe fell 10% yoy in the first half of 2013. Global steel utilisation rates are still relatively low at 78.9% up to July and are expected to stay at this level for the rest of 2013.
In the full publication you can also find market developments for nickel, zinc, iron ore and coking coal.