- Current position regional manufacturing PMIs bode well for industrial commodities
- Output and demand levels of industrial commodities will remain high
- Industrial commodity demand growth in China should remain at healthy levels in 2014
ABN AMRO expects that China, by far the world’s biggest industrial metal consumer, will achieve economic growth of 8% yoy in 2014. Increasing export growth and higher domestic consumption will probably contribute most to this target, while the pace of growth in infrastructure investments will gradually decline. Economic activity in Europe will manage to expand further during 2014, but the pace will still be moderate. The US economy continues to perform well and growth will accelerate coming year. On balance, the global economy is gaining momentum. On the back of the most recent PMI readings in these regions we expect stronger manufacturing output growth going forward. In addition, car sales improved in all major metal-consuming regions. Even the eurozone finally witnessed growth in car sales in October, after a long period of decreasing volumes. Retail sales and the construction sector remain robust in the US and China, while the eurozone still faces some challenges due to lingering austerity programmes. All in all, activity in the manufacturing sector is expanding globally and this bodes well for industrial metals markets.
Cyclical metals should benefit from accelerating economy
In the steel sector, weak demand in most regions has recently been the primary driver for prices. This is not surprising given that demand is typically weak during Q4. There are, of course, regional differences. In the US and Latin America, prices have strengthened over the last quarter, while prices in Europe and China were generally weak. But fundamentals for the global steel sector are providing some support, with the manufacturing PMI in solid expansion position in most regions. However, given the overcapacity in Europe and China, we don’t yet see any significant improvements on the horizon. Iron ore prices have rallied since October 2013 on restocking activity in China. As a result, inventories in China are currently high. In the short term we expect some pricing strength on continued restocking in China, ahead of the upcoming New Year celebrations. On the short term, pressures from the supply side could mount, due to worsening weather conditions in Australia in the first few months of 2014. This could lift prices. On the long term, however, we think supply additions will cause iron ore prices to ease again from mid-2014 onward. In the coking coal sector, prices have softened lately on increased output and subdued buying activity. Stocks at Chinese ports are high and we do not expect any significant price movements over the next three months, mainly due to lacklustre demand. In 2014, we foresee coking coal prices continuing to soften.
The current high premiums for aluminium are an incentive for producers to maintain production levels. We expect premiums to decrease over the coming year due to the new LME warehousing rules. The new rules (which will become effective early 2014) will cut warehouse queues to 50 days. Because this will increase the availability of aluminium for end-users, we do not expect any significant price gains for the next three months. In the long run, production cutbacks should restore more balance to the market. This will likely strengthen prices, which we expect to increase slowly but steadily in 2014. Demand for copper remains solid, with increasing import demand from China (especially for copper ore) and falling stocks at LME warehouses. On the back of improving market conditions and the sound outlook for copper end-using sectors (such as construction), copper demand will continue to grow further during 2014. However, there is a consensus that the market will be oversupplied over the coming year, which should limit any significant gains in copper prices. Because of the expected surplus in 2014, we have lowered our copper price forecast. We also foresee a rebound in nickel prices in 2014. This is not only due to improved sentiment on the back of the global macro-economic recovery, but also because of trade restrictions in Indonesia on exports of (high-grade) nickel ore. This will limit the availability of nickel ore, reduce nickel smelter activity, lower the volumes of refined nickel and ultimately bring the nickel market into more balance. The price of zinc has trending higher. Zinc fundamentals are improving slowly. Although the market is currently in surplus, data and forecasts show that a deficit is very likely in the coming years.
China has a very dominant position in industrial commodities, which highlights the importance of monitoring its industrial commodity demand levels. Ultimately, the transformation of China’s economic structure to a less investment-driven and industrial commodity-intensive economy will be reflected in import demand levels. Therefore, in due time, this will have an indirect downside effect on future metal demand growth. Still, despite this shift we think industrial commodity demand growth will be sustained at healthy levels, although the pace of growth will be relative lower. However, so far we have not seen any signals of this shift. Import demand for ‘the big three bulks’ (iron ore, coking coal and copper ore) up to November increased significantly on a yearly basis.