- Base metal prices softened due to China’s national holiday and weak factory activity in the US
- Outlook for base metals is sound, given the current state of and forecasts for the global economy
- Overcapacity (in China) will keep global steel prices soft, despite increased global activity
Nickel and global steel remained firm
Base metal prices softened in the last couple of weeks due to the fact that China was closed the last week of January because of the New Year holidays . January manufacturing data from the US disappointed, even if they were severely impacted by the weather circumstances. Aluminium dropped below USD 1,700/t, while copper and zinc prices have also been weakening since mid-January. Nickel prices jumped earlier this year, on the news that Indonesia has stopped the exports of unprocessed materials. The ban terminated the export of (laterite) nickel ore. China, the biggest consumer of nickel ore from Indonesia, needs the material for the production of nickel pig iron (NPI). Prices increased on the prospect of a possible increase in demand of refined nickel from China. But eventually, the Chinese national holiday and the weak manufacturing data from the US also hurt the nickel price, which has declined 4% since mid-January. The slow business activity and weak sentiment in the steel markets impacted global steel prices (HRC), which nevertheless managed to remain stable during the first few weeks of 2014. Chinese steel output continues to increase, despite existing overcapacity, which in turn continues to weigh on Chinese steel market sentiment.
Base metals: Relatively sound outlook
Demand for base metals is expected to increase further this year. This will help to restore the balance in base metal markets in 2014 and 2015. Much will depend, however, on the state of the Chinese economy and the pace of tapering by the US Federal Reserve. If demand for base metals from China slackens, the prospects for the base metal sector will deteriorate. In the aluminium sector, LME stocks are still relatively high and there is overcapacity. However, most aluminium at LME stocks are locked up as collateral in financing deals. Physical availability for end users is thus low, sending aluminium premiums – for immediate delivery – to record levels. At current low prices, reduction in capacity is most likely. Copper stocks at LME warehouses are falling rapidly, having decreased more than 50% since the peak level in May 2013. This decline, however, is not the result of increased demand, but rather of a transferral of stocks from LME to another registration system. What bodes well for the nickel market is that stainless steel demand in the US and Europe is in good shape. In addition, the Indonesian export ban could start to affect the nickel supply side in the second half of this year. The zinc supply/demand balance shows that the market is getting tighter. Demand from galvanising plants is expected to increase, while some zinc mines are set to be closed in the coming years.
Ferrous metals: Stronger steel prices in Europe
US steel prices have been strengthening strongly since June 2013, but lost momentum at the start of 2014. The ISM Manufacturing index fell strongly in January by 5.2 index points, but is still above the 50 neutral mark. It is likely, however, that this number is distorted by the weather conditions. The outlook for the Chinese steel industry remains uncertain. Credit pressure on the steel sector is expected to increase and we do not expect a significant boost in steel-buying activity by traders after the national holiday. Apart from that, there is still a lot of overcapacity in the Chinese steel industry and it is not likely this will be resolved any time soon. European steel market conditions have turned for the better, resulting in price increases in both the northern and southern part of the continent. Demand in Europe is currently sound and the outlook for demand in 2014 remains positive. Industrial activity is rising and the outlook for the construction sector is improving. European car sales jumped in January and it is expected that they will recover modestly in 2014.
What price directions do we expect in 2014?
We expect higher prices for base metals, due to improving global economic conditions and the sound outlook for the end-using sectors. We foresee a (slow but steady) recovery in construction activity in 2014. In many regions in the world demand for new houses and commercial buildings is rising again. An increase in private consumption will trigger global growth in car sales this year. And due to the economic recovery, we foresee a pick-up in investments, which will give an impulse to global demand for machinery and industrial activity in general. China – world’s biggest base metal consuming country – can disturb this perspective, however, should demand for base metals from that country fade this year. We have already witnessed some weakness in infrastructural spending in China, while the manufacturing sector is in contraction territory. Together with tight credit conditions, economic growth in China could disappoint this year, leading to lower factory output and thus lower demand for base metals. In the steel industry, overcapacity and weak demand will keep prices soft. Steel raw-material prices (iron ore and coking coal) will strengthen modestly in Q1.